Affordability is already one of the greatest barriers to achieving zero-net energy (ZNE) construction but now, with forecasts indicating that nonresidential new construction spending will continue to contract through 2023, owners have more motivation than ever to value engineer measures that could move their projects closer to ZNE.
Architects are more than familiar with value engineering as the approach for providing a project’s most necessary functions at the lowest cost. This strategy promotes the substitution of specified materials and methods with less expensive alternatives, without sacrificing functionality. It’s typically decried as a cost reduction strategy that can eliminate value in how a building performs.
There’s rarely consideration given to value engineering as a strategy for improving building value. Yet, wouldn’t it make more sense to focus on designing projects that achieve the lowest operational cost? Wouldn’t that be true value engineering?
When project costs are tight, it’s up to architects to help owners achieve their long-term cost reduction goals by focusing on ZNE targets and changing the discussion around what value truly means.
Understanding How Owners Value Buildings
Value engineering typically means taking steps to reduce a project’s cost to meet a given budget. However, this approach ultimately ignores the best interest of the customer.
Since most new construction projects are decided based on the proposed construction costs, there is very little consideration given to value engineering that improves building value, construction quality and building performance from energy efficiency and sustainability perspectives.
One reason for this disconnect is that few architects approach building value in the same terms as owners. For owners, building value is typically based on capitalization rate.
Capitalization rate is a variable based on market conditions but can be calculated as the ratio between the property’s net operating income and either the original capital cost or its current market value.
When owners pursue energy efficiency projects, they find their building’s lower-than-projected operating costs add exponentially to the overall value of the building.
For example, if a property is saving $10,000 a year in energy costs due to a specific upgrade, and the project has a capitalization rate of 10, then this measure adds to the value of building by ten times the savings it generates, turning that $10,000 into $100,000 worth of value.
Shifting the Focus to Long-Term Value
Another way to have this conversation about value is by approaching value engineering based on Life Cycle Cost (LCC). An LCC approach accounts for the total cost of a ZNE project based on investment costs as well as future operational costs. Prioritizing LCC where it makes the most impact can help ensure that the building owner achieves the greatest performance value for the lowest long-term cost.
It may not be feasible to do all projects through an LCC analysis lens. That approach could drive up an owner’s capital investment and, consequently, compromise the building’s market competitiveness in the short term, impacting the building’s capitalization ratio. Still, over the building’s lifetime, its capitalization rate and return on revenue will be much more beneficial for the owner.
Although various government agencies use this LCC approach on a regular basis, most private buildings are constructed based on the lowest proposed construction costs without regard to future costs. By addressing this long-term view of value in the conceptual design stage, architects can shift the conversation around value to prioritize ZNE projects.
Ideally, ZNE goals will be incorporated into the RFP process well before a design team is selected. However, architects taking on the challenge of educating owners about the feasibility of incorporating ZNE will find that a significant challenge to having these conversations comes in the way that the design team is valued. Most design firms still bid on a project using a competitive pricing model. This approach rarely includes sustainable building design fees, making ZNE work cost-prohibitive during the early design stages when it stands to make the most impact.
A team approach to design could help address this misalignment. By taking a teaming approach with energy consultants, as well as electrical and mechanical contractors and other partners, architects can gather stronger input on price alternatives through the conceptual, schematic, and design development stages. They can provide true value by working with partners to value engineer long-term energy and cost reduction strategies.
If you’re ready to build your team and benefit from deep experience in energy and sustainability consulting, reach out to Lincus today.