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DA PAMPHLET 2750-33 HEADQUARTERS, DEPARTMENT OF THE ARMY, WASHINGTON, D.C. Value Engineering in Military Procurement:- The Old Suggestion Box? By: Captain Stephen R. Black, JAGC, USAR, Seattle, Washington Introduction. tractors to explore avenues of cost saving to the The concept of value engineering (VE) was government by providing that a portion of any articulated first in the early 1960’s as a method Cost Savings Will be shared between the COntraC- of providing incentive to contractors to submit tor and the government. the correct cost saving ideas. The basic clauses and regula- use of value engineering, the armed forces may tion fist appeared in the Armed Services Pro- obtain needed supplies and services at the low- curementRegulation [hereinafter ASPR] in D~-est cost and the contractor realize significant cember 1962, with subsequent revision in the rewards- November 15, 1963, and April 16, 1973 editions The basic purpose underlying value engineer- - of ASPR. Defense Procurement Circular 121 is- ing is described as: sued 10 May 1974 became the current Armed m-Services Procurement Regulation pertaining to “* * * the elimination or modification of value engineering on 1 September 1974.’ The anything that contributes to the cost of a language of the current clauses and regulation contract item or task that is not necessary I accomplishes a marked departure from the pre- for needed performance, quality, main- vious regulatory language. This article is in- tainability, reliability, or interchangeabili- tended to acquaint the reader with the meaning ty. Specifically, VE as contemplated by this and application of the present value engineering Part, constitutes a systematic and creative clauses and regulation, contrast the same to the effort, not required by any other provision predecessor, probe the most common areas of of the contract, directed towards utilizing legal dispute and suggest the present viability each contract item or task to insure that its bf previous Armed Services Board of Contract essential function is provided at the lowest Appeal decisions. overall cost. Overall cost may include but need not be limited to, the costs of acquir- Purpose. ing, operating, and logistically supporting “The value engineering clause is, in ef- an item or system.” fect, the functional equivalent of the old employee suggestion box, but with a pre- Value Engineering Described. scribed system of rewards for valuable suggestions which are adopted. And it is Not every proposal which if implemented by the government would result in cost savings is well-established that the value engineering value engineering. Reductions in overall cost at- clause is to be liberally construed to carry tributable solely to deliverable end item quan- out its purpose of encouraging contractors tities, or a change in research and development to develop and submit cost savings propos- end items or test quantities due solely to results als.” of previous testing under the contract, or solely Value engineering provisions serve the pur- on a change of the contract type are not com- lc-x. pose of providing incentives to government con- pensable as value engir~eering.~ Pam 27-50-33 -_ 2 Thus, reduction of a contract quantity from 10 items to five items is not value engineering. However, use of the word “solely” suggests that overall cost savings attributable to changes in quantity may be value engineering, if based in part on valid and defined value engineering criteria. ASPR contains three mechanisms for imple- menting the value engineering concept. (1) Use of the VE program requirement contract clause (VEPR).5 (2) Use of the VE incentive clause (VEI).e (3) Review of unsoIicited value en- gineering change proposal^.^ All three clauses further the same purpose; to-wit: reduction of overall contract costs with- out impairment of essential function.B The VEPR differs from the VEI clause in that it mandates a systematic value engineering effort as part of the contract, whereas the VEI clause The Judge Advocate General operates strictly as an indu~ement.~ Major General Wilton B. Persons, Jr. The Assistant Judge Advocate General A contractor operating under a VEPR clause Major General Lawrence H. Williams apparently is paid twice, once as an item of work Commandant, Judge Advocate General‘s School in the contract for undertaking a continuous Colonel William S. Fulton, Jr. value engineering program and again when a Editorial Board Value Engineering Change Proposal (VEPR) Colonel Darrell L. Peck Lieutenant Colonel Jack H. Williams resulting from the value engineering program, Editor is accepted. The policy of the Department of De- Captain Paul F. Hill fense to insure critical reappraisals of contract Administrative Assistant requirements with a view toward cost savings Mrs. Helena Daidone justifies providing contractors with substantial financial incentives to undertake value en- gineering. Early Department of Defense policy in this regard was stated as follows: “It is Department of Defense policy to continuously review systems