How Value Engineering Can Mitigate Risk in Construction

A confluence of events has sharpened the construction industry’s focus on “value engineering,” or lowering costs of construction and long-term building maintenance — while reducing risk in the process.

The immediate need for value engineering is the constriction of supply chains resulting from the COVID-19 pandemic. Shortages are driving prices up: For instance, the prices of steel mill products alone skyrocketed 80% through the first seven months of 2021, following an 11% rise in 2020.¹

The perennial labor shortage has made the need for value engineering even greater.

However, value engineering isn’t just about fixing supply chain breakdowns and labor shortages. The effect of delivering value in and of itself, makes the methodology worthwhile in any environment.

How value engineering works and its effect on insurance

Value engineering involves analyzing building features, systems, equipment and material selections to achieve functionality at the lowest lifecycle cost without sacrificing necessary performance, quality, reliability and safety. General contractors, subcontractors, owners or developers all have a hand in the process.

The cost of insurance has not been considered part of value engineering. However, perhaps it should be, given insurance’s increasing share of project budgets.

Consider wood versus steel stud construction. Wood construction has been the standard due to plentiful supply, low costs and ease of use. In recent years, steel stud construction has emerged as a viable option, even though it carries higher initial costs and fewer contractors have experience with the material.

But even without the current supply chain woes, wood construction has increased risks over steel stud construction. Wood frame buildings are more vulnerable to extreme weather, including fire and damage from flooding.

Builder’s risk coverage rates alone on frame construction have skyrocketed as much as 600% in recent years. Rates on excess liability coverage against catastrophic losses have risen dramatically as well. Steel stud construction, meanwhile, has not seen similar increases.

In this case, value engineering accounts for the fact that insurance today accounts for 3% to 4% of a project’s total cost. Factoring the cost of insurance removes much of wood’s advantage over steel frame structures. Remember that insurance costs are paid over 20 to 25 years of the building’s lifecycle, not merely during construction.

Another factor: LEED certification

The impact of LEED (Leadership in Energy and Environmental Design) certification is also having a growing influence on value engineering.

This globally recognized standard covers the design, construction and operation of environmentally sustainable buildings.² Structures that are energy efficient, have excellent air and light quality, and don’t develop environmental issues are less expensive to build and operate long term. LEED-certified structures can command higher rents and sale prices, and have the promise of fewer insurance claims than for other buildings.

Value engineering asks and answers the question if it’s worth the additional upfront investment to design and build a LEED-certified building — or if that investment is better spent elsewhere.

Ultimately, value engineering is about trade-offs, based on rational evaluation of critical factors that will affect a construction project over the course of a structure’s lifetime. Supply and labor shortages, greater project risk and long-term environmental issues make value engineering more important than ever.

HUB International’s construction industry consultants can help you harness the trends driving change in the construction industry, delivering improved risk management and lower costs.

¹ National Association of Home Builders, “Building Materials Prices: Large Increases Year-To-Date,” September 9, 2021.

² Optima, “The History of LEED Certification,” April 1, 2020.