Overview
FAR Part 48 prescribes the policies and procedures for using Value Engineering (VE) in federal contracts. It provides a mechanism for contractors to suggest more economical ways of performing a contract—without compromising essential functions or characteristics—and share in the resulting cost savings.
Key Rules
- Two Approaches:
- Incentive (Voluntary): The contractor voluntarily develops and submits Value Engineering Change Proposals (VECPs) using their own resources. They only get paid if the VECP is accepted.
- Program Requirement (Mandatory): The Government requires a specific VE effort as a separately priced line item in the contract.
- Sharing Rates:
- For Fixed-Price voluntary incentives, the sharing rate is typically 50/50 (though the CO can increase the contractor’s share up to 75%).
- For Cost-Reimbursement voluntary incentives, the contractor typically receives 25% of the savings.
- Mandatory program requirements usually offer lower contractor sharing rates (e.g., 15-25%).
- Thresholds: VE clauses are generally mandatory in solicitations and contracts exceeding the Simplified Acquisition Threshold (SAT), except for specific categories like R&D, personal services, or standard commercial products.
- Architect-Engineer (A-E) Contracts: These must include a mandatory VE program, but the contractor is not permitted to share in any resulting savings.
- No "Double Dipping": Benefits from an accepted VECP cannot be rewarded under both VE sharing and other contract incentives (like performance or design-to-cost incentives).
Responsibilities
- Contracting Officers (COs):
- Determine the appropriate sharing period (typically 36 to 60 months) and sharing rates.
- Must accept or reject a VECP within 45 days of receipt (or provide a notification of delay).
- Document the rationale for accepting or rejecting a VECP in the contract file.
- Unilaterally determine collateral costs, collateral savings, and sharing rates under certain clause alternates.
- Agencies:
- Establish cost-effective VE procedures and processes.
- Ensure VECPs are processed objectively and expeditiously.
- Establish funding procedures for paying contractor shares of future and collateral savings.
- Contractors:
- Responsible for the development and implementation costs of voluntary VECPs.
- Must maintain records for 3 years after final payment to identify the first unit incorporating a VECP.
- Must reimburse the Government if the VECP is accepted but units are later rejected or not delivered.
Practical Implications
Value Engineering serves as a powerful tool for "win-win" scenarios in government contracting. In a real-world scenario, if a contractor identifies a manufacturing process change that saves the Government $1 million over five years, a voluntary incentive clause could net the contractor a $500,000 bonus (their 50% share) that does not count toward statutory profit or fee limitations.
However, contractors must weigh the development risk; since the Government has unilateral discretion to reject a VECP, the contractor may lose the investment they put into developing the proposal. For the Government, VE is a primary method for reducing Total Ownership Cost (TOC), particularly in major system acquisitions and construction, by incentivizing the private sector's technical expertise to eliminate "gold plating" and waste.