7.8 Value Engineering (VE)

Defense Manufacturing Management Guide for Program Managers
Chapter 7 - Producibility

7.8 Value Engineering (VE)
     7.8.1 DOD Policy
     7.8.2 Types of Value Engineering
     7.8.3 Contracting for Value Engineering
     7.8.4 Value Engineering Savings

The DOD Value Engineering program reduces cost, increases quality, and improves mission capabilities.  VE employs a simple yet flexible and structured set of tools, techniques and procedures to promote innovation and creativity.  Furthermore, it incentivizes government participants and their industry partners to increase their joint value proposition in achieving best value solutions as part of a successful business relationship.  VE can be defined as "an organized effort directed at analyzing the functions of systems, equipment, facilities, services, and supplies for the purpose of achieving the essential functions at the lowest life-cycle cost consistent with required performance, reliability, quality, and safety."

DOD policy has always been to encourage value engineering because it saves money, increasing emphasis in the 1980's led to Congressional interest in 1987 and the OMB Circular A-131 in January, 1988, Policy has shifted from DOD encouragement to OMB directed use of Value Engineering Program Requirements Clauses for contracts in initial production or research and development unless a waiver is justified. Agencies are now required to "actively elicit" Value Engineering Chance Proposals (VECP's) from contractors and are to emphasize VE to government and contractor personnel.

Within the defense environment there are two acronyms used for the recommendations resulting from VE efforts. They are:

1. Value Engineering Proposal (VEP). A VE recommendation originating and implemented solely within the Government, one which was originated by a contractor and may be implemented as a unilateral contractor action (i.e., a Class II change), or one which was originated by a contractor hired solely for the purpose of doing VE and implemented by the Government.
2. Value Engineering Change Proposal (VECP). A formal recommendation by a contractor requiring Government approval and which will require a change to the contract, specifications, purchase description, statement of work, etc., and result in a decrease in the overall cost to the Government. VECPS may be submitted by contractors having a VE clause included in their contract in accordance with the applicable acquisition regulation. Subcontractors may also submit VECPS to prime contractors in accordance with the terms of their contract. The current acquisition regulation directs contractors to include VE provisions in subcontracts (with certain limited exceptions) of $100,000 or more. Spares contracts and subcontracts of $25,000 or more must include a VE incentive clause.

The objective of VE in defense contracts is to reduce the cost of acquisition and/or ownership to the government, In addition VE is also used to enhance the effectiveness of the system.  Special contract clauses can be utilized (FAR 48.2) to either allow or require contractors to initiate, develop and submit cost reduction proposals during the performance of the contract. Through the VE clause, the contractor is offered the opportunity to share the attained savings with the DOD.

Value Engineering Incentive Clause:  The objective of this clause is to encourage contractors to develop and submit VECPs by providing for the sharing of any savings, although the contractor are not required to do VE. The clause merely describes the sharing that will take place should the contractor submit a VECP which the government accepts. Entirely permissive in intent, it allows the contractor to ignore this provision and still otherwise perform under his contract.

Value Engineering Program Requirement Clause:  The objective of the VE program requirement clause is to reduce development, production, or use costs by requiring the contractor to establish a VE program. This clause should be used when a sustained VE effort at a predetermined level is desired. The VE program requirement is a separately priced line item in the contract and may apply to all or to selected phases of contract performance.

There are two basic types of savings that can be shared when a VECP is approved and implemented. They are acquisition and collateral savings.

Acquisition savings may include savings from the instant contract, concurrent contracts, and future contracts. The VECP is submitted under the instant contract. If the VECP is accepted and implemented on items delivered on the instant contract, the contractor receives a percentage of the net savings that accrue as a result of the VECP. In calculating these savings, contractor costs of developing and implementing the VECP and the Government's cost of implementation are all subtracted from the gross saving before sharing begins. Therefore, it is important that the contractor identify and record (for audit purposes) the costs incurred in developing and implementing the VECP. Development costs are expenses incurred after it has been determined that a VECP will be prepared and before the Government accepts the VECP. Implementation costs are expenses that will be incurred to implement the change after the VECP has been approved. All development and implementation costs must be offset before any sharing of acquisition savings may occur.