March 17, 1986 FOREWORD Value Engineering (VE) VE is recognized as an effective technique for reducing costs, increasing productivity, and improving quality-related features such as durability, reliability, and maintainability. There has been a VE program in the Department of Defense (DoD) for over twenty years. Then, as now, the DoD VE program consists of in-house and contractor activities. Provisions in the Federal Acquisition Regulation permit a contractor to share the savings that result from those contractor value engineering change proposals that are accepted by the Government. The first in this Handbook series, DoD Hanbook 111, was published on March 29, 1963. Since its second publication in 1968, as DoD Value Engineering Handbook, DoD 5010.8-H, portions have again become obsolete. The integration of VE with design to cost, acquisition streamlining, spares value analysis, and other recent management initiatives along with the emphasis on VE as an integral part of the line management process are some of the reasons that prompted this revision. This Handbook is authorized by DoD Directive 4245.8. This Handbook is intended as a guide and should not be interpreted as a DoD Directive. It is intended to provide an understanding of the DoD VE program in order to encourage broad participation and achieve maximum benefits. It has been prepared by the U.S. Army Management Engineering Training Activity (AMETA). However, some material in the Handbook has been synthesized from extensive comments and suggestions received from both Government and industry contributors. Suggestions for further improvement should be addressed to the Office of the Assistant Secretary of Defense (Acquisition and Logistics), Pentagon, Washington, DC 20301-8000. DoD Components may obtain copies of this Handbook through their own publications channels. Other Federal Agencies and the public may obtain copies from the U.S. Department of Commerce, National Technical Information Services, 5285 Port Royal Rd., Springfield, Virginia 22161. James P. Wade, Jr. Assistant Secretary of Defense (Acquisition and Logistics) TABLE OF CONTENTS Page FOREWORD2 TABLE OF CONTENTS3 CHAPTER 1 - PERSPECTIVE OF VALUE ENGINEERING (VE)7 C1.1. INTRODUCTION7 C1.2. HISTORICAL BACKGROUND8 C1.3. VE DEFINED10 C1.4. PROGRAM OBJECTIVE11 C1.5. FUNDAMENTALS11 C1.6. A TYPICAL VE PROGRAM13 C1.7. OPPORTUNITIES FOR VE14 C1.8. BENEFITS OF VE15 C1.9. VE IN DoD CONTRACTS17 C1.10. SUMMARY18 CHAPTER 2 - APPLYING VE19 C2.1. CRITERIA19 C2.2. EARLY VS. LATER VE20 C2.3. PROGRAM LIFE CYCLE22 C2.4. PROJECT SELECTION25 C2.5. VE JOB PLAN27 C2.6. SUMMARY30 CHAPTER 3 - CONTRACTUAL ASPECTS OF VE32 C3.1. INTRODUCTION32 C3.2. BENEFITS33 C3.3. WHAT A VECP IS34 C3.4. THE PRELIMINARY VECP35 C3.5. TYPES OF VE PROVISIONS IN DoD CONTRACTS36 C3.6. SHARING VECP SAVINGS37 C3.7. SUBCONTRACTOR VE41 C3.8. VECP POTENTIAL42 C3.9. VECP BASIC REQUIREMENTS42 C3.10. VECP PREPARATION43 C3.11. VECP DATA RIGHTS44 C3.12. CONTESTED VE DECISIONS44 C3.13. VECP DISTRIBUTION49 C3.14. GOVERNMENT RESPONSE49 C3.15. SUMMARY49 CHAPTER 4 - MANAGING THE DoD VE ORGANIZATION51 C4.1. INTRODUCTION51 C4.2. DEVELOPING A VE POLICY51 C4.3. NATURE OF THE VE INVESTMENT52 C4.4. ORGANIZING THE VE CAPABILITY54 C4.5. METHODS OF OPERATION56 C4.6. VE IN THE PROJECT MANAGEMENT OFFICE (PMO)57 C4.7. MOTIVATIONAL CONSIDERATIONS57 C4.8. PROGRAM CONTROL61 C4.9. AUDIT SYSTEM62 C4.10. SUMMARY63 CHAPTER 5 - VE METHODOLOGY PART 1: GENERATING PROPOSALS65 C5.1. INTRODUCTION65 C5.2. GROUP DYNAMICS65 C5.3. THE VE JOB PLAN66 C5.4. ORIENTATION PHASE67 C5.5. INFORMATION PHASE68 C5.6. SPECULATION PHASE76 C5.7. ANALYSIS PHASE79 C5.8. DEVELOPMENT PHASE80 C5.9. SUMMARY82 CHAPTER 6 - VE METHODOLOGY PART II: MARKETING PROPOSALS88 C6.1. INTRODUCTION88 C6.2. PRESENTATION PHASE88 C6.3. GAINING VEP ACCEPTANCE90 C6.4. IMPLEMENTATION AND FOLLOW-UP PHASE93 C6.5. SUMMARY94 CHAPTER 7 - TRAINING99 C7.1. INTRODUCTION99 C7.2. IMPLEMENTING A VE TRAINING PROGRAM99 C7.3. SELECTING VE SPECIALISTS101 C7.4. INTENSIVE TRAINING101 C7.5. ORIENTATION SESSIONS105 C7.6. CONTRACTUAL TRAINING106 C7.7. INFORMAL TRAINING106 C7.8. SUMMARY107 CHAPTER 8 - RELATIONSHIP OF VE TO OTHER PROGRAMS AND DISCIPLINES110 C8.1. INTRODUCTION110 C8.2. PROGRAM (PROJECT) MANAGEMENT OFFICES110 C8.3. COST EFFECTIVENESS111 C8.4. PROGRAM ANALYSIS111 C8.5. CONFIGURATION MANAGEMENT112 C8.6. STANDARDIZATION113 C8.7. RELIABILITY, QUALITY ASSURANCE, MAINTAINABILITY113 C8.8. LIFE-CYCLE COSTING113 C8.9. DESIGN TO COST113 C8.10. LOGISTICS SUPPORT ANALYSIS114 C8.11. QUALITY CIRCLES114 C8.12. SUMMARY115 CHAPTER 9 - VE EXAMPLES116 C9.1. INTRODUCTION116 APPENDIX AP1. OFFICES RESPONSIBLE FOR VE WITHIN MAJOR DoD ELEMENTS137 FIGURES C1.F1. Factors Leading to VE Changes15 C1.F2. Total Value Engineering Effectiveness17 C2.F1. VE Savings Potential During Life of a Typical System22 C2.F2. Program Life-Cycle Opportunity24 C3.F1. Government and Contractor Sharing Rates39 C3.F2. Sample VECP Format46 C4.F1. Some Program Management Office VE Options59 C4.F2. Contractor VE Program Checklist64 C5.F1. VE Job Plan Chart67 C5.F2. Pareto's Law of Distribution73 C5.F3. Cost/Value Target Model75 C5.F4. Value Engineering Checklist84 C6.F1. Facsimile DoD In-House Value Engineering Proposal (VEP)96 C6.F2. GIDEP Value Engineering (VE) Database Report97 C6.F3. Instructions for Completion of DD Form 233398 C7.F1. Data Package for Workshop Projects108 C9.F1. San Antonio ALC VE Project116 C9.F2. MLG Wheel Brakes117 C9.F3. USACECOM AN/TYC-39 Message Switch118 C9.F4. U.S. Army Tank-Automotive Command119 C9.F5. IMMCO VECP's 4028-16/17-M14 Aiming Post Light120 C9.F6. Anniston Army Depot122 C9.F7. Refurbishing MK 82 Bomb Skins124 C9.F8. New Cumberland Army Depot126 C9.F9. Substitution for MIL-SPEC Compressor128 C9.F10. Airfield Taxiway & Apron129 C9.F11. Savings -- $43,000130 C9.F12. Sewage Collection & Treatment131 C9.F13. Day & Zimmermann, Inc. VEDP KS-4012-154132 C9.F14. VECP 0668133 C9.F15. VEPC 0875134 C1. CHAPTER 1 PERSPECTIVE OF VALUE ENGINEERING (VE) C1.1. INTRODUCTION C1.1.1. The amount of money available for our country's defense is determined by the democratic processes by which we govern ourselves. Defense budgets are affected by the threat from our adversaries, our reaction to the threat, by the funds necessary for Government activities other than defense and finally by our skill in managing the resources entrusted to us for defense. Efficient utilization of these allotted resources has been a major management objective for many years. The quickening pace of technological advances and the increasing pressure of budgetary restraints have made it necessary to place even more emphasis on economy and efficiency within the Department of Defense (DoD). C1.1.2. DoD policy is to use VE to make a significant contribution toward greater economy in developing, acquiring, operating, and supporting the products necessary to fulfill its mission. The DoD VE program is intended to foster the use of value-oriented techniques across the entire spectrum of DoD activities. C1.1.3. VE is a fundamental approach which challenges everything and takes nothing for granted, including the necessity for a product or service. It is applicable to systems, equipment, facilities, procedures, methods, software, and supplies. It may be successfully introduced at any point in the life cycle of the product under consideration (see Chapter 2). The following are some of the areas in which VE has been applied in the Department of Defense: C1.1.3.1. Construction. C1.1.3.2. Design or equipment modifications. C1.1.3.3. Equipment and logistics support. C1.1.3.4. Equipment maintenance. C1.1.3.5. Facilities, master plan, and concepts. C1.1.3.6. Hardware. C1.1.3.7. Manufacturing processes. C1.1.3.8. Material handling and transportation. C1.1.3.9. Packaging, packing, and preservation. C1.1.3.10. Procedures and reports. C1.1.3.11. Procurement and reprocurement. C1.1.3.12. Publications and manuals. C1.1.3.13. Quality assurance and reliability. C1.1.3.14. Salvage, rejected, or excess material. C1.1.3.15. Site preparation and adaptation. C1.1.3.16. Software (computer) programs and flow charts. C1.1.3.17. Specifications and drawings. C1.1.3.18. Technical and logistics data. C1.1.3.19. Technical requirements. C1.1.3.20. Testing, test equipment, and procedures. C1.1.3.21. Tooling. C1.1.3.22. Training. C1.1.4. VE emerged from the industrial community. It has spread throughout private industry and within the Department of Defense because of its ability to yield a large return on a relatively modest investment. It is an additional management tool to gain the desired results within the constraints of time and cost. To realize this potential, VE must be clearly understood and correctly applied. This Chapter provides the perspective for the VE program in the Department of Defense. C1.2. HISTORICAL BACKGROUND C1.2.1. The VE concept is a by-product of material shortages during World War II. These shortages led to the creation of innovative material and design alternatives. It was found that the alternative approaches often worked as well, or better, and cost less. From this beginning an analytical discipline evolved in private industry that was structured to challenge the proposed way of designing and acquiring things and to systematically search for less costly alternatives. C1.2.2. In 1957, the Navy's Bureau of Ships became the first DoD activity to establish a formal VE activity. It was called "value engineering" because it was staffed with general engineers, the most closely related position description available at that time. Although no longer exclusively the province of "engineers," the term "value engineering" has persisted as the title of the program. C1.2.3. The Department of Defense established its VE program in 1963. It continues to have two distinct elements. The first is an in-house effort whereby VE is performed by DoD military and civilian personnel. The second is the program that was created to stimulate contractors to perform VE and to develop and submit value engineering change proposals (VECPs). Accepted VECPs change contract specifications, purchase descriptions, or statements of work that impose costly, nonessential requirements. An incentive is provided by giving the contractor a share in the savings that result from any approved change proposals submitted by the contractor and approved by the Government. An alternative, the program requirement clause, is used to pay a contractor for VE activities regardless of whether the purpose is submission of VECPs or some other cost reduction purpose. C1.2.4. With some few exceptions, it has been mandatory since June 1962 that VE provisions be included in most DoD contracts to encourage contractor participation and to realize the full benefits from cost reduction opportunities and innovations. C1.2.5. Prior to the development of the clause permitting contractors to share in the savings, a contractor who submitted a cost reduction change had the amount of his contract reduced by the total reduction. This usually reduced his profit by a proportional amount. There was, therefore, no incentive to submit proposals to reduce cost. Now the VE clause allows a portion of the saving accruing to the Government to be returned to the contractor. C1.2.6. Unfortunately, there are still some Government personnel who believe that the contractor is paid twice or is unjustly rewarded. A close examination of the clauses, an understanding of the safeguards in the acquisition process, and some familiarization with the reasons for unnecessary costs should serve to correct this erroneous idea. C1.3. VE DEFINED C1.3.1. In the Department of Defense, VE is defined as a systematic effort directed at analyzing the functional requirements of DoD systems, equipment, facilities, procedures, and supplies for the purpose of achieving the essential functions at the lowest total cost, consistent with the needed performance, safety, reliability, quality, and maintainability. Although there are numerous other published definitions of VE, most are merely minor variations of this definition. Value Engineering (VE) is the term used in this Handbook and by the Department of Defense in its contracts. Terms such as value analysis, value management, value control, and others are considered synonymous. Some use them to differentiate the use of the value process by those who are not engineers. Thus, value analysis is sometimes used to describe a value program in a purchasing or acquisition function. The terms value control or value management are used by some to describe the application of value techniques to administrative and office procedures. There may be some subtle differences among these terms but the basic objectives and philosophy appear to be the same for all. The DoD VE program encompasses all value-oriented activities. C1.3.2. VE is not centered on a specific category of the physical sciences. It incorporates available technologies as well as the principles of economics and business management into a specific procedure. Chapter 5 of this Handbook describes the generation of value proposals portion of this procedure. Marketing of value proposals is one of the most difficult segments of the VE process. Chapter 6 of this Handbook is devoted solely to this topic. C1.3.3. VE utilizes the total resources available to an organization to achieve broad, top management objectives. Thus, VE is seen as a systematic and creative approach for increasing the "return on investment" (ROI) in components, weapon systems, facilities, and other products acquired and operated by the Department of Defense. C1.3.4. Increased ROI for the Department of Defense results from a combination of lower costs for acquisition, logistics, or operation while maintaining the necessary level of performance. It often results in capability for the same or a lower dollar expenditure. This viewpoint is consistent with statements of policy and regulations governing VE in the Department of Defense, and serves to further describe the role of VE in the Department of Defense. For industry, the benefits of VE include an acceptable ROI, increased profits, and improved competitive position. C1.4. PROGRAM OBJECTIVE C1.4.1. The basic VE concept is that anything providing less than the performance required by the customer or user is not acceptable; anything providing more should be avoided unless there is no cost penalty. C1.4.2. The objective of VE in defense contracting is to reduce the Government's acquisition or ownership costs (operational costs, maintenance costs, training costs, etc.) while maintaining the necessary level of performance. This objective may be achieved by encouraging contractors to respond to the VE clauses in DoD contracts. These clauses invite or require contractors to initiate, develop, and submit cost-reduction proposals during performance of a contract that involve changes to contract requirements. The clauses require the Government to share with the contractor any cost reduction resulting from a VECP. VE clauses in DoD contracts are not enough. The clauses