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CIB2007-023
Living Building Concept for Adding
Value in an Unpredictable Future
Hennes de Ridder, Ruben Vrijhoef
ABSTRACT
The “living building” concept presented in this paper is a new approach to
life cycle management of built services. The concept represents an
adaptable approach that respects the fact that the function and
circumstances of built services change faster than the building itself. This is
in full contrast to the traditional building paradigm and current practice,
which are based on a static approach to the performance of buildings. In
traditional practice the demand is fixed at the start of a project and supply is
only mobilised to meet the initially established requirements. This is
demand driven supply often preventing innovation. The “living building”
concept aims to involve all parties in the delivery and use of buildings to
deal adequately with changing technology, changing regulations and
changing demands throughout the entire life cycle of buildings. Basically
the whole life cycle of a built object can be managed and optimised by
quantifying and interconnecting the time dependent variables value, costs
and price. Application of the “living building” concept potentially reduces
risks and transaction costs substantially. In order to do so the concept must
be the basis for life cycle contracts. When dealing with the changes of the
building during the contract period, and prescribing the unit price per unit
change. In short, the basic idea is to measure the value/price balance
during life time in relation to the initial value/price balance offered by the
supplier.
Keywords: Best value, Dynamic Control, Life Cycle Value, Benefit
Optimisation, Living Building Concept.
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1. INTRODUCTION
The development of buildings and constructions is mostly a “one shot”
realisation and can be compared with prototype development for other
industrial products. The big difference is the available budget for
development. Since the prototype is not copied and subsequently sold in
large numbers, the development budget is rather low and rarely exceeds
5% to 10% of the total costs for the prototype. In manufacturing, the
quotient of development costs and the production cost of one single
prototype is substantially higher, reaching at least 50 but sometimes
exceeding 100.
In the last two decades systems engineering (SE) has been
introduced in the construction sector in order to control the complex design
and construct of buildings and structures. The complete toolbox of SE,
which originally was developed for the aerospace and automotive
industries, has been copied for construction industry while neglecting the
big difference in available budget for development. The first experiences
point out that SE does not give added value where the costs are
disproportional. Another important difference is the contractual setting in
the construction industry where the application of SE should be conducted
with both a demanding party as well as a supplying party. Hence not only
cost plays an important role but also the price.
For the building industry, which becomes more difficult in an
increasing complex and complicated society, SE plays a central role in
controlling projects. In this paper the principles of SE are translated into a
practical set of concepts which allow for an industrial development of
prototypes which can be used for client specific solutions.
2. CLIENT’S PERSPECTIVE ON BUILT VALUE AND BENEFIT
The aim of construction is to produce an acceptable difference between the
value at the one side against the costs of a built object at the other side.
The difference is the total benefit. This benefit is for all involved parties.
Value can be decomposed in three types of value: (1) Psychic value, which
is strongly connected to aesthetics and luxury of buildings, (2) functional
value which is connected to capacities of buildings and structures such as
square meters floor surface, lifting capacity or pumping capacity, and (3)
technical value which is connected to for instance climate, energy
consumption, safety.
Costs can also be decomposed in three cost components: (1)
development costs consisting of design, engineering and construction
costs, (2) operational costs and (3) maintenance costs for repair,
inspection, replacement and protection (figure 1).
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costs
value
psychic
value
functional
value
technical
value
development costs of
operation
costs
maintenance
costs
Figure 1: Value and cost aspects
3. PRESENT SITUATION IN CONSTRUCTION
In the present approach in the construction industry the client will define a
building for which the value is fixed and associated with a cost estimation.
In most cases the building is developed by an advisor. The client wants to
know what he will buy before entering the market with his demand.
Disadvantages are well known. The client with, or without, help of his
advisor is not able to define his wishes without knowing the possibilities,
therefore the client often is disappointed when the building is submitted.
Suppliers are also disappointed because they don’t have any opportunity to
profile themselves with interesting products. There is only price competition
as the value is fully fixed. More value is not rewarded and less value will be
punished.
The main effect of price competition is that suppliers hardly make
profits. The only way to generate profits is to squeeze subcontractors,
which affect the quality delivered. Perhaps the most important
disadvantage of this situation is that suppliers don’t have possibilities to
industrialise their products. They can’t specialise in order to capture an
interesting part of the market. All this results in buildings that are more
expensive than needed, and dissatisfying clients. Finally, the traditional
way of working in construction, i.e. building a client-specific one-off
prototype each project again, generates significant transactions costs and
rework because suppliers have to build what is designed by others.
