We have a contract ongoing whereby there is / will be a number of VE options. We have got a few smaller items agreed already but we have identified a proposal that would save both sides a 6 figure sum.
How should this proposal be valued correctly? There is agreement on how much the revised works/scope would cost but agreement on the starting point is difficult.
4 different people have had a look at it and come up with 4 different ways of pricing.
Tender Activity Schedule - Taking the activity schedule and deducting the VE option from it. This does not see fair to me as it is not a defined cost
Revised Activity Schedule - This is the schedule being used for applications. Again it doesn’t involve defined cost
Works Removed - Costing up the works not being undertaken and splitting the differece.
Defined Cost - Costing up honestly what the works would have cost to do and what they are doing now.
The client is obviously taking the path of the biggest figure which is the tender activity schedule and unless we can convince them otherwise they will make a PM assessment to that effect.
What is the correct way of pricing a VE?
Valuing VE under clause 16.1 of the NEC4 contract is for the Contractor to put forward a proposal and for the PM to accept or not accept that proposal. it does not go into detail on how the Contractor prices the proposal, other than the fact that if it is not accepted then the proposed VE will not go ahead and the Contractor will not get any proportion of the saving and will just have to work to the original Scope.
In practice I think the proposal should be assessed the same way you would assess a compensation event. For that you do NOT use activity schedule rates, unless by agreement. You otherwise build up from first principals what the original works you now know would have cost, less the cost of the new works both considering risk. That is how the proposal should be built up.
The idea though with NEC4 is that this VE is offer/acceptance. It is not like a CE where the PM gets to assess themselves if they do not agree with the works.
This will be now further complicated no doubt if they have already instructed this VE works to go ahead, without first agreeing the cost of the saving.
What ever the saving is, the Prices are reduced by the value engineering ratio stated in contract data if this is option A/B, or will fall out of the gainshare under option C/D (where the target is not changed but the forecast cost will go down with the VE meaning more gainshare)