merely permit contractors to question the value of Government specifications, statements of work, and those requirements that contribute nothing (except cost) to the contract tasks or items being bought. The invitation must be accepted by the Government. Then both parties (Government and contractor) must work together to capture the actual benefits. C1.5. FUNDAMENTALS C1.5.1. Function. Function is defined as the specific purpose or use intended for something. It describes what must be achieved. For VE studies, the description of function is reduced to the simplest accurate expression. This is accomplished by employing only two words; an active verb and quantifiable noun. "Support weight," "transmit torque," and "conduct current" are typical expressions of function. Note that each function is described in terms that are quantifiable and measurable. C1.5.2. Worth. Worth is the least expenditure required to provide an essential function and is established by comparison. (One method of approximating worth is by determining the cost of a functional equivalent.) Worth is not affected by the consequence of failure. (For example, if a bolt supporting a wing of an aircraft fails, the plane may crash. Nevertheless, the worth of the bolt is the lowest cost necessary to provide a reliable fastening, not the cost of a downed aircraft.) C1.5.3. Cost. Cost is the total amount of funds required to acquire, utilize, and maintain the specified functions. For the seller, this is the total expense associated with the production of a product. For the Department of Defense, the total cost includes not only the purchase price of the product, but also the costs of introducing it into the DoD inventory, operating it, supporting it throughout its usable life and disposing of it when it no longer serves a useful, functional purpose. (Total cost also includes a proportionate share of the in-house expenditures for development, engineering, testing, spare parts, and various categories of overhead expense.) C1.5.4. Value C1.5.4.1. Value is the relationship of worth to cost in accordance with the user's (or customer's) needs and resources in a given situation. The ratio of worth to cost is the principal measure of value. Thus, a "value equation" may be used to derive a Value Index as follows: Value Index = Worth = Utility Cost Cost C1.5.4.2. Value may be increased by: C1.5.4.2.1. Improving the utility of something with no change in cost; C1.5.4.2.2. Retaining the same utility for less cost; or C1.5.4.2.3. Combining improved utility with a decrease in cost. Optimum value is achieved when all utility criteria are met at the lowest overall cost. Although worth and cost can each be expressed in monetary units, value is a dimensionless expression of the relationship of these two. C1.5.5. Types of VE Recommendations C1.5.5.1. Within the defense environment there are two acronyms used for the recommendations resulting from VE efforts. They are: C1.5.5.1.1. 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. C1.5.5.1.2. Value Engineering Change Proposal (VECP). A formal recommendation by a contractor requiring Government approval and that 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 (VEI) clause. (See Chapter 3 for a more complete discussion of contractual aspects.) C1.6. A TYPICAL VE PROGRAM C1.6.1. A typical VE program is a defined set of policies and responsibilities that will ensure that VE discipline is integrated into all elements of an organization. An effective and sustained VE program will have: C1.6.1.1. Top management involvement to ensure implementation and continuing emphasis by middle management. C1.6.1.2. A key individual to manage the VE program. This individual should be well versed in VE principles, techniques, and appropriate acquisition regulations. C1.6.1.3. A "master plan" to insure that actions that may effectively contribute to a sucessful program are considered and acted upon. C1.6.1.4. VE objectives, policies, responsibilities, and reporting requirements firmly established and implemented. C1.6.1.5. The funds necessary for administrative and operating expenses such as testing and evaluating proposals. C1.6.1.6. A comprehensive training and orientation program, to acquaint personnel with policies, procedures, and benefits. C1.6.1.7. "Cross-feed" mechanisms to communicate information about successful application to others who can benefit. For defense industry programs, the following should also be included: C1.6.1.8. Close coordination with contract administration and marketing to ensure proper VE contractual participation and marketing follow-up. C1.6.1.9. Management attention to ensure that the VE discipline is used to earn additional income. C1.6.2. Although there are many other specific tasks required to ensure that VE achieves its full potential, the above form the foundation upon which the structure of a strong program may be built. C1.7. OPPORTUNITIES FOR VE C1.7.1. Shortly after its program was established, the Department of Defense conducted a study to determine the predominant sources of the opportunity for VE. The objective of the study was to determine the range and degree of application of VE. With the combined assistance of the three Military Departments, the Defense Supply Agency (now the Defense Logistics Agency), and the Society of American Value Engineers a review was conducted of 415 implemented VE changes that yielded total cost savings of $106 million. This study identified seven factors that were responsible for about 95 percent of the savings. Predominant were excessive cost, additional design effort, advances in technology, and the questioning of specifications. It is important to note that these factors do not suggest that the original design efforts were substandard. The study also revealed that a single factor was rarely the basis for a VE action. The study findings are tabulated in Figure C1.F1., below. Figure C1.F1. Factors Leading To VE Changes Percent of total actions Percent of total savings Factor Definition 13.9 23.2 Advances in technology Incorporation of new materials, components, techniques, or processes (advances in the state-of-the-art) not available at the time of the previous design effort. 23.1 22.2 Excessive cost Prior design proved technically adequate, but subsequent cost analysis revealed excessive cost. 14.4 17.7 Questioning specifications User's specifications were examined, questioned, determined to be inappropriate, out-of-date, or overspecified. 27.8 14.8 Additional design effort Application of additional skills, ideas, and information available but not utilized, during previous design effort. 5.2 11.8 Change in user's needs User's modification or redefinition of mission, function, or application of item. 6.8 4.0 Feedback from test/use Design modification based on user tests or field experience suggesting that specified parameters governing previous design exaggerated. 4.6 3.8 Design deficiencies Prior design proved inadequate in use (e.g., was characterized by inadequate performance, excessive failure rates, or technical deficiency). 4.2 2.5 Miscellaneous Other factors not included in above. C1.8. BENEFITS OF VE C1.8.1. Benefits from the DoD VE program are significant. In-house savings of approximately a billion dollars a year are being reported. Reported savings from the contractor VECP program are approximately $250 million, and are expected to increase. Benefits of this magnitude are noteworthy, but do not tell the full story. As important are the use to which these funds are put. The dollars that are made available through VE savings may be reapplied within the program, command, or DoD Component to provide the means to support approved but previously unfunded requirements. The money stays with the activity that achieves the saving and rewards those who are deserving. It can provide needed funds that are generated internally by sound management activities. C1.8.2. For DoD contractors and subcontractors there are both direct and indirect advantages from the internal VE activities, as well as from VECPs. The most obvious direct advantage is that the defense contractor shares in the cost savings that accrue from implementing VECPs. Therefore, it is a tool for increasing the contractor's profit through proposed changes in contract requirements. Changes may be proposed to contract specifications, purchase descriptions, or statements of work as long as they do not degrade essential quality, reliability, maintainability, or required performance of the item. C1.8.3. A major indirect advantage for contractors and subcontractors in addition to the savings on approved VECPs is an enhanced competitive position by producing required products at lower costs. An active program establishes a reputation as a cost-conscious producer. A reputation of this nature can be beneficial. For contracts that are negotiated, VE successes may be considered when determining the Government's fee objective for the contract. Thus a contractor with an active VE program might obtain a larger fee than a contractor without one, all other things being equal. The net result of successful contractor VE is an improved profit structure, while the Government acquires needed defense capability with a minimum expenditure of tax dollars. C1.8.4. VE also offers other benefits. For example, in an early assessment of the DoD VE program, the American Ordnance Association (now the American Defense Preparedness Association) reported the results of a survey it conducted at the request of the Department of Defense. The objective was to determine the impact on certain factors other than cost. This analysis was conducted on a random sample of 124 VE changes (taken from a total population of 660 changes). The survey revealed that VE made significant contributions toward improving the measured characteristics. Another later but more extensive survey corroborated the earlier findings and also identified why VE yielded these benefits. The specific benefits and the relative frequency of their occurrence are shown in Figure C1.F2. Figure C1.F2. Total Value Engineering Effectiveness Sample Of 193 Implemented Contractor VE Changes Drawn From 2,627 Changes C1.8.5. Thus, in addition to cost savings, VE often yields benefits such as: improved performance, relative ease of repair and replacement, repeatable manufacture, elimination of materials, standardization or simplification of operations, lighter weight, and improved use of resources. C1.9. VE IN DoD CONTRACTS Specific VE contract provisions are contained in the Federal Acquisition Regulation (FAR) and the DoD FAR supplement. These publications specify DoD acquisition policies. Their provisions enable a contractor to recover a portion of the savings that result from initiative and ingenuity in identifying and successfully challenging nonessential contract terms and provisions. These clauses are intended to foster a climate of cooperation, and managed change to permit the Government to acquire better, lower-cost items. Chapter 3 contains a detailed discussion of these contract clauses. C1.10. SUMMARY C1.10.1. The Secretary of Defense has placed increased emphasis on limiting the overall expenditures of the Department of Defense to the minimum necessary to achieve the capability to fulfill its mission. VE has become recognized as an effective contributor to this objective. It is an intensive review of requirements and the development of alternatives by the use of appropriate value techniques utilizing aspects of engineering, requirements analysis, the behavioral sciences, creativity, economic analysis, and the scientific method. Employed in an organized effort, it utilizes a systematic procedure for analyzing requirements and translating these into the most economical means of providing essential functions without impairing essential performance, reliability, quality, maintainability, and safety. There is no limit to the field in which VE may be applied. Its application can be considered at any point in the life cycle of a product. Experience has shown that the beneficial impact of VE is not limited to economic improvement. Significant improvements also occur in other attributes that are not always readily measurable in monetary terms. C1.10.2. A successful VE program requires top management involvement. Each functional, project or acquisition manager must cooperate and participate to ensure an effective program. Line management is both responsible for and benefits from VE. C2. CHAPTER 2 APPLYING VE C2.1. CRITERIA C2.1.1. If not used effectively, knowledge of VE techniques in itself is of little value. Like any profitable program or business, the successful VE program is based on an adequate return on investment. Normally a product line is selected on the basis of anticipated contribution to profit. Similarly, the selection of VE projects should be based on the potential yield from the time, talent, and cost that will be invested. The selection procedure should rank possible projects in order of potential return and probability of implementation. This enables the manager to determine that projects are likely to be the best investment. C2.1.2. VE has been proved effective in environments such as the engineering laboratory, test facilities, procurement operations, construction projects, manufacturing facilities, and maintenance depots. It has been applied to a broad spectrum of items, procedures, systems, and equipment. The range continues to expand. C2.1.3. A VE program includes a planned and organized set of specific tasks that support (or apply the VE discipline to) all major cost elements of an organization. Well-defined procedures lead practitioners through the essential steps of the process, and the execution of these steps generally involves the participation and coordination of personnel with diverse backgrounds. C2.1.4. VE is directed toward analyzing the functions of an item. In this respect, it differs from most other cost reduction techniques. Some other techniques may reduce inherent quality by cheapening the product to reduce cost. The VE technique starts with a determination of the required function and then seeks lower cost alternatives to achieve that essential function. The objective is to identify and eliminate unnecessary cost without loss in needed quality or reliability. C2.1.5. Functional analysis develops a "statement of function" for each part or element of the item being analyzed. Such functions are classified as basic and secondary. A basic function is one that cannot be eliminated without degrading the usefulness of the end item. A secondary function is not essential to operate the item in its intended application but is a consequence of the selected design solution. Limiting secondary functions and minimizing the cost of basic functions results in an item of "best value" that is consistent with all performance, reliability, quality, maintainability, logistics support, and safety requirements. The term "best value" refers to the best relationship between worth and cost. In other words, a "best