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Two sister cities, Rosencrantz and Guildenstern, have both decided to each build a new library for their citizens. Both cities have roughly the same budget (100 million coins) and a schedule of 3 years (for both design and construction).
Target Value Delivery (TVD) is “a management practice that drives the design [and construction] to deliver customer values within project constraints” (Ballard, 2009). It is an application of Taiichi Ohno’s practice of self-imposing necessity as a means for continuous improvement (Ballard, 2009).
A common concept in the construction industry is that there are three legs to a project: Schedule, Cost, and Quality. An owner is advised to pick any two, and thereby sacrifice the third (i.e., you can have cost and schedule, but not the quality you want.
Around the world, shared risk and reward contracts are becoming more prevalent. In the United States several forms of agreements for construction projects including: Sutter Health’s Integrated Form of Agreement (IFOA), the ConsensusDocs 300, and American Institute of Architects (AIA) contracts.
Research on Target Value Design (TVD) has found that TVD projects are delivered 15% to 20% below market price1. Additionally, TVD projects are more likely to achieve predictable cost performance outcomes while carry less contingency than projects that do not use TVD2.
Project cost overrun is a common problem around the world. A study of 258 projects in 20 nations revealed that cost escalation occurred in 9 out of 10 projects. The study found that on average the final cost was 28% higher than the forecasted cost. Cost overrun is a serious problem because it makes construction investment projects risky.
The use of target costing can be a promising approach to achieving a more proactive cost management. Developed over the past 40 years by a number of Japanese companies, Target Costing differs from the cost-plus approach traditionally used in the construction industry.