Overview
FAR 48.102 establishes the requirement for federal agencies to maintain value engineering (VE) programs that provide financial incentives to contractors for developing cost-saving proposals. It mandates the inclusion of VE clauses in most contracts while outlining specific procedures for processing Value Engineering Change Proposals (VECPs) and sharing the resulting savings.
Key Rules
- Mandatory Incentives: Agencies must provide contractors with a substantial financial incentive to submit VECPs and must include VE provisions in supply, service, architect-engineer, and construction contracts unless specifically exempted.
- Major Systems Requirements:
- Non-DoD: Must use VE program requirement clauses in initial production contracts for major systems unless documented as inappropriate.
- DoD: Mandatory for the first and second production buys of major system acquisitions, with exceptions for competitive awards or where a contractor already has an effective VE program.
- Profit and Fee Treatment: VE incentive payments are legally distinct from profit and fee; they do not count toward statutory fee limitations (e.g., the 10% or 15% caps). Furthermore, a contractor’s profit on the "instant" (current) contract should generally not be reduced because a VECP was accepted.
- Architect-Engineer (A-E) Exception: A-E contracts must include a mandatory VE program to reduce ownership costs, but unlike other contract types, A-E contractors are prohibited from sharing in the savings.
- CO Determinations: The Contracting Officer (CO) determines sharing rates and periods on a case-by-case basis. They must document the contract file with rationale considering the complexity of the change, development risk, and remaining production units.
Practical Implications
- Revenue Opportunity: For supply and construction contractors, VECPs represent a high-margin opportunity to increase total contract value because savings shares are additive to negotiated profit and exempt from statutory fee ceilings.
- Administrative Burden: Agencies are under a regulatory mandate to process VECPs "expeditiously," providing contractors a lever to ensure their cost-saving ideas are not ignored by the government technical team.
- A-E Performance vs. Reward: A-E firms must be aware that while they are required to perform value engineering as part of their professional services, they will not receive a percentage of the savings, making VE a performance metric rather than a direct financial incentive for them.