Introduction- Value Management
The principle aim of value management in this case will be to optimize value for money or achieve the best value possible in the hotel construction project. Value management is a process that is built in the project life cycle and is supposed to return the best value for money spent in a project. Value management is the process that will ensure that the hotel construction project creates and capitalises on the opportunity to improve value for the project stakeholders. Value management is sometimes regarded as being synonymous with cost reduction. Even though cost reduction may result in value management, the ultimate aim is to improve the overall value of a project to all stakeholders (PERERA, HAYLES and KERLIN, 2011). Value management essentially involves eliminating unnecessary costs in the entire project life cycle without compromising functional quality thereby achieving the highest value possible for the project stakeholders. Value management in this case will ensure the project implementers achieve the best possible hotel product by providing a process that will ensure all project implementation staff are aware about the particular objectives that the hotel building must meet in terms of constructing a hotel that will capture the imaginations of residents and visitors to the city. Value management is a process that adopts proactive methods in solving project problems. This enhances the functional value of a project by managing its implementation from the strategic appraisal and design stage through to its operational use and decommissioning. The processes involve structured team oriented and open dialogue discussions which appraise decisions and recommend alternative courses of action through reference to the project stakeholder’s value requirements and aspirations (PERERA, HAYLES and KERLIN, 2011).
According to CABE definition of value drivers there are specific value drivers that are specific to this project and which measure value in the hotel project. The first value driver that will optimize value for the project stakeholders is that the project must achieve economic viability and sustainability. The project must be able to make adequate returns within a given time period that will enable the project financiers to recoup their money and make sufficient returns to compensate them for the risk of financing the project. This in other words can be referred to as the exchange value driver (MILLS, AUSTIN, THOMSON and DEVINE-WRIGHT, 2009). The project designers must be able predict with a certain degree of accuracy that the hotel project will be able to make sufficient capital gains in the foreseeable future to enable the project stakeholders and more specifically the project financiers to recover the money they have injected into the project and make a reasonable profit. The project must be able to achieve a payback period that is acceptable to hotel financiers to ensure they will be willing to commit their funds in the project. The project must be able to attract a certain critical number of customers that will enable it to operate above its breakeven point. If the hotel project is unable to reach the breakeven point then it will make losses and will destroy value (YU, SHEN, KELLY and HUNTER, 2005).
The metrics that will be use to measure this value driver include gross profit margin, the net profit margin, return on equity and debt service cover ratio. The gross profit margin measures the ability of hotel revenues to cover the cost of goods sold whereas the net profit margin will measure the ability of the hotel revenues to cover the expenses incurred in generating the revenues (YU, SHEN, KELLY and HUNTER, 2005). The return on equity will measure the returns that the hotel project will make on the ordinary paid up capital. It measures the ability of the hotel to make capital gains. The debt service coverage ratio on the other hand will measure the ability of the hotel to generate enough funds from normal trading operations to cover its debt obligations. Debt obligations will arise from funds sourced from financial institutions to finance the project development. If all metrics turn out to be positive to a satisfactory degree then the project will generate value to the stakeholders (YU, SHEN, KELLY and HUNTER, 2005). The parties involved in ensuring this value driver is achieved include the project manager, the project cost accountant, the project architect and the project team leader.
The metrics that will measure this value driver include rate of labour turnover, net profit margin, and occupancy rate and employee satisfaction indicator. Labour turnover ratio will measure the ability of the hotel to attract and retain talent. If it keeps on going up then the value to the stakeholders will be destroyed but if it keeps on going down then the value will be enhanced (YU, SHEN, KELLY and HUNTER, 2005). The occupancy rate measures the rate of use and hence is an indicator of the market share. If occupancy rates are consistently high then the hotel building will be creating value for stakeholders but if occupancy rates fall drastically or are erratic then the value to stakeholders is threatened. Net profit margin measures the rate of use of the facility. If the hotel is able to attract sufficient client numbers then it will be profitable and vice versa. Employee satisfaction level indicator measures employee satisfaction levels which has a bearing on the labour turnover. The parties responsible for this metric include the project team leader and project manager (YU, SHEN, KELLY and HUNTER, 2005).
The other value driver is connected with the reputation and or image that the hotel project will present to the community. The hotel will generate a certain reputation after completion. The image and the reputation that the hotel will generate will determine value to the stakeholders. The designer should put into consideration the impact of the hotel project to the corporate identity, prestige and brand image. The brand promise will be encompassed in the hotel building and clients will expectations will be formed by the reputation, image and prestige of the hotel project. The metrics that will measure this value driver include occupancy rate, number of repeat clients, public relations opportunities etc. The parties that will be responsible include the project manager and the architect (PERERA, HAYLES and KERLIN, 2011).