value" is represented by an item that reliably performs the required basic function at an appointed time and place and that has the lowest total cost. C2.1.6. The VE program in the Department of Defense includes activities that do not necessarily use the function analysis technique. For example, activities organized to support the DoD Component Breakout, Competition, and Spares Management initiatives may not utilize all of the elements of the VE job plan as explained later in this Handbook. Similarly a rewardable VECP is one that complies with the terms of the specific contract and applicable acquisition regulations. An acceptable VECP does not have to be the result of a VE study. Although purposeful application of VE methodology is the greatest source of VECP savings benefits, on occasion, serendipity may also produce a rewardable contract change with little or no engineering content. C2.2. EARLY VS. LATER VE C2.2.1. The life cycle of a system or equipment begins with the determination that an operational deficiency exists or a new military capability is needed. Figure C2.F1. illustrates a common situation in which the savings potential decreases as the program ages. Early VE tends to produce greater savings or "cost avoidance" for two reasons. First, more units are affected by the savings actions. Second, earlier changes lower implementation costs such as testing, modifications to production lines, retooling expenses, and changes to operational support elements (e.g., spares, manuals, maintenance facilities, etc.). VE should be accomplished as early as possible. C2.2.2. However, VE late in a program is precluded only in those rare instances where the cost of the VE effort and subsequent implementation would be greater than the savings potential. While later VE normally adds implementation costs and may affect smaller quantities, such deterrents can be more than offset by improved performance through advances in technology, additional available resources, more time, etc. There are always some opportunities that offer net savings at any stage of a program. For instance, one contractor activity reports that it was advised that it was probably too late in one program to submit VECPs. Nevertheless the group persisted and submitted VECPs for an additional 3 years. Of the 22 VECPs submitted since the purported cutoff, 12 were implemented. C2.2.3. Opportunities for certain types of proposals are frequently enhanced later in the life cycle. For instance, deletion of quality assurance testing often cannot be proposed until considerable experience is acquired and data gathered to prove that it is not harmful. In another case, management reports required to understand the complex situation early in a program may turn out to be unnecessary during later phases of the program. C2.2.4. The VE opportunity may be extended because the product life and total requirements are not known. Many items of defense material will be reprocured indefinitely. There is no way to estimate the total quantity that will be purchased. Examples are: clothing, ammunition, fire extinguishers, tires, etc. Many items, which entered the defense inventory in the past, were never value engineered. These items often benefit from a VE effort to the same extent as previously value-engineered products. The potential for VE savings on these items is great. Advances in technology or changes in user requirements provide a basis for potential savings greater than the cost of the study and subsequent implementation. C2.2.5. Thus, VE may be applied at any point in the life cycle of an item or system where it is profitable to do so. Selection of the most appropriate time is influenced by many factors. Two of the most important are the magnitude of the savings likely from the effort and the ease or difficulty with which VE may be applied. VE in early stages is characterized by benefits that are difficult to measure. Often resulting "cost avoidances" are simply approximated. Later VE results in "before and after" examples whose savings may be forecast with greater accuracy. Figure C2.F1. VE Savings Potential During Life of a Typical System C2.3. PROGRAM LIFE CYCLE C2.3.1. Concept Exploration Phase. The purpose of the concept exploration phase is to develop requirements and feasible concepts and define future operational and support requirements. Value improvement generated early in the life cycle produces benefits that may last throughout the life of the item or system. The engineering competence of VE personnel is of special importance in this phase. Analysis and decisions must often be made before the complete picture is available. The goal of low total cost (rather than just low acquisition cost) emphasizes the need for a VE organization competent in related acquisition, technical, and logistics fields. The VE effort in this phase furnishes guidance needed to ensure the most economical early program and design decisions. Use of the VE program requirement clause is most useful in the early phases before full-scale engineering development (FSED) when there is no baseline from which to propose changes. C2.3.2. Demonstration and Validation Phase. The objective of the demonstration and validation phase is to ensure that the most promising system design concept(s) will be selected for FSED. During the validation phase, the contractors and Government can evaluate the system design concept(s) in terms of cost and value of operations, maintenance, test, and supply support functions. Significant improvements in total cost can be achieved through the performance of VE during this phase. C2.3.3. FSED Phase. The objective of this phase is to reaffirm the mission need and program objectives, complete the engineering design and ensure that system performance has been satisfactorily tested. VE can be used to analyze the essential requirements, military and technical characteristics, and the design tasks to develop possible alternatives offering improved value. Comparisons during this phase require special skills to validate the projected economic benefits. Evaluating initial prototypes, design layouts, and other details during the development phase may provide additional opportunities to improve value. Efforts in this phase are directed toward evaluations and recommendations concerning function, cost, and worth of specifications, systems, modules, assemblies, parts, and components. By defining value in measurable terms, VE can produce a functional cost analysis to improve visibility of the costs directly related to detailed requirements. This capability is most useful in supporting design to cost producibility engineering and planning, and other similar programs. VE is also used to support engineering activities such as design reviews, test planning and evaluation, life-cycle cost analysis, etc. C2.3.4. Production Phase. During the production phase, VE can be applied to evaluate manufacturing processes, methods, and materials. Equally applicable are support and test equipment, supply transportation and handling, technical data, facilities, maintenance, and training. C2.3.5. Operations Phase C2.3.5.1. Ownership cost is affected by operating, maintenance, and other logistics costs. Reducing ownership costs (in excess of any attendant increase in acquisition cost) results in a lower total cost. Large potential savings often justify the investment for the VE study and subsequent implementation expenses during the operational phase. Studies during this phase offer an opportunity to make changes to incorporate new technology or to exploit mission or requirements changes. Sometimes new alternatives are a better choice than the item currently in the supply system. C2.3.5.2. Studies during the operational phase by contractors and DoD personnel have resulted in: C2.3.5.2.1. Extension of item life by the application of new state-of-the-art designs, materials, or processes. C2.3.5.2.2. Reduced repair costs by achieving the repair function in a more economical manner. C2.3.5.2.3. Reduction of packaging costs by improvements in packaging procedures or materials. C2.3.5.2.4. Elimination of items. C2.3.5.3. Figure C2.F2. summarizes the VE opportunities throughout the life cycle of a typical major program. Figure C2.F2. Program Life-Cycle Opportunity Life-cycle phase System level Program phase activity Activity description Concept Exploration Mission Function or objective Clear definition of mission with stated function(s) or objectives in specific terms. a. General operational Mission performance characteristics. System trade-off study, cost-effectiveness analysis, and value-engineering analysis Review of mission requirement in terms of required performance. Review of existing system proposed systems involving advances in the state of the art. b. Feasibility System operational requirement. Utility, go/no go determination Program requirements baseline defined. Prepare system, subsystem, equipment, and component trade-off, initial cost/value effect, feasibility, and other studies consistent with mission and performance objectives. Demonstration and Validation System, sub-system equipment, and component. System design, design trade-off studies, and specs required. Expand operations, maintenance, test and activation functions. Determine additional design requirements for operations, maintenance, test, and activation. Identify and perform trade-off studies. Figure C2.F2. Program Life-Cycle Opportunity, Continued Life-cycle phase System level Program phase activity Activity description Identify applicable requirements and update source documentation. System requirement review (performance cost/value, design data, etc.) System design review. Technical evaluation and system engineering synthesis. Design requirements baseline defined. Subsystem, equipment and component design, and cost/value trade-off within functional/performance specifications. Full-Scale Engineering Development Subsystem equipment and components Subsystem design review and VE studies, test, and modification changes. Design requirement baseline approved. Product configuration defined and approved. Conduct preliminary design reviews on operations/maintenance equipment and facilities. Production System, sub-equipment, and components Evaluate manufacturing processes, methods, and materials Conduct VE studies on manufacturing problems and contract requirements. Conduct critical design review on operations and maintenance equipment and facilities. Operations (maintenance and logistic) Equipment and component Initial fabrication of changes (requiring Government approval and unilateral contr. changes) Equipment and component review to further reduce cost within the established performance characteristics. C2.4. PROJECT SELECTION C2.4.1. Although the previous discussion focused on the VE opportunity throughout the life cycle of a typical hardware system, VE is not limited to hardware. Other possible VE opportunities within the defense environment include: materials, organizational functions, software, construction, technical data, etc. Almost anything within the assigned responsibility of an activity is a possible opportunity. In the early stages of a VE program, sophisticated project selection criteria are not usually needed. Frequently there are numerous areas for which the need for VE is obvious and that offer a substantial return on investment. C2.4.2. Those involved in beginning a new VE program or revitalizing a dormant one should select early projects that are most susceptible to VE. Initial projects should be selected that: C2.4.2.1. Involve an ample dollar expenditure. C2.4.2.2. Merit attention for reasons other than cost (i.e., deficiencies in performance, reliability, etc.). C2.4.2.3. Are of interest to system or executive management. C2.4.3. As the VE program matures and the opportunities become less obvious, additional criteria may be used to select subsequent tasks. Guidelines for each specific possibility are far too numerous to be included in this Handbook. However, some additional characteristics usually exhibited by worthwhile candidates are: C2.4.3.1. No known deterrents such as exorbitant test costs or implementation schedule requirements. C2.4.3.2. A product with excessive complexity. C2.4.3.3. A design that utilizes the most advanced technology. C2.4.3.4. An accelerated development program. C2.4.3.5. An item that field use indicates is deficient in some characteristics such as excessive failure rate or extravagant operating cost. C2.4.3.6. An item utilizing older technologies for which modernization appears very promising. C2.4.4. Note that one of the attributes of VE is its ability to reveal to the rigorous user of the methodology cost improvement opportunities that might otherwise have remained invisible. C2.5. VE JOB PLAN C2.5.1. For those interested in a more detailed discussion of the VE job plan, please refer to Chapters 5 and 6 of this Handbook. The VE job plan may be summarized as a systematic, step-by-step application of the general problem-solving method: identify problem, solve problem, implement solution. Although there is no single best procedure, there are numerous ways in which VE techniques and practices can be supplemented, augmented, and adapted to conform to specific needs. Integrating these techniques and practices into a sequential procedure that is consistently productive is the core of the VE discipline. While the number of steps may vary, all job plans are characterized by an orderly progression through phases that include activities such as orientation, information, speculation, analysis, development and implementation, or something similar. C2.5.2. In the orientation phase, the project is selected and those who are going to work the problem are familiarized with it. Projects may be selected because they represent the greatest potential for savings or are characterized as a high-dollar (valuable) item or are needed in large quantities and therefore represent a considerable expense. Often projects are selected for reasons other than just savings potential or high cost. C2.5.3. The information gathering phase of the job plan includes researching the product selected to determine cost, function, and worth. The objectives of this research are: C2.5.3.1. To develop a thorough understanding of the item under study; and C2.5.3.2. To identify the specific value problem by including a functional analysis of the item accompanied by an estimate of the worth of each required function. Potential sources of factual information are drawings, manuals, specifications, cost and price information, work statements, and personal interviews. C2.5.4. During the speculation phase, creative-thinking techniques are used to develop alternative approaches that will accomplish the required functions. Such techniques may be either organized, forced, or free. Criticism of potential solutions must not be permitted, nor should alternatives be analyzed in this phase. A large number of alternatives is desirable. Often organized creativity sessions set goals of 75, 100, or even 200 