Overview
FAR 48.101 defines Value Engineering (VE) as a formal technique used to reduce acquisition, operation, and support costs without compromising the essential functions or characteristics of the contracted items. It establishes two primary frameworks—voluntary incentives and mandatory programs—to encourage contractors to identify and propose more economical performance methods.
Key Rules
- Definition of VE: A systematic effort to eliminate non-essential costs while maintaining performance, reliability, quality, and safety.
- Voluntary Approach (Incentive):
- Contractor participation is optional and self-funded.
- The government only reimburses development and implementation costs if a Value Engineering Change Proposal (VECP) is accepted.
- Contractors receive a higher percentage of the resulting savings as an incentive for taking the financial risk.
- Mandatory Approach (Program Requirement):
- The government requires and pays for a specific VE effort as a separately priced line item in the contract.
- The contractor must follow a government-approved program plan and level of effort.
- Savings sharing is permitted at a lower rate than the voluntary approach, except in architect-engineer contracts where sharing is strictly prohibited.
- VECP Sharing: Sharing of savings is the mechanism used to reward contractors for accepted proposals that reduce the overall cost of the contract.
Practical Implications
- Profit Opportunity: Contractors can leverage the voluntary VECP process to increase their profit margins by sharing in the cost savings generated by their internal innovations.
- Risk Allocation: In voluntary programs, the contractor bears the financial risk of developing proposals; in mandatory programs, the government assumes the risk by funding the effort upfront to ensure cost-reduction activities occur on high-value or complex projects.