The next value driver is the social value of the hotel project. This has to do with the hotel aesthetics; the way it conveys corporate image and the building’s relationship to the society in general. The building project must deliver social and economic benefits to the community and contribute to future use by being adaptable. The designers should of essence make sure the building enhances positive social interaction by enhancing or creating opportunities for such interaction (YU, SHEN, KELLY and HUNTER, 2005). The society must be seen to be contributing to the good of the society by enhancing health standards, reduction in crime levels, reduction in crime, enhancement of social security and general wellbeing. The metrics that will measure this value drive include design awards, design quality indicator and positive response from the planning authority. The parties responsible for this metric include the project manager and the project architect (NALEWAIK, 2007).
The next value driver is the related to the environmental value of the project. A good building project should contribute to the environment on which it is situated. The project must contribute to conservation of rare plant and animal species. It must do something to reverse climate change and reduce pollution rate in the environment. The project must be seen to be promoting green technology and the reduction of greenhouse gases in the atmosphere. The metric for measuring this value driver is mainly environmental impact report. The project manager is basically the party responsible for this value driver (YU, SHEN, KELLY and HUNTER, 2005).
Culture is the next value driver in this project. Culture is basically the way things are done in a particular environment. Culture includes the norms and value systems in a community. The hotel project must support the cultural practises in the community. It can do so by including the cultural themes in the design of the project and its ambience (NALEWAIK, 2007). The project must capture the tapestry, historical significance, sense of place, symbolism, aesthetics and inspiration of the community. This will enhance value for the stakeholders. The metrics that will measure this value driver include critical reviews and opinions, professional press coverage and occupancy rate. The project manager and architect are responsible for ensuring the project achieves this value enhancement metric (BESNER and HOBBS, 2012).
The last value driver is implementing the project at the minimum cost achievable while achieving the highest possible value. The aim of the value driver is to ensure that the hotel project maximises effectiveness to ensure the project is delivered on time (NALEWAIK, 2007). This will ensure the project achieves the required financial performance through minimization of operation and maintenance costs thereby complying with all stakeholders requirements. The metric to measure this value driver include net present value, internal rate of return and payback period. These metrics will measure the attractiveness of the hotel project. The parties responsible for this metric include the project manager, the project architect and the entire project implementation team.
- A detailed 3 day VM study agenda to be undertaken by the project team and explanations thereof
The project team should undertake a value management study covering the following agenda;
- The first item on the agenda is conducting a survey of the market to determine the customers, their characteristics, the average purchasing power, the needs of the prospective customers and the available competition and other alternative methods that meet the needs that the hotel project seeks to meet. The team should come up with a profile of the competitors and their key competitive strategies (BESNER and HOBBS, 2012). This is the strategic design and appraisal stage which is the initial stage of project implementation. This is normally done by a research firm that has experience in carrying out research and preparing project feasibility studies.
- The second agenda item is to explore possible hotel project designs that can meet and exceed customer expectations. The team should determine possible ways that the customers will make use of the hotel facility. This will include determining the hotels total built up area. The size of the rooms, extra amenities etc. This will include by analysing the objectives of the new project (BESNER and HOBBS, 2012). This stage involves drawing the concept paper which outlines the business model. The business model simply indicates how the business will be performed. The concept paper is the initial document that is shared with financiers for initial discussion on financing prospects. The project architect draws the designs of the project which capture the ambience, the aesthetics and other value variables (YU, SHEN, KELLY and HUNTER, 2005) .
- The third agenda item is to determine the economic viability of the hotel project. The task entails determining the total project cost. The stage also involves determining the financial requirements of the project and possible sources of finance. The stage also entails drawing the projected performance for a minimum period of five years. This will assist in determining the payback period of the project, the internal rate of return and the net present value. The project will only be implemented if the metrics return positive figures. This implies that the project cash out flows must be less than the present value of the cash inflow discounted with the hotel’s cost of capital. The internal rate of return must also be above the hotel’s cost of capital and lastly the project must be able to record a payback period that is within acceptable limits. The project must also have a debt service coverage ratio of above 1 for it to be acceptable. This is normally done by the project cost accountant who determines the financial viability of the project
- The fourth agenda will be to determine the quantity of materials that will be involved in the hotel project including their prices, the unit cost and the total cost. This would be to ensure the project achieves the highest possible value at the least minimum wastage possible. The bill of quantities which is normally drawn by a qualified and certified quantity surveyor is a very important document as this document is also used by financiers to assess the financial requirements of the project.