fresh ideas in order to ensure an adequate number. C2.5.5. All alternatives generated during the speculation phase are evaluated during the analysis phase against the functional criteria as well as examined for technical feasibility and cost. The alternatives are ranked. None are discarded. The most promising alternatives are selected for detailed evaluation and development. If none of those originally selected offer an acceptable solution, another set is selected and developed. The process is repeated until a solution is found. C2.5.6. In the development phase, final recommendations are developed from the alternatives selected during the analysis phase. Detailed technical and economic testing is conducted and the probability of successful implementation is assessed. The alternatives must be investigated in sufficient depth to permit the development of specific recommendations including an implementation plan. This must include making sure that the user's needs are satisfied; that the design is technically adequate; and that cost estimates, implementation expenses, and schedules are accurately estimated. Sound cost estimating is crucial when evaluating VE alternatives. It requires accurate information, expert judgments on cost allocations, and the inclusion of all pertinent cost elements in the analysis. At the conclusion of this phase, one or more alternatives should be recommended for implementation and an implementation schedule yielding the greatest overall benefit should be constructed. C2.5.7. The presentation phase is actually presenting the best alternative (or alternatives) to those who have the authority to implement the proposed solutions that are acceptable. It includes preparing a formal VECP or value engineering proposal (VEP) that contains the information needed to reach a decision and implement the proposal. C2.5.8. During the implementation and follow-up phase, management must ensure that approved recommendations are converted into actions. Until this is done, savings to offset the cost of the study will not be realized. Some degree of investment is usually required if a VE opportunity is to become a reality. Funds for implementation must be provided to support the actions necessary to capture the savings opportunity. Implementation progress must be monitored just as systematically as proposal development. It is the responsibility of management to ensure that implementation is actually achieved. Often the VE focal point or program manager is responsible for monitoring milestone achievement in the implementation plan. C2.5.9. A VE project is not completed with implementation of an idea. Full benefit is not derived from a proposal until the follow-up is completed. Other applications of the proposal and actual results need to be established. Successful VE actions must be entered into the DoD VE database and cost savings and other benefits reported through command channels. Until then, the records on a project cannot be closed. C2.5.10. A complete VE evaluation should answer the following questions: C2.5.10.1. Orientation: -What is to be studied? C2.5.10.2. Information Gathering: -What is it? -What does it do? -What does it cost? -What is it worth? C2.5.10.3. Speculation: -What else will do the job? C2.5.10.4. Analysis: -What do the alternatives cost? -Which is least expensive? C2.5.10.5. Development: -Will the proposed alternative work? -Will the proposed alternative meet requirements? -What will the proposed alternative require? C2.5.10.6. Presentation: -What is recommended? -What are the alternatives? -What will it cost? -How much will it save? -What is implementation schedule? C2.5.10.7. Implementation -Has the proposal been approved, whole or in part, together with funding? -Who is responsible for implementation? -What actions have to be taken? -Have completion dates been established? -Have requirements for progress reporting been established? C2.5.10.8. Follow-Up: -Did the idea work? -Did it save money? -Would you do it again? -Could it benefit others? -Has it been forwarded properly? -Has it had proper publicity? -Should any awards be made? -Has it been listed in the VE-trieval or VE Data Information Storage and Retrieval System (VEDISARS) databases? -Has it been included in DoD VE savings reports? C2.6. SUMMARY C2.6.1. The choice of techniques varies with the phase of the life cycle and the situation in which the VE study is initiated. Between the conceptual and operational phases of a product, the available time, talent, and factors to be considered change. Although VE studies conducted in the conceptual and validation phases may offer a maximum opportunity for value improvement, potential dollar savings are often difficult to validate since there is generally no cost base with which to compare cost improvements. VE may be profitably employed early in the life cycle to challenge basic requirements and analyze preliminary designs. Also, functional trade-offs, systems analysis, and operations research techniques play a greater role than in later VE. Cost-estimating techniques also differ significantly since some details of the design may have to be assumed. As a product progresses along its life cycle, the VE methodology must be adapted to conform to the situation and the available data. Something value engineered in the conceptual phase may offer additional opportunities later. This is particularly true if the applicable technology is rapidly changing, or if original development schedules did not include time for an adequate effort. Excellent opportunities exist to examine design requirements, development tests, operational tests, quality-assurance programs, and packaging requirements during the production phase. VE accomplished in the operational phase offers many opportunities for improvement in repair, packaging, and state-of-the-art materials, and process changes. Opportunities also exist in the operational phase for items that have never been reviewed or modernized. C2.6.2. Initially, VE projects may be selected on the basis of dollar volume, complexity, and degree of management support. Later, as projects with significant potential become less obvious, selection may be based on such additional factors as test costs, state of the art, degree of development, time compression, and field-problem reports. The VE job plan is the framework upon which a successful effort is built. When utilized properly, it ensures a systematic approach to the identification and capture of a value opportunity. It provides for a thorough understanding of the subject including a quantitative identification of the nature and worth of the functional requirements. Uninhibited creative effort then may suggest alternative approaches to achieve all functions needed by the user. This is followed by a series of evaluations to select, develop, and implement the alternative offering the best opportunity for value improvement. No project is complete until proposals are implemented, results tallied, and new knowledge exploited as fully as possible. C3. CHAPTER 3 CONTRACTUAL ASPECTS OF VE C3.1. INTRODUCTION C3.1.1. Prior to the publication of the VE portions of the acquisition regulation, there was little or no financial incentive for a contractor to submit engineering change proposals that saved money. Until then the usual result of Government acceptance of a contract cost-reduction change proposal was a reduction in the contract value. This reduction was generally accompanied by an attendant reduction in profit or fee. Since a contractor's success was derived from fees and expected profit, reluctance to propose cost-reduction actions in such circumstances is understandable. Now a positive incentive has been created through the development of the DoD VE contract clauses. C3.1.2. "It is now DoD policy to promote VE actions that will reduce cost and improve the productivity of DoD in-house and contractor resources."1 One of the results of a purposeful contractor VE program is expected to be contract or engineering change proposals that offer a saving to the Government and thus are VECPs. However, acceptance of a VECP does not depend upon it being the result of using the VE methodology. In fact, a VECP must meet only two criteria: C3.1.2.1. It requires a change to the contract; and C3.1.2.2. It saves money for the Government. C3.1.3. The DoD VE contract clauses encourage industry to challenge unrealistic Government requirements and specifications and to profit by doing so. These clauses are unlike other contract incentives that reward efficient performance according to the stated terms of the contract. VE contract clauses reward the contractor who proposes acceptable changes to the contract that will result in equal or better but lower-cost defense products. These changes are mutually advantageous to the Government and the contractor because both share the resultant savings. The DoD VE contract clauses encourage entrepreneurship by rewarding contractors equitably for their initiative in developing VECPs. ______________ 1 DoD Directive 4245.9, "DoD Value Engineering Program," May 7, 1984. C3.2. BENEFITS C3.2.1. To the Department of Defense C3.2.1.1. The Department of Defense is interested in VE contract clauses for two reasons. First, VE generally improves or updates the product. The American Ordnance Association (AOA) studies (Figure C1.F2.) demonstrated that VE generally results in a better product. The Genesis of VE Opportunity Study (Figure C1.F1.) indicates that even a well-designed product can usually be improved due to the subsequent availability of more information, added insight, or new technology. Second, VE is a convenient means to foster greater economy. In his December 14, 1979, affordability and VE letter to the Military Services, the Deputy Under Secretary of Defense (Acquisition Policy) suggested an annual goal for VECP savings of 0.7 of 1 percent of the procurement Total Obligational Authority (TOA) (as expressed in the January P-1 document supporting the President's budget) was reasonable and attainable. To date reported VECP savings, while impressive, do not reflect the full potential of the contractor VECP program. C3.2.1.2. It should be noted the savings that have been reported are based on conservative estimates. It is possible that the actual savings will exceed those reported. The benefits usually remain with the program, command, or DoD Component implementing the proposal. The funds that are thus freed can be reapplied within the program, command, or component for authorized but unfunded requirements. Savings benefits are an acceptable way to generate the ability to pay for what would otherwise be unaffordable. C3.2.2. To DoD Contractors C3.2.2.1. It might be well to emphasize that VE contract clauses are but one of the means by which a good VE program can contribute to a contractor's competitive position and profit. Others are: C3.2.2.1.1. Pre-contract VE can help make proposals more attractive to the customer. C3.2.2.1.2. VE is frequently a factor in source selection. Other things being equal, it could be a decisive factor. C3.2.2.1.3. VE successes can be an element in the contract-performance evaluation program. C3.2.2.1.4. As an element in the weighted guidelines, past VE performance may contribute to improved negotiated fee or profit on new contracts. C3.2.2.1.5. Benefits from unilateral (Class II) contractor VEPs usually revert entirely to the contractor. C3.2.2.1.6. The contractor may benefit financially by sharing in VE savings offered by subcontractors. C3.2.2.2. But, the primary stimulus to encourage participation by contractors is the profit motive, as shown by the following statistics: C3.2.2.2.1. Of over 5,000 contractor VECPs submitted, about 50 percent have been approved to date. C3.2.2.2.2. Contractors earn about 43 cents for each dollar the DoD saves through approved VECPs. C3.2.2.3. The objective of the DoD VE program is to motivate the defense contractor to practice VE and to exercise the VE provisions in their contracts by submitting VECPs. The incentives are the money they receive from a share of the cost savings resulting from the approved changes to their contracts. Contractors are also encouraged to include VE sharing arrangements in subcontracts and to benefit by doing so. C3.2.2.4. The acceptability of a contractor's VECP is dependent upon the knowledge, insight, and care applied during its preparation and processing. In return, the Government owes the contractor fair, timely, and objective evaluation of VECPs. The purpose of this Chapter is to provide information and suggestions that will contribute to the effectiveness of the contractor's VE efforts. It is designed to answer questions concerning the What-Why-When-Where-Who- and How of contractual VE. C3.3. WHAT A VECP IS C3.3.1. A VECP is a proposal submitted by a contractor to the Government in accordance with the VE provisions of the contract. It proposes a change that, if accepted and implemented, provides an overall cost savings to the Government. The VE provisions in a contract permit the contractor to share in the savings that accrue from implementing the change. In other words, the VECP provides the means to lower defense costs while increasing the contractor's rate of return on investment. Thus, the VECP becomeichboth a contractor and a Government management tool. This definition includes VECPs that would produce collateral savings in Government-furnished property (GFP), operations, maintenance, or other areas that exceed any increased acquisition cost and do not impair functions or characteristics. C3.3.2. In order to qualify as a VECP so that a savings can be shared, the proposed change must meet two primary requirements: C3.3.2.1. It must require a change to the instant contract to implement; and C3.3.2.2. It must provide an overall cost savings to the Government without impairing essential functions or characteristics, provided that it does not involve a change: C3.3.2.2.1. In deliverable quantities only. C3.3.2.2.2. In Research and Development (RD) quantities or test quantities due solely to results of previous testing under the instant contract. C3.3.2.2.3. To the contract type only. C3.4. THE PRELIMINARY VECP C3.4.1. The term preliminary VECP is derived from MIL-STD 480 and is used in a similar manner. It is not a mandatory form. A preliminary VECP can be used to submit an initial proposal to the Government before the submission of a final VECP. Use of a preliminary VECP is appropriate when the development of the final VECP would require a contractor to risk significant funds. The contractor may use the preliminary VECP to notify the Principal Contracting Officer (PCO) of the initial proposal, provide information concerning the potential for cost reduction, indicate the approximate costs for developing the VECP and the estimated savings that might be achieved, and an early assessment of advantages and disadvantages. C3.4.2. The PCO typically forwards a preliminary VECP to the Engineering Support Activity (ESA) for an initial evaluation to ensure that the