4. VALUE AND COSTS AS CHANGING VARIABLES
The present situation in construction industry is not optimal. The main point
is that the world in and around a built object is changing faster than the
building itself. A list of influencing factors can be given, which are subject to
changes. First of all the users with their wishes and requirements. Then the
surroundings with the associated stakeholders. Further, the regulations for
what should be established and what is allowed in buildings change
continuously. Then, the technology is in a constant acceleration. Also the
climate is changing with rainfall, winds and temperature. Last but not least
the financial situations are changing continuously. The changing world
makes that a client should be aware of changing circumstances and
changing insights which ask for ‘living buildings’. Changes are regular
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instead of exceptions and should be incorporated in the contracts between
demanding and supplying parties.
Nevertheless, an initiative for a construction or building project can
be conditioned and limited in a first stage of a project. First of all the value
should not be less than a certain minimum value. That defines the Design
Program (Austin & Thomson 1999). The value is also limited by all types of
boundary conditions, which together form a constraint. The difference
between the minimum value and the actual value is limited by the boundary
conditions which can be considered as a set of opportunities.
Then, the costs should not exceed a certain maximum. That is the
available budget. The initial estimation of the costs can be considered as a
minimum. The reason is perception which in all cases leads to an
underestimation of costs. The difference between the maximum costs and
the minimum costs can be considered to be the “risk budget” (Figure 2).
Moreover each project has is own strategic goal which normally is given in
the ratio between value and total costs, which should always be more than
1. The main issue here is that value and costs are variables in time, set
within a number of limitations but subject to the creativity and inventiveness
of the designers.
Boundary conditions
Opportunities
maximum costs (budget)
benefit (t)
Minimum value
Risk budget
value (t)
costs (t)
Minimum
costst
benefit > 0
benefit
=η
cos t
Figure 2: Essence of delivering value in the built environment
The basic goals, strategy, conditions and limitations of a project
can also be shown in a graph indicating the area of interest if the
development, and the possibilities and opportunities of a project (Figure 3).
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value curve
cost
value
Boundary conditions
Area of
interest
Minimum value
Minimum costs
costs
Maximum costs
Figure 3: Relation between value and costs
5. INCREASING BENEFIT BY DYNAMIC CONTROL
As mentioned above, value as well as costs are variables in time to be
controlled dynamically. In 2003 the concept of dynamic control was first
introduced (De Ridder & Vrijhoef 2003). The essential mechanism of
dynamic control is represented by two main strategies to respond to
unexpected events (figure 4). The first option is the opportunity of creating
more value against little more costs, increasing the benefit when compared
to the initial benefit. The second option can be used when confronting a
risk. In such a case a little less value should be accepted against a
substantial reduction of costs. This option leads also to an increase of
benefit.
value
costs
value
costs
value
costs
Figure 4: Aim of dynamic control
6. COMPLICATING FACTOR: THE ROLE OF THE SUPPLIER
Introducing the dynamic control reveals a significant difficulty for the
construction industry. Since in every project the development process is
outsourced to a supplying party the total benefit should be split into two
parts: (1) the benefit for the demanding party and (2) the profit for the
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supplying party. (Vogtlander 2001). An extra difficulty is that there is neither
one demanding party nor one supplying party. There are many
stakeholders playing their specific role and having their specific interests
both at the demand side as well as at the supply side, both looking for
benefit (figure 5).
demanders benefit
suppliers benefit
value (t)
costs (t)
price (t)
costs (t)
Figure 5: Demand and supply
The main condition for dynamic control is the dynamic coupling between
the three variables value, price and costs. In fact, two complex and multidimensional transfer functions should be established between: (1) Value
and price, and (2) Price and costs.
An exploration of the dynamic relation between the value and the
price leads to a set of system specifications representing the system with
value on the one hand and the price on the other. From the system
specifications the client is to get an idea of the value, whereas the system
specifications give the client the opportunity to pay a price for the delivered
system. An exploration of the dynamic coupling between price and costs
leads to the system (object, building, structure) itself as a mean to indicate
the different cost types and the risk involved with the different tasks to be
performed. For suppliers the difference between price and costs equals the
sum of risks and profit (figure 6).
value (t)
system
specification
price (t)
system
costs (t)
Figure 6: Dynamic coupling of value, price and costs
The coupling between system and costs is achieved by
determining the costs of the elements plus the costs to aggregate them.
This can be done at any aggregation level. By using transfer functions, the
client is not only able to select competent suppliers who can offer an
interesting value-price ratio, but also to control his project in a “dynamic
way”, which results in a satisfactory value price ratio.