- The next item in the agenda would be to determine the project implementation schedule which would be determined through the work breakdown structure. The team should also come up with the critical path which should guide the implementation of the project. This would ensure the project achieves the design quality. This is normally the work of the project manager who should be conversant with the steps in coming up with project implementation schedule, critical path and work breakdown structure. The implementation schedule is supposed to control time taken in undertaking individual work packages. The critical path is the longest path in achieving the project timelines. If the tasks in the critical path take longer than the time allocated for them then the project risks falling behind schedule and may incur cost overruns.
- The other step would be to determine those specific factors that could derail the project. These could be called risks to the project and design the risk mitigation strategies. This is a very important step as it touches on those uncertain and unpredictable events that have the potential of derailing the project and impairing its ability to achieve its objectives. The agenda in this stage would be to some up with a risk management structure and a risk register. This step is very crucial since it will ensure all unforeseen events that have the potential of disrupting the project are recorded and strategies to manage them should they occur identified and recorded. This task is undertaken by the entire project team led by the project manager.
- The next item in the agenda would be to determine the ways the project would enhance society, environment and culture values. The team would be assigned the task of determining how the project would achieve that and include it in the project lifecycle. The project has a lot of interaction with the environment, society and influences culture. For the project to achieve its objectives it must not only understand its obligations to the society, environment and culture but it must have a positive influence on them. Project managers like strategists must realize that a project is environment and society serving and dependent. The project will have to create benefits for the society and the environment for it to continue benefiting from the goodwill of those around it.
- A one page (A4) function logic diagram that represents the functional requirements and clearly identifies the overall project task.
Note; RVM-Risk and value management,
IRR-Internal rate of return
NPV- Net present value
ROE-Return on Equity
- Strategies to cut costs by 10% with minimal impact on project
Two of the main methods of cutting costs with minimal impact on the project are through carrying out lean synchronization and value management. Lean synchronization is a system in which the project manager carries out an audit of the processes to remove wastage and duplication of roles and resources. This will cut the wastage and ensure that resources are applied optimally. This stage involves analysing each step in the value chain to remove unnecessary steps or duplication of roles (ADAMS, 2008). Any resource that is misapplied or misused is removed from the value chain. The strategy aims at achieving a lean method of applying resources in the most optimal manner. In this strategy the manager puts into consideration various strategic options before choosing the one that achieves lean synchronization
The next strategy would be incorporating value management in all the various stages of the project lifecycle. Value management is a cost cutting strategy or a cost reduction method because on those activities or tasks that achieve the highest possible value are implemented. Value in this case refers to value in terms of financial viability, value to society, ease of use, image, functionality, value to environment and society etc (YU, SHEN, KELLY and HUNTER, 2005). If a process does not enhance value then it is removed from the tasks that are scheduled. Using modern Ms Project softwares, the project manager can carry out activity scheduling to ensure activities are carried out in a logical sequence. This software enables resource levelling which ensures that human, capital and other resources that go into implementing the project are allocated evenly among the various project tasks. This ensures no duplication of resources during implementation and no resources that are not needed are employed(ADAMS, 2008). The process of resource levelling cuts costs without compromising value. This process also allocates staff to tasks and manages man hours. The process ensures than each task is performed within a given time period which saves on time and thus money. The incidences where employees just laze around are eliminated since it also encourages performance monitoring. The software also sets milestones that must be achieved at certain times during the implementation of the project. These milestones are meant to check the progress and ensure the project is being implemented within the given time period which saves money(ADAMS, 2008).
The next method is removing from the implementation plan any step that does not enhance value to stakeholders. This will remove unnecessary wastage of resources. The next step involves implementing the project in phases. This will ensure those phases that can be implemented first are carried out and the rest are done at a later date. This reduces cost without reducing value. Implementing project in phases enables the project manager to roll out some services as the project is being implemented. For example in the hotel project the project manager can roll out the room service as he moves to the next phase. This will start bring in revenue which is interest rate free. This in effect reduces the finance costs.
The final method is sourcing for cheaper but high quality alternative construction materials from a different source. The project manager should do a little bit more research to identify cheaper but high quality raw materials. This will reduce cost without impacting on the project substantially. In modern procurement practises all over the world, a procurement manager must at least choose between three quotations from three different suppliers before making the decision to place an order. Applying this practise in the procurement of capital intensive equipment can save the hotel project substantial funds as it will ensure sourcing is done from the supplier who offers the best deal that achieves the highest value for money(ADAMS, 2008).
The last and final method of reducing cost without impacting on the project majorly is by sourcing for cheaper finance. One of the largest components of project implementation costs is finance costs component. Different financial institutions offer financial products at different interest rates. By seeking for the cheapest source in the market the project manager will reduce costs without impacting on the project in a major scale. There are also different financial products which offer different benefits. For example equity finance terms are different from debt finance terms(ADAMS, 2008). By analysing the impact of the various available options to the projects cash flows the project manager can choose a financing scheme that achieves the highest value for the project. The project manager could also request for a long term loan whose repayment is smaller than when the loan is on a short term basis. All these are some of the most easily recognizable methods that the project manager and his project implementation team can use to reduce cost without impacting on the project majorly (ADAMS, 2008).