proposal has technical merit and deserves to be developed into a final VECP submission. Often this results in discussions between the Government and the contractor until a suitable understanding is reached. The PCO then indicates whether the idea deserves additional study, or should not be pursued any further due to circumstances known to the PCO or the ESA. The contractor should be aware that an indication from the PCO that the idea has potential, does not guarantee that the final VECP submission will be accepted. As with any VECP, there is still the possibility that it might be rejected, and there is, therefore, some element of risk involved. The idea behind the preliminary VECP is to reduce this risk so that the contractor does not expend significant funds on ideas that have little or no chance of being accepted. C3.4.3. Use of the preliminary VECP carries with it some risk in multiple-source situations. A contractor would have to weigh the risks of inadvertent disclosure to a competitor versus the risk of investing time and money for a VECP that is of little or no interest to its customer. C3.5. TYPES OF VE PROVISIONS IN DoD CONTRACTS C3.5.1. The FAR of April 1, 1984, and the DoD FAR Supplement prescribes the DoD VE contract clauses. They also establish policy and procedures for the program or buying office to use to construct the VE arrangements in a particular contract or on a specific acquisition program. C3.5.2. FAR Sections 52.248-2 and -3 describe clauses for use in architect-engineer and construction contracts respectively. For weapon systems and weapon system elements, the FAR Section 52.248-1 provides two basic alternatives: C3.5.2.1. An incentive approach in which contractors take part voluntarily; and C3.5.2.2. A mandatory program through which the Government requires and pays for a specific level of VE effort. A combination of the two approaches may be used in some instances. A discussion of these two approaches follows: C3.5.2.3. Value Engineering Incentive (VEI) C3.5.2.3.1. The basic VEI is used in supply and service contracts and subcontracts for: C3.5.2.3.1.1. Spare parts and repair kits of $25,000 or more for other than standard commercial parts. C3.5.2.3.1.2. Other contracts with a value of $100,000 or more. C3.5.2.3.2. The VEI may be included in supply or service contracts of lesser value if the contracting officer determines there is a potential for significant savings. Exceptions to this policy include contracts for: research and development (other than FSED), engineering services from not-for-profit organizations, personal services, product or component improvement (unless the VE clause application is restricted to areas not covered by the provisions for product or component improvement), or standard commercial items that do not involve any special requirements or specifications. C3.5.2.3.3. The VEI provisions of a contract do not obligate the contractor to take any action. The VEI clause is intended to encourage the contractor to take part voluntarily by sharing with the contractor the actual or estimated cost savings the Government receives from VECPs that the contractor undertook on its own initiative. C3.5.2.3.4. The FAR provides for payment of the costs of preparing a VECP if it is accepted. The contractor and the Government share in the net savings. Development costs related to unsuccessful VECPs are generally not allowed in accordance with the cost allowability principles of the FAR. C3.5.2.4. Value Engineering Program Requirement (VEPR) C3.5.2.4.1. In addition to the basic VEI clause, the FAR provides an alternate provision that allows the contracting officer to incorporate into a contract a mandatory VE activity known as the VEPR. The VEPR is a separately priced line item in the contract that specifies a certain level of VE activity and the portion (or portions) of the contract work to which it applies. Benefits are expected not only from the submission of VECPs, but also from a continuous VE effort by the contractor in order to get results earlier. Thus, drawings, specifications, methods, and processes will reflect the full benefit of VE in the initial stages of design, development, and production. The contractor may be required to submit reports reflecting the results of this effort. Within the Department of Defense, MIL-STD-1771 is used to establish minimum contractor requirements and standards of performance for the VEPR. The sharing arrangements for approved VECPs originated under VEPRs are less for the contractor than the share provided for VECPs submitted under the VEI. C3.5.2.4.2. The contracting officer may incorporate both the VEI and VEPR clauses into the same contract. The VEPR is restricted in the contract schedule to a specifically defined performance areas, while the basic VEI clause is used to cover the remaining areas of the contract. C3.6. SHARING VECP SAVINGS C3.6.1. There are two basic types of savings that can be shared when a VECP is approved and implemented. They are acquisition and collateral savings. C3.6.1.1. Acquisition Savings C3.6.1.1.1. Supplies and Services C3.6.1.1.1.1. 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. C3.6.1.1.1.2. Concurrent contracts are those current contracts awarded by the acquisition activity to the contractor or other contractors for essentially the same item. If the contracting office directs that the VECP be incorporated into concurrent contracts, the contractor originating the VECP will share in the net reduction in price that are negotiated on concurrent contracts. The contractor does not begin to share concurrent contract savings until all costs of developing and implementing the VECP are offset. C3.6.1.1.1.3. To the degree that instant contract savings exceed development and implementation cost, these savings represent a reduction in the dollars associated with the current contract as well as a planned reduction in the amount of con-current and future contracts. The contractor's share of the savings, by definition must be less than the total, and is intended as partial compensation for the loss in current and potential future billings resulting from the accepted VECP. C3.6.1.1.1.4. Future contracts are for items incorporating the VECP that are awarded after the VECP is approved. Future contract savings may be shared on all affected items scheduled for delivery within 3 years after the first item that incorporates the VECP is accepted. These future contract savings may be shared in one of two ways. The first is through a series of payments made for the contractor's share of savings as future contracts are awarded. This method of sharing is referred to as the "royalty" method. Under an alternate procedure, known as the "lump sum" method, the instant contract may provide that the contractor accept its share of future contract savings in one lump sum, based on the contracting officer's projection of the total number of units that will be delivered during the sharing period. Under both methods, the contractor's share of future contract savings is added to the instant contract price. The instant contract, therefore, cannot be completed until all VECP savings awards to the contractor have been made. C3.6.1.1.1.5. For multi-year contracts that run for more than 3 years after the first item is accepted, the sharing period covers all items accepted before the originally scheduled contract completion date. If the VECP is submitted during the design or limited-production phase, future sharing is based on that quantity of units produced during the highest 36-consecutive months of anticipated production based on the Five-Year Defense Program (FYDP) or other planning documentation existing when the VECP is accepted. C3.6.1.1.1.6. The sharing rates (Government/contractor) for acquisition savings for supplies and services are based on the type of contract, the VE clause, and the type of savings as shown in Figure C3.F1. Figure C3.F1. Government and Contractor Sharing Rates For Supply and Service Contracts, the sharing ratios are: Type of Contract VE Incentive (Voluntary) VE Program Requirement (Mandatory) Instant Concurrent and Future Instant Concurrent and Future Fixed-Price (Other than incentive) 50/50 50/50 75/25 75/25 Incentive (Fixed-price or cost) * 50/50 * 75/25 Cost-reimbursement** (Other than incentive) 75/25 75/25 85/15 85/15 *Same ratio as the contract's cost incentive ratio. **Includes cost-plus-award-fee contracts. C3.6.1.1.2. Construction C3.6.1.1.2.1. A separate VE clause (FAR 52.248-2) is used for construction contracts. Sharing on construction contracts applies only to savings on the instant contract. The sharing rates (Government and contractor) are as follows: Fixed-Price* 45/55 Cost Reimbursement* 75/25 *Other than incentive. C3.6.1.1.2.2. For incentive contracts, sharing is the same as the contract cost incentive ratio. C3.6.1.1.3. Architect-Engineer. The basic VEI clause may not be used for Architect-Engineer (A-E) contracts. When the VEPR is included in an A-E contract, the clause (FAR 52.248-3) makes no provision for sharing on accepted VECPs resulting from the paid VE effort. C3.6.1.1.4. No-Cost Settlement C3.6.1.1.4.1. In order to minimize the administrative costs for both parties on small dollar individual VECPs, consideration should be given to the settlement of a VECP submitted against the VEI clause of the contract at "no cost" to either party. Under this method of settlement, the contractor would keep all of the savings on the instant contract, and all savings on its concurrent contracts only. The Government would keep all savings resulting from current contracts awarded to other contractors, savings from all future contracts and all collateral savings. Use of this method must be by mutual agreement of both parties for individual VECPs. C3.6.1.1.4.2. The benefits of an accepted VECP should not be rewarded both as VE shares and pursuant to performance, design-to-cost, or similar incentives of the contract. Thus, when performance, design-to-cost, or similar targets are set and incentivized, the targets of such incentives affected by the VECP are not adjusted because of the acceptance of the VECP. Only those benefits of an accepted VECP that are not rewardable under other incentives are rewarded under a VE clause. C3.6.1.2. Collateral Savings C3.6.1.2.1 Collateral savings are measurable net reductions in costs of operation, maintenance, logistics and support alternatives, shipping costs, stock levels, or GFP when these savings are a result of an accepted VECP. In some cases, a VECP may increase the acquisition cost of an item but result in larger collateral savings. For collateral savings, the contractor is entitled to 20 percent of the net savings that the purchasing office estimates will be realized during an average 1-year period. However, the contractor's share cannot exceed $100,000 or the contract's firm-fixed-price, target price, target cost, or estimated cost at the time the VECP is accepted, whichever is greater. The amount of collateral savings is determined by the purchasing activity, and its determination is not subject to the "disputes" clause of the contract. Collateral savings provisions are included in contracts whenever an opportunity may exist for savings. They are intended to focus the contractor's attention on savings benefits other than acquisition savings. However, because the savings share is not intended as a partial replacement for a reduction in the contractor's current or future billings, the contractor's share of collateral savings, although substantial, is nonetheless smaller than its share of acquisition savings. C3.6.1.2.2. The collateral savings provision may be excluded from a contract at the discretion of the head of the contracting activity. This is done when it is anticipated that the cost of computing and tracking collateral savings is more than the benefits to be derived. Collateral savings may be deleted from contracts for supplies and services as well as construction contracts. C3.7. SUBCONTRACTOR VE C3.7.1. Prime defense contractors are encouraged to extend VE to their subcontractors. The FAR requires prime contractors to extend VE to their subcontractors on contracts of $100,000 or greater. Subcontracts for spare parts of $25,000 or more, for other than commercial items, are also to include VE provisions. However, VE may be extended to subcontractors on contracts of lesser value. Prime contractor to subcontractor VE arrangements can extend to the subcontractor a part of whatever share the prime contractor receives, including the instant or concurrent contract share, collateral share, and future contract share. The subcontractor must submit VECPs to the prime contractor who, in turn, submits them to the Government, if appropriate. C3.7.2. The sharing between the prime and the subcontractor is a matter for negotiation between them and should provide encouragement for the subcontractor to pursue VE and to submit VECPs to the prime contractor. It may also provide a savings share to the prime contractor, who is responsible for editing a subcontractor's VECP into proper format and for presenting it to the Government. Any subcontractor development and implementation costs and the share of instant contract savings extended to the subcontractor are considered part of the prime contractor's development and implementation costs. However, note that agreements made between the prime contractor and the subcontractor cannot reduce the Government's share of concurrent, future, or collateral savings. C3.8. VECP POTENTIAL C3.8.1. A VECP may be submitted any time the contractor has an active DoD contract with a VE clause. VECP savings are usually time dependent. The potential savings are affected by the total quantity remaining to be produced and the non-recurring costs incurred to develop and implement the proposal. VECPs originated during the early stages of a program usually produce greater savings because they apply to a larger number of units and implementation costs such as changes to tooling, facilities, drawings, and manuals are not as great. As a program matures, the savings benefit per VECP may decrease but the potential for VECPs may increase due to advancing technology. As long as the potential savings exceed the cost of developing and implementing a VECP, the VECP can be beneficial. C3.8.2. Many items in the DoD inventory are procured according to old specifications in large quantities on a regular basis. Due to advances in technology, materials, and processes, the specifications that apply become outdated and may force "technology regression" on a contractor to produce from the old specifications. Therefore, any items procured on a repetitive basis to old specifications are good candidates for VE. VECPs may be used to add a qualified, low-price, new source to a drawing if the Government has not previously required or funded the second source effort. C3.8.3. Another potential for VE may be found in items that were designed on a stringent schedule to meet urgent requirements. Under these conditions, the designers