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7. INTRODUCING SYSTEMS APPROACH FOR DYNAMIC CONTROL
With the introduction of dynamic control the problem arises how to control
the process. In fact for dynamic control the system behaviour at the top
level should be quantified in value, price and costs, whereas the work will
be done at the lower scale levels. A smart decomposition of the system can
be helpful to reduce complexity and to improve control. Two types of part
systems play an important role (De Ridder 1994) (figure 7). The first type is
a subsystem, which is defined as a subset of elements of the system with
conservation of all original relations between all elements. The second type
is an aspect system which is defined as a subset of the relations of the
system including all elements of the system (In ’t Veld 1992).
Relation
Subsystem
Figure 7: Subsystems and aspect systems
Subsystems refer to “things” and can be formed such that interactions and
communications are simplified. (Kickert 1979). The “nearly decomposition
rule” of Simon (Simon 1969) leads to the formation of subsystems. The
essence is that the behaviour of the considered subsystems on short term
basis is determined by internal coherence, whereas the long term
behaviour of the considered sub system is determined by external
coherence between the subsystems. The consequence of the above rule in
terms of decomposition is that relationships inside the subsystems are
maximised and relationships outside the subsystems are minimised.
Aspect systems refer to the issues or topics of a system and finally
the behaviour of the system as a whole. It is clear that the costs at system
level can be considered as aspect systems. For instance operational costs
are a subset of the total lifecycle costs. It can be seen that a technical value
as for instance “energy consumption” is also an aspect system. The same
is true for a functional aspect such as pumping capacity for a pumping
station. It becomes difficult for the “psychic value”. In most cases a
reference building is used for aesthetic value or luxury level. When using
aspect systems, value and costs can be controlled dynamically (figure 8).
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costs
value
Aspect
systems
psychological
value
functional
value
development
costs
technical
value
operational
costs
maintenance
costs
Subsystems
Elements
Figure 8: Simplified control of subsystems and aspect systems
8. THE ROLE OF SUPPLIERS
8.1 STANDARDISATION AT HIGHER AGGREGATION LEVEL
Suppliers are supposed to add value. This is only possible when they have
full insight in the behaviour and the costs of their competitive offer. That
means that they should sell only an aggregate of standard products
belonging to product families and product modules, which result in a unique
client specific solution. The development of product families is a result of
market research and technical research. This is neither the case in the
traditional situation nor in the DBFMO intermediate situation. The path
towards a push market in the construction industry is shown in figure 9.
Client specific
solution
Client specific
solution
Contract
Level of
standardisation
Level of
standardisation
Supply driven
solution
Contract
Contract Level of
standardisation
Elements,
components
Top-down
Top-down
Bottom-up
Traditional
DB(FMO)
LBC ‘push market’
Figure 9: Path toward push market in construction
A higher level of standardization will not only lead to better and cheaper
solutions but also to significantly lower transaction costs when compared
with the traditional situation. The difference is that the supplier will offer his
own product, and possesses all related knowledge needed to supply the
product.
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8.2 SELECTION OF SUPPLIERS
Using the two “transfer functions” System and System specifications, the
client is able to select the best supplier with the best offer. This precontractual procedure is very important for a good start of the project. It
should be recognised that demander and supplier have a long relation
during the development, construction and maintenance of the system.
Using the basic relation between value, price and costs, the basic
strategies of the players involved are shown in figure 10. Given the area of
interest of the demander, spanned by his maximum price, minimum
requirements and the value price ratio, the line C1-P1-V1 in figure 10
represents system 1 delivered by supplier 1, characterised by Value V1,
Price P1 and Costs C1. The line C2-P2-V2 represents system 2 delivered by
supplier 2. It is easy for the client to determine the best “value for money”.
The supplier offering the system with the smallest Alpha should be the
winner in the competition. The case with two suppliers in figure 10 shows
clearly that both providers fulfil the basics requirements: V1 ≥ Vmin and V2 ≥
Vmin.
price
Demander’s strategy
Suppliers’ strategies
min.
requirements
Supplier 2
Supplier 1
max. price
P1
P2
α2
α1
value
V1
V2
C2
C1
costs
Figure 10: Selection of suppliers
8.3 DYNAMIC CONTRACT
The need for ‘living buildings’ requires a ‘dynamic contract’ in which the
relation between value delivered and price to be paid is fixed. The output
measurement will be coupled at the highest possible aggregation level with
the price to be paid. The simplest relation between value delivered and
price to be paid is a straight line connecting the initial Value Price proposal
of the winning competitor with the origin. Hence any change in value can
simply be quantified and paid for. However, the range and the impact of
unforeseen changes must be limited. The boundaries of the changes are
defined in the contract. In case changes appear to be too big, the changes
will be dealt with by starting a new project, and an additional contract to
accommodate these changes.