against ‘de- sign to’ requirements for cost acquisition and ownership. To exercise such cost re- straint, management mechanisms and tools are necessary to challenge unnecessary re- The Army Lawyer is published monthly by The Judge quirements. Value engineering is one of the Advocate General’s School. By-lined articles represent management tools available for this pur- the opinions of the authors and do not necessarily reflect pose.” lo the views of The Judge Advocate General or the Depart- ment of the Army. Manuscripts on topics of interest to Consistent with this directive, the current military lawyers are invited to: Editor, The Army Lawyer, The Judge Advocate General’s School, Char- regulation states the objective for inclusion of a lottesville, Virginia 22901. Manuscripts will be returned VEPR in a contract as being: only upon specific request. No compensation can be paid to authors for articles published. Funds for printing this “* * * to reduce development, produc- publication were approved by Headquarters, Depart- tion, or use costs by requiring the contrac- ment of the Amy, 26 May 1971. tor to establish a VE program in accordance Pam 27-50-33 3 with MIL-V-38352 or as otherwise specified $100,000.00 is optional.16 If a VEI clause is pre- in the contract. The clause should be used sent in the prime contract, its use is mandatory when a sustained VE effort at a predeter- in subcontracts of over $100,000.00 and optional mined level is desired. The VE program re- in subcontracts of under that amount.17 quirement shall be shown as a separately priced line item in the contract and may The VEI clause may be excluded if in conflict apply to all or to selected phases of contract with other contract requirements and objectives performance. This clause is designed in contracts for advanced development or en- primarily for contracts covering conceptual, gineering development or cost plus incentive fee validation and full scale development or cost plus award fee type contracts.18 phases of a program.’’ (Emphasis The incentive clause must be excluded from: supplied.) l1 contracts for research or exploratory develop- ment; contracts for engineering services from Thus, the government is willing to pay the nonprofit organizations; cost reimbursement contractor for undertaking the value engineer- type contracts other than cost plus incentive fee ing program to insure it will receive the early or cost plus award fee type contracts; contracts and full benefit of the cost savings which the for architect engineer services; contracts con- contractor may be able to effect. taining a VEPR clause except as provided in “It is DOD policy: (a) to provide contrac- ASPR 1-1702.3(b); contracts providing for tors with a substantive financial incentive product or component improvement unless re- to undertake VE on the premise that both stricted to areas not covered by provisions for DOD and the contractor will benefit. Ac- product or component improvement, contracts cordingly, the contractor should be assured for commercial items being procured without (1) a fair proportion of the savings, (2) that invoking special military requirements and his proportion will apply to a substantial specifications; and contracts for personal serv- base, and (3) objective and expeditious ice~.~~ processing of proposals submitted, and ASPR now provides a specific procedure for “(b) To encourage subcontractor partici- consideration of unsolicited VE proposals. The pation through extension by prime contrac- prior ASPR provision merely authorized ac- tors of VE incentives to appropriate sub- ceptance of such proposals, but did not define contractors. specific requirements for acceptance or pay- “VE incentive payments do not constitute ment. profit or fee subject to the limitation im- An unsolicited value engineering proposal posed by 10 USC 2306(d).” may be submitted on any contract. There is no By contrast the VEI clause does not require requirement that the person submitting the any specified value engineering effort on the VECP have any connection with the contract. contractor’s part as an item of work, but merely The proposal must reduce costs without affect- holds forth the prospect for reward if the con- ing essential functions and must contain certain tractor develops and submits meritorious cost minimal information.20 If the procurement ac- tivity accepts an unsolicited VECP, a separate saving proposals. l3 purchase agreement will be negotiated.21 How- The contracting officer decides, within certain ever, the contract price for an unsolicited VECP prescribed confines, whether a contract is suit- is limited to the larger of 20 percent of the net able for value engineering.14 A VEI clause is savings on current contracts, or 20 percent of mandatory for supply and service contracts in the estimated average savings to the depart- excess of $100,000.00 and all fixed price con- ment as determined by the purchasing office.22 struction ~0ntracts.l~However, the head of the procurement agency may determine a minimal potential exists for cost reduction and excuse Methods of Cost Sharing.