often incorporate the known components or subsystems into the design simply because time would not permit qualification of an improved substitute. Subsequently, a newer, less expensive or more reliable alternative may have been developed and proven that can be introduced by submitting a VECP. C3.9. VECP BASIC REQUIREMENTS The VECP should be prepared with sufficient information so that a thorough evaluation may be conducted by the Government with mimimum delay. The FAR requires that as a minimum, the following information be submitted with a VECP: C3.9.1. A description of the difference between the existing contract requirement and the proposed change, and the comparative advantages and disadvantages of each. C3.9.2. A listing and analysis of each contractual requirement that must be changed if the VECP is accepted, plus any recommendations the contractor may have for changing specifications. C3.9.3. A detailed cost estimate for both the old and proposed methods. The contractor must account for estimated development and implementation costs including any costs attributable to subcontractors. Also, the contractor must include a description and estimate of costs the Government may incur in implementing the VECP, such as test and evaluation as well as any changes in operating and support costs or procedures. C3.9.4. A prediction of the collateral cost saving or increase that the Government would experience if the VECP is implemented. C3.9.5. Identification of the time that a contract modification implementing the VECP must be issued in order to get maximum savings, plus any effect it will have on the delivery schedule or contract performance time. C3.9.6. Identification of any previous submissions of the VECP, including the dates submitted, agencies involved, numbers, and previous actions by the Government. C3.9.7. Identification of the unit (item or task) to which the VECP applies. C3.9.8. Statement that it is being submitted according to the VE clause. C3.10. VECP PREPARATION C3.10.1. Although the FAR clause relative to VE does not specify a particular format in preparing a VECP, it is highly probable that either DoD-STD-480A or MIL-STD-481A is listed as a contract requirement. One of these standards, both of which are entitled "Configuration Control," governs the format to be followed in submitting a VECP if they apply. A review of the contract determines that, if either, of these standards applies. If neither is specified, the contracting officer may specify the format to be used. C3.10.2. A transmittal letter for each VECP sent to the contracting officer is an important ingredient for a successful action. It should state that the VECP is being submitted pursuant to the VE clause of the contract. Also, it should summarize the contents of the VECP. It should briefly state the estimated cost changes, the nature of the proposed change, and the reference where complete details can be found in the proposal. The transmittal letter also serves as a marketing document that brings out the highlights of the proposals. It should emphasize the technical advantages and cost benefits to the Government. If the VECP contains data the contractor wishes to restrict, a statement to that effect must be included in the proposal. Figure C3.F2. is an example of a VECP format. C3.11. VECP DATA RIGHTS C3.11.1. When the proper legend is affixed to a VECP, the data therein shall not be disclosed outside the Government or duplicated, used, or disclosed, in whole or in part, for any purpose other than to evaluate a VECP submitted under the clause. This restriction does not limit the Government's right to use information contained in these data if it has been obtained or is otherwise available from the contractor or from another source without limitations. Failure to identify, mark, and propose data rights in an accepted VECP allows the Government to have unlimited rights to all data in the VECP as well as supporting data. C3.11.2. If a VECP is accepted, the contractor grants the Government unlimited rights in the VECP and supporting data. Except that, with respect to data qualifying and submitted as limited rights technical data, the Government has the rights specified in the contract modification implementing the VECP. C3.11.3. The Government has the right to furnish the listed technical data to a supplier for performance of work required to implement the VECP, but must protect the proprietary data from unauthorized use, duplication, or disclosure. C3.12. CONTESTED VE DECISIONS C3.12.1. The courts have been reviewing cases and handing down appeal decisions since 1963. These decisions help to clarify the Federal regulations and must be taken into account in those areas where the actions are germane. C3.12.2. These decisions are published regularly as "Armed Services Board of Contract Appeals Decisions," "Contract Cases Federal," "Comptroller General Board Cases," and "U.S. Court of Claims Decisions." C3.12.3. They can be found through the publications of the Commerce Clearing House, 4025 W. Peterson Avenue, Chicago, IL 60646. "A Compendium of Contested Values Engineering Actions" is also available from the Electronics Industries Association, 2001 Eye Street, N.W., Washington, DC 20006. Figure C3.F2. Sample VECP Format Figure C3.F2. Sample VECP Format (continued) VALUE ENGINEERING CHANGE PORPOSAL NO. 3 Figure C3.F3. Sample VECP Format (continued) C3.13. VECP DISTRIBUTION The FAR governs the distribution of a VECP. It requires that VECPs be sent to the PCO and, when the contract is administrated by other than the purchasing agency, a copy of the VECP must be sent at the same time to the administrative contracting officer (ACO). It is extremely important that the ACO receive a copy of each VECP as the ACO is responsible for periodic follow-up with the PCO on all VECPs during the evaluation process. Also, the ACO must be made aware of a VECP to expedite its evaluation and to support the decision process by the PCO and the ESA. C3.14. GOVERNMENT RESPONSE C3.14.1. A response to the contractor is due within 45 days. If it is not possible to evaluate and reach a decision by that time, then the PCO shall notify the contractor of the status of the VECP within 45 calendar days after it is received by the contracting office. The contractor shall be provided the reason for the delay, and be advised of the expected date of the contracting officer's decision. VECPs will be processed expeditiously. However, the Government assumes no liability for delay in acting on them. C3.14.2. The PCO shall accept the VECP by modification to the contract. If the VECP is not accepted, the contracting officer shall write the contractor explaining the reasons for rejection. The contractor may withdraw, in whole or in part, any VECP not accepted by the Government within the period specified in the VECP. The decision whether or not to accept a VECP rests solely with the PCO and may not be disputed by the contractor. C3.15. SUMMARY DoD contracting officers are expected to encourage prime contractors to submit VECPs that reduce cost and to offer a reasonable share of the resulting savings as a reward for the effort undertaken by the contractor. There are two types of VE contract clauses. The VEI clause entitles the contractor to a share of the savings resulting from accepted proposals that it initiates. The second clause is the VEPR that requires the contractor to undertake a specified VE program as a contract line item in accordance with MIL-STD-1771. For supply and service contracts, either clause entitles the contractor to share in savings, not only on the instant contract, but also on concurrent contracts, future contracts, and collateral savings. The VE sharing rates are standardized for instant, concurrent, and future contracts, depending upon the VE clause and type of contract. Prime contractors are encouraged to extend VE to their subcontractors. The preparation and format of the VECP should be in accordance with the requirements contained in the contract or as specified by the contracting officer. Government personnel are expected to process the VECPs as expeditiously as possible, and to keep the contractor informed as to the status of VECPs. C4. CHAPTER 4 MANAGING THE DoD VE ORGANIZATION C4.1. INTRODUCTION To be successful and attain its full potential, a management program requires close supervision by those responsible for achieving its objectives. This is particularly true of VE because of the critical need to allocate scarce VE resources to maximize the return on their use. This chapter discusses some of the considerations for a manager seeking to organize, operate, and measure a VE program in the Department of Defense. Collectively they provide a method of directing VE efforts toward a maximum contribution to better value. C4.2. DEVELOPING A VE POLICY C4.2.1. VE programs in industry and Government are usually intended to be a purposeful, planned approach to cost reduction, which make use of the best relevant tools of science, engineering, and industrial management. Establishment of such a program does not, of itself, ensure an effective approach to cost reduction. A productive VE capability requires strong and active top management involvement. A powerful indication of this is an affirmative policy statement on VE issued by top management. Within the Department of Defense, involvement is demonstrated by the policies contained in DoD Directive 4245.8, "DoD Value Engineering Program," May 7, 1984. C4.2.2. Each DoD Component subsequently issued a document implementing its program in accordance with the policy statement issued by the OSD. Although overall uniformity is desirable, nevertheless, each subordinate element tailored its policies to satisfy its needs and comply with its procedures. Generally these implementing Directives include requirements to: C4.2.2.1. Centralize policy direction and responsibility for ensuring implementation of overall VE policies. C4.2.2.2. Establish VE goals for subordinate components. C4.2.2.3. Initiate procedures for periodic management review of progress and overall status. C4.2.2.4. Expedite the objective evaluation of VEPs and VECPs and related contract changes. C4.2.2.5. Ensure that personnel charged with various facets of the DoD VE program are adequately trained. C4.2.2.6. Provide adequate funding to operate and support VE activities. C4.2.3. A statement of policy from top management does not guarantee a successful program. Management must demonstrate continuing personal involvement to emphasize the importance of the program and to encourage participation at all levels of the organization. C4.3. NATURE OF THE VE INVESTMENT C4.3.1. Total Benefits. The intent of a VE effort is to minimize the total cost of a product or capability. VE is a means to help the line organization improve the value of the product. VE efforts have produced both dollar savings and non-monetary benefits. Although the non-monetary benefits resulting from VE cannot be precisely measured, nevertheless they are substantial. Further improvement in these characteristics benefit both the Government and the contractor. Thus, prior to determining the structure and magnitude of the VE investment, the nature of the overall benefits likely to accrue should first be considered. C4.3.2. Resources Needed C4.3.2.1. Dollars. The total investment in a VE program may be viewed from several aspects. One view is to consider that the investment in VE has three components. First are the "indirect" costs of planning and operating a VE program, including such items as training, promotional materials, motivational exercises, etc. The second consists of the cost of generating and reviewing specific VE proposals. However, the success of the DoD VE program is measured by the savings from implemented VE actions. Therefore, the third cost component associated with a VE program is the cost to implement accepted VE proposals. The budget for a VE program must include the funds necessary for implementation to eliminate impediments such as "no money for test" or "no money available to purchase samples." For instance, the VE program may require more money for implementation and test costs than is required for the direct cost of the VE studies. On the other hand, resulting savings may total more than 10 to 20 times the cost of the studies. To take advantage of this potential yield, implementation funds have to be made available. C4.3.2.2. Personnel (Level of Effort) C4.3.2.2.1. In addition to a dedicated individual to manage the program, experience in industry and the Department of Defense indicates that a minimum level of effort is at least one full-time value engineer per one hundred (100) design or production personnel. Another reasonable index developed from the experience within DoD and contractor activities is to commit 0.1 percent to 0.5 percent of total annual dollar volume as an initial operating budget for VE. For procuring activities, one full-time value engineer for each 50 employees is reasonable. (These indices are guidelines and should not be considered inflexible requirements.) This ratio may vary considerably depending upon the degree of in-house specification analysis undertaken. The level of effort to be applied also varies with the nature of the VE organization, and the type of operation at the activity; i.e., the percent of design, development, and production; the type of product or services, etc. Also the need for dedicated people may be reduced if there are trained people in the organization who perform VE as an integral part of their job and can be made available for special intensive reviews. C4.3.2.2.2. Some organizations have applied a novel procedure for providing the funds necessary to sustain a VE program. The VE program is funded at an initial level that management deems a reasonable investment risk. As the actual dollars saved become available, a portion of the savings is channeled into the VE program to replace expended funds. This accounting procedure permits a VE program to sustain itself on a portion of the actual savings that is achieved. The remainder is returned and utilized for other purposes. The process is somewhat similar to DoD operations supported by the stock fund concepts. This arrangement provides a continuing current assessment of the VE program and acts as a strong stimulus to encourage identifiable and verifiable results. C4.3.3. Rates of Return C4.3.3.1. The factors used to calculate rate of return will vary in accordance with the way the VE program is organized, and the manner in which indirect costs are allocated. Often, net savings to investment ratios of 15 to 1, or even higher, are shown. Many consider a reasonable return on the VE investment to be 10 to 1. But to be meaningful such claims must include an explanation of the investment base as well as the manner in which the productivity of the VE effort is measured. Productivity is a function of the savings resulting from implemented VE proposals. Productivity can be based on the savings for 1, 3, 5, 10, or more years. Each possibility