Money and value are related, but they are different concepts. So before we dive into lean, let's think about value, because value is one of the three things we talk about when we talk about lean. We talk about waste, we talk about flow, we talk about value. So let's talk about the value side of money. Many, many studies have been done over the last 20 plus years, of the total cost of ownership over a building life, a 20 year cycle, 30 year cycle, 40 year cycle. They generally result in pie charts that look something like this, whereas the biggest cost over the life of a building is operation. Second biggest is energy. And then finally, construction cost is down there. You have the fees, you have the owner costs, and you also have the cost of money. Borrow money to build something, you have to pay for that cost. It gets amortized like your mortgage for your home. So the construction cost is maybe a small part of the total, but it is the keystone part. 100% of projects that are estimated too high, don't go ahead. If you don't pencil out, you do not have a project. Penciling out is a concept borrowed from commercial developers. It is precisely the process that's used in target value design, with some additional tools. So value is delivered by a project. So once again, what is a project? We've seen this wonderful definition earlier from Professor Peter Barrett. A project is a means to a means to an end. In the value case, the end is about wealth. It could be about the mission of the organization, their business case, problem statement or a value proposition. Different ways to state it. Let's begin with a value proposition. This is from a project I did a few years ago in midtown Manhattan. And the developer's problem statement was quite succinct. Design a Class A midtown tower renting at competitive rates to Triple-A corporate tenants, delivering an 8% return on investment. The capital they put in and want to get an 8% return over time. So let's break that down into elements of function and form, economy and time. Well function in Class A meant, well a 45' distance from the quarter to perimeter. Generally a 30' column to column spacing. Those tenants did not want to see a lot of columns, a 9' high finish ceiling and a 30 second maximum wait at the lobby for an elevator during the morning rush. Those are functional attributes from that value proposition. Now let's take a look at form attributes, triple-A corporate tenants. We'll they're going to be interested in a certain level of lobby and core finishes. They're going to want HVAC control or floor-by-floor air handling units. They would like the curb appeal of the store front, what they see in the massing, general look and feel of the building, and they like a 5' planning module, because it makes it easier to lay out system's furniture. In terms of economy, we have to look at two things, the competitive rates, and the 8% return on investment. That tells us how much construction cost we can spend so that we can then pencil out. We design to the allowable cost, we set certain limits such as 17.5 pounds per square foot for the super structure and we maximize the floor area ratio. To get that return on investment and to rent at a competitive rate, the developer had to build on every square foot that they could maximize, as allowed by zoning. We're going to look at that into detail a little bit later on. And finally time, well to be competitive, the product, the space for rent, had to be available at a predicted peak in market demand. So that is where the estimate is looking to. What we gotta come on the market at such and such a time, so we're escalating out mid way to construction. And we need a design concepts ready enough to show brokers. Start building interest before the building was completed. So function, form, economy, and time all derived from a single succinct value proposition. Penciling out, what does that mean? Well, it beings with understanding the competitive market. What will a tenant pay in rent? That's the income. That's the income side, that's the money coming in. We have to compare that, as it's defined in the business case, to set the allowable costs. What will we spend to get that income? And that's all project items, hard and soft. The construction costs may be only part of the hard costs, there are other owner costs below the line costs. But it's the keystone part that's in the business case and then we take a look and we confirm it with that cost estimate. If the estimate for the hard costs is equal to or less than the allowable cost, the design pencils out. And we can proceed, and with the developer mindset, which is also the target value delivery mindset. You do that early on, you do that system by system, segment by segment. Because you don't want that backflow problem of designing too far, and then having to come back and redesign, that's waste. Now remember Step 4 from normalization, the Parametric Estimate? That's that Predictive Cost Model. This icon shows it as a single sheet. Might be more than one sheet, but it's very, very brief and it's looking at a high level, the big picture. Well we do that because one of the classic wastes we learn in lean is over processing and as an architect, and again I'm speaking from the architectural point of view, too often we get a detailed estimate with projected trade costs, and it's irrelevant to early decision making. It's possible with software, to plug in a few variables and tell a designer early in conceptual, well three years from now when we're in construction we've gotta go buy 3,000, 3/4" copper ells. That's true, I got that information early on in design, completely useless. That's a classic waste of over processing. What I needed to know is, my plumbing system as a cost of total construction for this building type, is it appropriate? We know plumbing for an office building is a relatively low percentage of the cost. For a hospital, it's relatively high. It's a very different type of piping. I need to know that. I didn't need to know this. I didn't need all that detail. The parametric estimate is key. So let's recap. It is the owner's value proposition that directs our search as designers, with a full team of constructors define that effective design solution. The parametric estimate enables our decision making, system selection, and solution ranking by providing a big picture view of the cost model, without useless detail. You don't want to over process your estimate.