- Design of a structure for integrating formal Risk Management into the project process in order that a risk register can be set-up and maintained throughout the design and construction phases.
Risk can be considered as the potential for complications and problems as it relates to completion of project goals and tasks. In other words a risk is any situation that is unplanned for but if it occurs can prevent or disrupt the a project from achieving its objectives. Risks are said to be prevalent in any human endeavour including construction projects and some cannot be completely eliminated but can only be managed to mitigate the impact to the achievement of project objectives. Construction projects attach their goals to cost, time and quality standards. These goals can only be achieved if risks are identified and mitigated. Risk management must therefore be integrated in the overall project management approach (BESNER and HOBBS, 2012).
In carrying out risk management structure it is important to note that risks in a project such as the hotel project cannot be identified for the project as a whole rather for the various sections and units within the project. The entire project is broken down into work packages using the work breakdown structure. Risks should therefore be identified in consultation with other stakeholders for each work package. In this process risky work packages are identified and the risks recorded in the risk register (DEY, 2002). A risk breakdown structure just like the work breakdown structure is essential in managing risk in a construction project. Risk management is a facet of quality using basic techniques of measurement to ensure risks in the hotel project are identified, classified and managed effectively. The first step in the process of risk management structure is designing a system of assessing risks. This ensures all risks are identified and recorded. In this process uncertainties are assessed on the basis of their probable impact on cost structure, quality standards or time implications (MILLS, AUSTIN, THOMSON and DEVINE-WRIGHT, 2009). The next step after that is analysing the risks by identifying the uncertainties and prioritizing the risks. Prioritizing risks enables the project manager to determine which risks need to be eliminated completely because of their potential consequences to the project objectives if they were to happen. The next step is known as risk control. This involves laying down strategies to mitigate the risks and carrying out evaluation and control. This structure of risk management then enables the project manager to prepare a risk breakdown structure which classifies risks according to category and shows the sources of the risks. The project manager can then determine which areas of the project lifecycle are more likely to bring about many risks and which require careful attention (DEY, 2002). The risks are then recorded in a risk register which identifies and defines the risk, the probable impact were it to occur i.e. whether it would have moderate impact, high impact or negligible impact, the mitigating steps and control and evaluation methods. This risk register acts as a guide in managing risks in a construction project and ensures the project achieves quality in terms of cost, quality and time (DEY, 2002).
2. Identification of risks that should be recorded on the initial risk register for monitoring.
The hotel project faces a number of probable risks that should be recorded on the initial risk register. The first risk that should be recorded on the initial risk register should be technical risk. This risk is associated with the operation and application of programs which include computers and security perimeter fencing, closed circuit television services (CCTV), ETC. There is a risk that the hotel project implementers may not have the technical capacity to install and operate these programs to the benefit of the hotel. The hotel may not have an antivirus to check malware , cookies and other malware that may put the computer system at risk of crushing thereby grounding the hotel operation into a halt(DEY, 2002). The next risk may be the project management risk. This could be the inability or inadequacy of the project manager to supervise, monitor, guide and deliver the hotel project on time as per cost specification and according to standards set and anticipated by stakeholders. This may in effect delay the hotel from rolling out its services to the market on time which in effect makes it unsustainable(YU, SHEN, KELLY and HUNTER, 2005). The next risk which should be recorded on the initial risk register is the organizational risk. This deals with the organizational structure. The risk is whether the hotel project has the right structure which enables the hotel to attract talent and retain it. This risk also looks at whether the hotel infrastructure relates to business operations and protects its assets. The worry is whether the hotel has clear segregation of duties which prevents wastage of resources and inefficiencies. The next risk that should be recorded in the risk register includes financial risks(YU, SHEN, KELLY and HUNTER, 2005). The hotel will incur a huge capital expenditure to erect and upgrade to international standards. The uncertainty or risk is whether it will generate adequate returns to pay off the loan and also whether it will get adequate financiers who will buy in and offer financing at affordable rates. There are also external risks that can impact on the hotel’s ability to meet its objectives. These risks are normally beyond the ability7 of the company to mitigate. These include terrorist threats, earthquakes, tornados, hurricanes, tsunamis, floods etc. These are natural calamities which can easily destroy the hotel building and bring the business to a halt. The next risk includes compliance risks. The hotel may fail to abide by the states laws and regulations. This may lead to closure of the hotel business(YU, SHEN, KELLY and HUNTER, 2005).
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