has its adherents. C4.3.3.2. Within the Department of Defense, VE savings actions are reported in accordance with DoD Instruction 4245.8, which provides that monetary savings will be calculated for 3 years. The savings for all 3 years (separately identified for each year) are reported in the fiscal year that the action is accepted and implemented. C4.3.3.3. Similarly, the investment base is also subject to interpretation. For instance, a VE staff of four (a manager, two specialists, and a secretary) might incur direct payroll costs of $125,000 per year. Some might consider this the total investment in VE. Others might wish to include such overhead costs as fringe benefits, taxes, travel, telephone, facilities, etc., which might add another $50,000. Still others might wish to charge the VE program for the time and expenses of others on the VE program. For example, five managers meeting as a VE council for 1.5 hours a month might charge the VE program $10,000 per year. Or, non-VE personnel supporting VE efforts might cost the VE program $200 per day salary plus any other expenses incurred. Thus, a manager who includes all of the expenses necessary to operate a VE, program, might consider a more conservative 5 to 1 net return on investment to be a more realistic goal. C4.3.3.4. As the program matures, it should be reviewed periodically and a rate of return determined. Knowing the basis for the statistics regarding the program, a manager could then adjust the VE investment as necessary to maintain an adequate return. The experience of others and knowledge of the results achieved by other programs may be used as a guide to determine the initial investment and expected rate of return. But the results attained will determine a manager's subsequent investment decisions. If the investment cost is exceeding the savings or providing a poor rate of return, the program may be overstaffed or for other reasons not be functioning properly. In this case a manager may wish to make whatever adjustments are likely to yield a more productive VE program. On the other hand, an extremely high rate of return may indicate that an increase in investment in VE may provide even greater savings. C4.4. ORGANIZING THE VE CAPABILITY C4.4.1. Placement within the Organization C4.4.1.1. There is no preferred position within the organizational structure for the VE function. The mission of the parent activity greatly affects the type and location of the VE organization. Basic differences exist between development, acquisition, production, reprocurement, and maintenance activities. Some organizations may be devoted almost entirely to one of the above. But in most cases, there is a combination of activities with which to deal. The structure of the VE organization will vary to correlate with the functions and responsibilities of the activity of which it is a part. For example, a company specializing in research and development on advanced aerospace equipment generally will be heavily engineering oriented. In this instance, the principal focus for VE usually falls within the engineering department. On the other hand, a manufacturing company primarily engaged in the production of standardized military items that are procured in large quantities on a recurring basis tends to concentrate VE effort in the production department. Another company that subcontracts a great portion of the total dollar value of its contracts might well place primary emphasis on VE in the purchasing department. Some large companies, like the Department of Defense, place operating VE elements in several activities such as engineering, purchasing, production, and marketing. C4.4.2. Categories of Responsibilities C4.4.2.1. It is usual practice to divide the VE responsibilities into two categories, the coordinating and the operating components. Coordinating tasks are those undertaken to assist those who perform actual VE efforts. Examples of coordinating tasks are overall program control, assignment of savings goals, allocation of resources, determination of priorities, measurement of progress, and development of VE policies and procedures. Operating tasks are those concerned with the direct support or actual performance of VE. Those assigned operating tasks conduct VE studies and generate and present VE proposals (VEPs). Also, they are usually assigned the responsibility for ensuring that a VEP (or a VECP) is carried through to either implementation or rejection. (In some organizations, those performing coordinating tasks share this responsibility.) C4.2.2.2. The coordinating and operating elements may be vested in one group. This group can be subdivided, formally or informally, to satisfy both sets of duties. When the value studies constitute a variable workload supporting several projects or programs, a centralized VE organizational structure may be the most effective arrangement. Under this "pool" concept, the VE personnel are technically assigned to projects as required while administratively reporting to the central VE group. This type of organization would, for example, permit a single staff group to provide direct support for a number of program or project offices. As the value program matures and its scope expands, it may be desirable to separate the coordinating and operating elements. Also, the size of the parent activity will influence the number of levels and type of structure for the VE element. For example, in a small organization the VE component may be organized as a single element or even as one person, embodying both the coordinating and operating responsibilities. On the other hand, in a very large organization there may be a number of VE program managers with subordinates, all of whom perform only the coordinating tasks. In addition, there may be a number of operating VE units in each of the major departments of each facility. Although both coordinating and operating tasks are vital for a successful program, the ratio of "doers" to coordinators should always be as large as possible. C4.5. METHODS OF OPERATION The VE operating component can be organized any number of ways, depending upon the size, project mix, and structure of the parent organization. In practice, most of the patterns fall into three categories. These methods are not mutually exclusive. Many organizations use them in combinations. Some even use all three at the same activity. The three methods are: C4.5.1. Multi-Discipline Project Teams. Task force teams of specialists, including full-time value engineers, may be assigned to value engineer specific products. Normally team members represent many disciplines or occupational specialties such as design, production engineering, purchasing, industrial engineering, manufacturing, logistics management, user, etc. The complexity of the study subject and its cost determine the magnitude of the effort undertaken by the project team. The team may work on a full- or part-time basis. Teams have been established for as short a term as two weeks or for as long as six months. This method of organizing the operating component has the advantage of bringing together a number of diverse yet complementary talents that provide a multi-discipline approach to the problem. When the task is completed and the proposed remedies are accepted and implemented, the team is disbanded. C4.5.2. Project Value Engineers. Using this approach, a value engineer is assigned to a particular project and made responsible for a continuing VE effort from design through production. In this case, one or more value engineers technically competent in the assigned product area is assigned responsibility for ensuring optimum value in the product at every stage in its development. This method of organizing the VE effort has the advantage of providing VE continuity through all design and production decision points. The approach is most useful when projects are of sufficient economic promise to justify assigning value personnel on a full-time basis. C4.5.3. Procedural Review Points. With this method, a value engineer participates in all decisions at established review points such as design reviews, make-or-buy reviews, systems integration, drawing-release points, etc. The value engineer in this case is responsible for ensuring that value considerations are given proper weight at each decision point. This approach permits the VE staff to provide coverage for more projects. Although this procedure does not encourage intensive VE studies, in some cases it has been organized in a manner that would subsequently lead to such studies. C4.6. VE IN THE PROJECT MANAGEMENT OFFICE (PMO) C4.6.1. Two aspects must be considered when establishing and operating a VE program in a PMO. They are managing the VE effort and performing the actual VE studies. Generally, VE studies must be accomplished at an appropriate level of responsibility (system versus detail) within the organization. If systems engineering is a part of the actual work of the PMO, then VE studies can be accomplished as part of the system-engineering effort. If the PMO is a separate organizational entity from its system-engineering element (as for example, in technical direction and system-engineering contracts), the PMO VE role may be primarily one of management. Managing VE in a PMO would include identifying areas for VE study, arranging for contract incentive clauses, and monitoring the results. It might also include arranging (and possibly managing) VE task forces staffed (or augmented) by personnel temporarily recruited from other sources. C4.6.2. There are inherent variations in the operation of project offices. To effectively manage VE, each PMO should establish VE objectives, develop a plan for achieving these objectives, and incorporate procedures for measuring progress toward the established objectives. The plan should take into account all the VE resources available to the PMO both contractual and organic. Figure C4.F1. offers three different PMO VE program options. These programs differ primarily in the amount of manpower required. The basic objectives of each option are to reduce costs and meet any assigned VE savings goals without impairing essential performance. Slight variations of these options should fit most PMO situations. C4.6.3. Within the Department of Defense, most of the procurement dollars are spent by the PMOs that manage major weapon systems. The DoD semi-annual reports, therefore, include statistics on VE accomplishments in each major program in order to emphasize their importance. C4.7. MOTIVATIONAL CONSIDERATIONS C4.7.1. Goal Setting C4.7.1.1. Announcement of an overall VE program savings goal is not likely to stimulate extensive participation in a VE program by subordinate organizations. Instead, each subordinate activity should accept responsibilities for a specific portion of the overall goal. Collectively, these sub-goals should add up to the total goal. This goal apportioning continues down through the entire organization. Achieving the VE savings goal should be the responsibility of the line organization, not the VE staff. In this way, savings become a line management responsibility. The entire organization becomes committed to achieving the savings targets. Each organizational component has a known specific target against which it can measure its own achievements. The VE goals assigned to an organization are expected to be "reasonable" in that the target is not set so high as to be unattainable, nor so low as to require little effort to meet it. However, the goals are intended to be attainable only by a concerted effort. This provides the impetus for each component to concentrate on projects promising the greatest dollar return per hour of VE effort. To ensure a continuing motivation, previously announced targets should be given renewed emphasis periodically. Figure C4.F1. Some Program Management Office VE Options Options Actions Manpower Comments Option I - Minimum Investment Program. 1. Establish and operate VE reporting procedure. 2. Encourage contractors and subcontractors to submit VECPs (letters by program manager). 3. Publicize and reward achievements. One person part time, if procurement and technical personnel are made responsible for encouraging contractors to submit VECPs. Program designed primarily for meeting VE program goals. Requires periodic management review of results obtained and periodic reminders to personnel to continue actions 1 and 2. Option II - Medium Investment Program. Actions 1 thru 3, plus: 4. Establish cost target program. 5. Establish procedures to identify areas for VE studies. 6. Assign VE study responsibilities during program reviews, and design reviews. 7. Visit contractors to review VE program progress and encourage VECP submissions. One person full time, if assignment is primarily coordination asks. If operating tasks are also included, manpower requirement would vary with size of system-engineering group (approx one per 50). This option is intended to achieve VE through individual efforts as part of overall task. Requires training plan. Should reduce costs beyond goals. Management review of progress again required. Option III - Maximum Investment Program. Actions 1 thru 7, plus: 8. Conduct selected VE team or task force efforts on areas of high potential savings (in-house or joint Government/contractor efforts). Per specific target. 