Value

I recently hopped onto the IVMA website, suggested by a colleague, to look at the content added by Roy Barton on 'value'. Appropriate for an organisation that seeks to manage value.

It is interesting to consider the construction industry view of value as a benefit between options, and a more financial or economic approach.

When it comes to assessing 'value for money' in my procurement and construction roles, I've heard much said, but often little that advanced the cause. Happily, Roy's work is a welcome clarification on what constitutes value for money.

Value for money is not an absolute concept, but a comparative one, created on the basis of market valuation of relevant factors (and here concepts used in cost-benefit analysis come to mind).

The benefits of an investment, often assessed qualitatively in asset projects (at least at the level of the asset team), need to be quantified, as do the costs to the owner and user/s (in true CBA style). Then we've got input to a comparative value for money assessment.

What we are seeking is an opportunity cost comparison based on estimates of costs and quantified ($-based) benefits from a project, running over the project life (or a reasonable period that allows for comparison). Factored into this, if we are being rigorous, is pricing of (real) options into the future for opportunities to take up activities that will produce a meaningful return and drop off activities that fail to achieve a meaningful return.

The value for money consideration is what set of benefits to costs do we get for investment A compared to investment B or any other likely use of the money...a market comparator can always be helpful as an 'umpire' for the exercise. This would be a set of financial instruments with a similar risk to that of the project options before us.

There is no short-cut to assessing value for money; its all about what else could be done with the money: if it is an investment achieving a greater return (more benefits), then the VFM of the project in question drops. If it drops too much, then, irrespective of any theoretical NPV the project might have, it represents a nett cost: another use of the money would produce a greater benefit, and this is foregone. The converse also applies, of course.

Benefits can be assessed on the basis of costs imposed upon or taken off the owner or user: maintenance and other operating costs is the obvious first port of call, but costs imposed or taken off users are important too.

An example of this in a retail centre: I can reduce the users' cost/time in travel by adding cinemas to my retail centre; that will make the cinema part of the 'destination', making it more attractive than otherwise, and drive patronage. For the investor, the additional capital and operating costs provide for a greater return in higher patronage.

Is this value for money? Compared to stand alone cinemas some distance away; probably, and it can be measured on a comparative basis, and compared with an investment in shares in a similarly balanced portfolio of retail and cinema operators.

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After I'd written this, I came across a very concise explanation of comparative value for money in a piece of draft legislation I reviewed:

"x represents value for money in that the costs of the services are reasonable, relative to both the benefits achieved and the cost of alternative equivalent benefit producing services"

This references the market for price-benefit setting, takes into consideration the opportunity cost of a service and the benefits that accrue to the user.