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8.4 PRICE FORMING
During the contractual period, the price forming has the same importance
as the initial price. Dynamic price forming is a new phenomenon in the
construction and building industry. In most cases clients are willing to
accept changes to the price that influence the value delivered up to a
guaranteed maximum price (Boukendour & Bah 2001). An exception is a
pure commercial project in which the value equals the income generated
by the system. In that case the difference between the value and costs can
easily be measured in money and divided amongst the two involved
parties. (figure 11).
Price
Pactual
Pinit
Value
value
actual
value
init.
cost
init.
cost
actual
Costs
Figure 11: Value vs price vs costs
When value is also expressed in non-monetary dimensions, it is easy to
use aspect systems for the price forming. The principle is rather simple.
After the formation of the relevant aspect systems it is possible to establish
the initial performance of the system associated with the initial price. When
a change occurs, it is easy to establish the actual performance of the
system using the same aspect systems. First the aspect systems are made
dimensionless and can therefore be considered as vectors. When using
dimensionless linear vectors, it is possible to add the different value
dimensions in order to establish a dimensionless total value. Then the ratio
of the actual performance and the initial performance can be used to
establish the price (De Ridder 2002). Another way to arrange a coupling
between the two variables value and costs is using scenarios. The client
defines a few virtual and extreme scenarios with respect to psychic value,
functional value and technical value which should virtually be realized 5
years after the start of the project. These scenarios are defined in two
directions (minimum and maximum) with respect to the base case (figure
12).
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MAX
Base
case
Base
case
MIN
t
MAX
MAX
Base
case
start
t
MIN
MIN
t
scenario
t
end
Psychic value
start
t
scenario
t
t
end
start
t
scenario
t
end
Technical value
Functional value
Figure 12: Minimum and maximum scenarios
The suppliers are invited to make a price for each scenario, which is rather
simple because the scenarios are well defined. The price of an actual
change can easily be determined from the scenarios, based on the
magnitude of the change and the time if its occurrence, related to the
scenario (figure 13).
Vmaximum
V
change
Vadapted
base case
t
scenario
start
t
scenario
t
end
Figure 13: Change to the scenario
For the dynamic control of psychic value it is difficult to make price
arrangements with a direct coupling between value and price. Psychic
value is hardly to measure. Therefore changes in psychic value during the
contractual period should be paid by a “cost plus” arrangement. This
means that costs induced by creating extra psychic value will be measured
and paid, plus a percentage fee (figure 14). In this case both involved
parties will work together in order to get best value for money and best
money for value.
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547
Price
Pactual
Pinit
cost
init.
cost
actual
Costs
Figure 14: Price forming when value cannot be quantified (psychic value)
9. CONCLUSION
Defining and managing the value, price and costs of buildings has proven
to be difficult. The characteristics of construction, including fragmented
demand and supply chains, complex projects, one shot development and
long lead times are basic causes, often leading to cost and time overruns,
value loss and dissatisfied clients.
In this paper, a systems engineering model for the construction
industry is presented for the dynamic and integrated control of value, price
and costs across the demand and supply chain, i.e. through the cascade of
value demanding and value supplying parties. The basic paradigm of the
model is to maximize the total benefit of the built object, which is the sum of
the aggregate profit for supplying parties and the added value for
demanding parties. The model is extended over the life cycle aimed at
achieving ultimate life cycle benefit of building objects viewed as an
aggregate of built functional objects through the partial life cycles.
10. REFERENCES
Austin, S. A. and Thomson, D. S. (1999). "Integral value engineering in
design." In: Proceedings COBRA 1999.
Boukendour, S. and Bah, R. (2001). "The guaranteed maximum price
contract as call option." Construction Management and Economics 19,
563-567.
De Leeuw, A.C.J. (1974), Systeemleer en organisatiekunde, Leiden.
De Ridder, H.A.J. (1994), Design and construct of complex civil
engineering systems: a new approach to organization and contracts, Delft
University Press, Delft.
De Ridder, H.A.J. (2002). “Performance based control of design and
construct contracts.” Proceedings CIB Joint Conference Hong Kong, May
2002.
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De Ridder, H. and Vrijhoef, R. (2003). "The concept of life cycle benefit of
buildings: developing a framework for life cycle value management." In:
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Construction, Vol. 1, 22-24 October 2003, Singapore, 654-664.
In ’t Veld, J. (1992), Analyse van Organisatie problemen, Stenfert Kroese,
Leiden/Antwerpen.
Kickert, W.J.M. (1979), Organisation of decision making, North Holland,
New York.
Simon, H.A. (1969), “The architecture of complexity”. In: The sciences of
the artificial, Cambridge.
Van Emden, M.H. (1971), An Analysis of Complexity, Mathematical Centre,
Amsterdam.
Vogtlander, J.G. (2001) The model of the Eco-costs/Value Ratio. Design
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