2 to 5 people for 12 to 15 weeks. May be part time, no less than half-day meetings. Full-scale effort (complete analysis of system): 2 to 6 key PMO systems engineers supported by 10 to 30 additional people who could come from external source. Help to manage effort may also be available externally. force may meet for up to 2 months. More resources applied to high-dollar opportunities. VE opportunity emphasized for both management and operating personnel. Task forces also train, demonstrate benefits, and motivate personnel. Joint contractor Government efforts conserve Government manpower and demonstrate benefits of FAR VE clauses to industry and Government personnel. C4.7.1.2. One method used to establish a goal is to compute the anticipated cost of the VE program and multiply it by ten. A second method is to assume an average level of cost reduction through VE on the entire product mix. Although the cost of the items studied may be reduced by 20 percent, 30 percent, or even more, the total cost of the entire mix is not likely to be reduced by this amount as an average. A very conservative across-the-board figure of 5 percent (or some other percent) of the total cost might be reasonable for a savings goal. Initial goals set on this basis may be subsequently revised, as appropriate. Some commercial entities report that as much as 20 percent of their net profit after taxes results from their in-house VE program. C4.7.1.3. Within the Department of Defense, a goal of 0.7 percent of the procurement TOA was set for the Contractor VECP program in 1979. Each Military Department is responsible for allocating this goal among its major purchasing activities. Each DoD Component reports its accomplishments versus the goal semi-annually. In addition to dollar goals, some DoD Components set annual goals for the number of VE actions. This serves as an additional stimulus to the VE program. C4.7.2. Recognizing Contributors C4.7.2.1. The purpose of the VE staff is to act as a catalyst for the overall VE savings program. Since VE savings goals are assigned to the line or program management organization, the dollar savings are credited to the element responsible for taking the action. Within the Department of Defense, the element whose budget is affected by the savings action, (usually the element responsible for implementing the proposed change) is responsible for reporting the savings. The reported savings is then credited against the specific VE goal of the reporting element. Current DoD policy is to report all VE savings that result from VE actions taken by personnel of DoD Components or VE actions on existing defense contracts that require Government approval (VECPs). C4.7.2.2. Official recognition of contributors is vital to realizing the full potential of VE. A DoD manager needs to know which employees enhance the image of an Agency spending the tax dollar wisely. An industry manager wants to know which employees are sufficiently competitive and profit-minded to apply VE resources and methodology most effectively. C4.7.2.3. The assignment of credit can be more subtle and complex than the direct measurement of VE savings. The system used by management to measure the results achieved by organizational elements participating in the VE program can be developed into a motivational force to encourage implementing VE proposals. For instance, one large aerospace contractor noted that its Government contracts' staff placed very little emphasis on presenting VECPs to its DoD customers despite the significant profit opportunity that they represented. A study of the problem revealed that the net effect on the marketing group of accepted and implemented VECPs was a reduction in contract sales achievements equivalent to the reduction negotiated in the contract price. To counteract this negative incentive, the Government contracts group is now credited with the sales equivalent to the savings reward earned for a VECP. For example, an accepted $100,060 VECP (with a 50 percent sharing clause) used to result in the sales group losing credit for $100,000 in sales. Now Government sales might be credited with something like $625,000 in sales based on an assumed 8 percent average gross income to sales. This procedure encourages the Government contracts group to strike a proper balance between its marketing efforts on new contracts and VECPs based on profit potential rather than impact on sales dollars. C4.7.2.4. The Department of Defense has an annual honorary awards program for VE. The awards program is intended to acknowledge those individuals, program managers, organizations, contractors and VE specialists whose VE efforts were exemplary and resulted in substantial savings benefits during a particular fiscal year. Under this program, each DoD Component is encouraged to forward one nominee in each of five categories: DoD program manager, DoD field command or installation, DoD individual, DoD contractor, and VE professional. In addition, each DoD Component may also provide additional awards to its contractors or personnel who merit recognition for lesser, but still significant achievements. For example, one DoD Component provides an award to contractors with approved VECPs of $50,000 or more. Another recognizes individuals who reach savings of $100,000 or more. C4.8. PROGRAM CONTROL C4.8.1. Listed below are items of information normally included in a VE program control reporting system within a contractor or Government activity. Not all items would necessarily be reported to top management. Of those that do appear, many would be summarized rather than reported in detail. C4.8.1.1. Identification of the unit preparing the report. C4.8.1.2. Date the report was prepared. C4.8.1.3. Time period covered by the report. C4.8.1.4. Number of VE proposals approved and implemented during the reporting period, including net DoD savings anticipated. C4.8.1.5. Number of VE projects currently under study. C4.8.1.6. Number and dollar savings of VE proposals currently being evaluated. C4.8.1.7. Breakdown of "age" of proposals under evaluation, (i.e., 0 to 60 days, over 60 days). C4.8.1.8. Number of personnel spending more than half their time on VE work. C4.8.1.9. Total cost of VE program, last 12 months. C4.8.1.10. Ratio of savings to cost of program, last 12 months. C4.8.2. For DoD Components, semi-annual reports are required in accordance with DoD Directive 4245.8. Additionally, each accepted VE action is to be entered into the appropriate VE database. For supply and service contracts, a DD Form 2333 is to be used to forward the information to the DoD VEDISARS. Construction actions are forwarded to the VE-trieval system. C4.9. AUDIT SYSTEM C4.9.1. Program. There are two basic types of audit procedures. First, is the VE program audit, an on-site qualitative evaluation of the VE effort. Program audits can be internal (i.e., within the Department of Defense or within contractor establishments) or a customer audit of supplier VE operations. Regardless of the type, the substance of the audit is the same. It includes an examination of the organization, staffing, procedures, and budgets of the VE elements throughout the organization. The audit team may also verify the validity of reported VE savings. In order to minimize the cost of the VE audit, it is generally integrated into previously established audit functions. The frequency of audits depends upon available manpower resources. Once a year is a reasonable goal, not always achieved in actual practice. C4.9.2. Savings Actions C4.9.2.1. A second type of audit procedure is used to validate each reported savings action against the established criteria. In the Department of Defense, estimated savings are reviewed before Component semi-annual reports are submitted. Normally, all reported savings are both supported and validated from records and documentation existing within the reporting organization. C4.9.2.2. Current guidance for the in-house DoD VE program specifies a comprehensive audit of actions that save $100,000 or over in any one of the three reporting years. Savings below $100,000 a year are given desk reviews and occasionally a very limited field audit. The cognizant auditor for the reporting activity either validates each savings action or provides a signed statement setting forth the reasons for non-validation. Only validated savings are reported. When reporting officials do not concur with an audit non-validation and are unable to settle the dispute at the local level, a copy of the non-validated individual savings action; the auditor's statement; and a rebuttal to audit conclusions are forwarded through channels for review and final decision at a higher headquarters level. C4.10. SUMMARY Maintaining an effective VE program requires continuous monitoring and control. The initial investment in VE might be funded at 0.1 percent to 0.5 percent of the organization's budget (or sales for industry). Return on investment may range from a conservative 3 to 1 to a ratio of 10 to 1 or even higher. The results achieved will dictate the nature of the adjustments in the VE investment. The VE functions must be positioned in the organization in such a way as to be able to adequately perform both coordinating and operating functions. VE is generally accomplished in one of three ways: C4.10.1. Multi-discipline project teams; C4.10.2. Project-value engineers; and C4.10.3. Procedural review points, or a combination of these. C4.10.4. The VE capability in a Program Management Office must complement and provide direct support to those undertaking value studies, as well as coordinate in-house and contractor VE programs. VE goals will be influenced by differences in product mix, VE capability, size of the organization, etc. Broad targets, however, can often be set by: C4.10.4.1. Multiplying the cost of the VE effort by a target ratio; or C4.10.4.2. Taking a predetermined percent of the total product dollar volume. C4.10.5. A reporting system measures progress toward the targets and provides a quantitative measurement of the program. A well-designed reporting system is concise, responsive, accurate, and timely. Summary reports are employed for higher-level use. The concept of "reporting by exception" is utilized when appropriate. An audit system provides an on-site qualitative measurement of the VE program as well as verification of reported savings. The VE audit should be integrated with existing audit functions to minimize cost. Figure C4.F2. provides a checklist useful to contractors in evaluating their VE program. Figure C4.F2. Contractor VE Program Checklist 1. Do you set company or division goals for VECP income? 2. Are VECP goals established for line department and program managers? 3. Does top management review VECP income and approve VE operating goals and budgets. 4. Does company top management meet with key customer personnel to agree on VECP goals and processing on major contracts and programs? 5. Do personnel, such as marketing, work on the "team" and do they receive credit for VECPs approved, or are they "penalized" due to reduced credit for reduced contract price? 6. Do your negotiators understand VE clauses in the FAR? Do you request and negotiate for fair terms? 7. Do you place VE sharing provisions in your subcontracts? 8. Is VECP income identified separately by accounting so that (1) Renegotiation Board review is eased, and (2) top management can recognize contribution of VE? 9. Do you assign resources to the development and marketing of specific VECPs? 10. Do you operate in a manner that allows you to minimize time to (1) develop a VECP and (2) obtain internal company approval prior to submittal to the Government? 11. Do you conduct formal VE workshops to expand your in-house capabilities and educate your customer? 12. Do you exploit the benefits of using preliminary VECPs with your customer? C5. CHAPTER 5 VE METHODOLOGY PART I: GENERATING PROPOSALS C5.1. INTRODUCTION A task that is accomplished in a planned and systematic manner is more likely to be productive than one that is unplanned and relies upon undisciplined ingenuity. VE efforts generally follow a variation of the scientific method to ensure a planned purposeful approach. This procedure is termed the VE Job Plan. It was conceived as a group undertaking because it is unlikely that an implemented VE proposal will be the product of the effort of a single individual. This Chapter explains the VE Job Plan as it would be employed in a specific VE study. C5.2. GROUP DYNAMICS C5.2.1. The cornerstone of an effective VE effort is the generation of a large number of useful ideas developed into feasible proposals. To accomplish this efficiently, it is common practice to seek and utilize contributions from specialists representing many disciplines and form a team amalgamating their specialties with VE. Those team members who are VE specialists provide motivation and guidance to ensure that the VE Job Plan is followed. The other specialists are used to gain new insight and generate new ideas. They not only contribute their own capabilities but also usually have ready access to additional specialists. Although it is not necessary for all team members to have had previous VE training, it is a desirable goal. Each member of the team contributes a pattern of thinking that is characteristic of his or her specialty and experience. Each member tends to stimulate other team members to contribute their characteristic patterns of thinking. Each can determine and discuss the effect another's idea will have on his or her own area of interest. C5.2.2. No single phase of the VE Job Plan should be assigned as a secondary responsibility on a part-time basis with the expectation that collectively VE will be accomplished. Experience has proven that a VE effort is most productive when all personnel involved in the team actively participate in all phases of the VE Job Plan. C5.2.3. The group dynamics of a VE team effort produce benefits which the efforts of one or two individuals can seldom match. Among the prominent benefits are: C5.2.3.1. More talent is directly applied to the problem. C5.2.3.2. The scope and depth of the effort is increased. C5.2.3.3. More efficient use is made of the available time because problem areas are more readily resolved through direct communications. C5.2.3.4. Team participation provides productive training for those not previously exposed to formal VE training and serves as a refresher course for those with previous VE training. C5.2.3.5. The synergistic effect of a diverse group working in harmony toward a common objective. C5.3. THE VE JOB PLAN C5.3.1. Several versions of the VE Job Plan can be found in current VE literature. Some texts list five phases, others six, and some refer to more. However, the number of phases is less important than the systematic approach implied. This Manual describes a seven-phase VE Job Plan. It encompasses the same fundamentals contained in other VE Job Plans (Figure C5.F1.). Actually, there are no sharp lines of distinction between the phases. They tend to overlap in varying degrees and generally require several iterations through many of the phases of the plan. C5.3.2. An effective VE effort must include all phases of the Job Plan. However, the proper share of attention given to each phase may differ from one effort to another. The Job Plan represents a concerted effort to furnish the best answers to the following "key question": What is it? What does it do? What must it do? What does it cost? What is it worth? What else might do the job? What does that cost? What will satisfy all of the users' needs? What is needed to implement it? Figure C5.F1. VE Job Plan Chart C5.3.3. The remainder of this Chapter is devoted to describing and discussing the essential elements of the first five phases of the Job Plan as they occur in a typical VE effort. The sixth and seventh phases (Presentation and Implementation and Follow-up) is discussed in the next chapter. C5.4. ORIENTATION PHASE The selection of VE projects is a management responsibility in the orientation phase. The success of the VE program depends on management exercising its project authority wisely. Most organizations have limited VE resources available for a large number of projects; therefore, project selection should be based on maximizing return (maximum cost reduction) for the total VE investment. Selections should be ranked by dollar value with the most potential for savings being assigned to the product with the highest total cost. In the early stages of the VE program, the selection process may be quite simple, but when the obvious projects are depleted, the need for a systematic project selection procedure develops. Guidelines for the selection of projects may mean little in a specific situation. Due