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    Government Contracting Database

    Value Engineering

    The government has a policy of providing incentives to encourage contractors to submit proposals that identify ways the government can save costs. The program is called “value engineering,” and it is prescribed for construction contracts in section 48.202 of the Federal Acquisition Regulations. The contract clause concerning value engineering for construction is found in FAR 52.248-3. All fixed-price construction contracts over $100,000 are to provide for value engineering unless the head of an agency has elected to exempt his agency or a particular contract from the value engineering requirements. Participation by the construction contractor is normally voluntary. If the government accepts a value engineering proposal, a construction contractor is entitled to a share of up to fifty-five percent of the savings under his contract.

    In adopting what amounts to be an “employee suggestion box” for contractors, the government intended to encourage its use. Toward that end, the applicable regulations are very broad in the definition of what constitutes a value engineering proposal. The contract clause for construction contracts, FAR 52.248-3, only requires that a VECP involve a change in the contract and a reduction in the contract price or estimated cost without impairment of the essential functions or characteristics of what is being provided under the contract. In order for the proposal to be valid, the contractor must have been legally obligated to perform the work proposed for change and must have identified its proposal as a value engineering change. The only proposals which are explicitly indicated as not constituting a valid VECP are those which only result in a change in the deliverable end item quantities or only result in a change in the type of contract.

    The decision of whether to accept or reject a VECP is solely one of discretion and is not subject to appeal under the Disputes clause of the contract or the Contract Disputes Act of 1978. Any challenge of the rejection of a VECP would require an action in federal court based on a violation of the Administrative Procedures Act. Given the broad latitude the courts afford the government in matters that are solely discretionary, if the government wishes to not save money by not adopting a VECP, there is little a contractor (or, for that matter, a taxpayer) can do about it.

    However, in instances where a contract is subsequently changed to include a requirement virtually identical to the proposal made by the contractor, the Boards will review the matter under a theory of constructive acceptance and will award a contractor compensation. Certainly, if the government receives value engineering proposals from a contractor but then issues change orders deleting the work without sharing the savings, the government is only encouraging a contractor to keep its ideas to itself, thereby frustrating the very purpose for which the clause is intended. As the ASBCA observed, “Interpreting the clause to permit the government to hold out the offer of reward to induce contractor’s cost reduction proposals but escape sharing the resultant savings. . . would serve neither justice nor the policy intended by the clause.” Syro Steel Company, ASBCA 12530, 69-2 BCA ¶8046.

    In a case before the Board, the government argued that a contractor’s proposal was not a “value engineering” proposal because it did not involve a change in the end item being provided. In that case, the contractor had proposed that the government use “AA” alkaline batteries in a device rather than the more expensive mercury batteries specified. In ruling for the contractor, the Armed Services Board of Contract Appeals observed that,

    The short answer to this is that the VEI clause does not limit a VECP to a physical change in the end item delivered to the Government. Aside from the VECP at issue here, such a restrictive reading would preclude many other legitimate cost savings proposals to the Government related to the contract which do not change the end item, including packaging changes, or changes to spare parts, support equipment, or supporting data, see Philco Ford Corp., ASBCA No. 16197, 73-1 BCA ¶ 9917. In this regard, the VEI clause merely requires that the proposal “require a change to this contract to implement the VECP.” This serves to insure that the proposal provides something different from what the Government has already required by the design specifications, yet at the same time is not so far removed in subject matter as to be beyond the general scope of the contract.

    ICSD Corporation, ASBCA 28028, 90-3 BCA ¶ 23027.

    Although the ICSD case involved a supply contract, the observations of the Board are equally applicable to a value engineering proposal on a construction contract.

    At times, the government has asserted that for a proposal to be a valid and recoverable “value engineering” change, the contractor must conduct an engineering analysis and set forth an alternate design solution to an engineering problem. To support this claim, the government usually points to the requirements in the Value Engineering clause relating to documentation. The ASBCA, however, addressed this specific assertion and strongly disagreed with the government. The Board stated the following:

    While it may be true that it was contemplated by the Government that the greatest savings would result from proposals relating to complicated engineering problems, we know of nothing, and our attention has not been directed to anything, which states that proposals must relate to such problems. As a matter of fact, the imposition of such a requirement would run counter to the entire value engineering incentive program. It would appear that dollars saved from some simple solution to an uncomplicated problem would be as welcome to the Government as dollars saved from an alternate design solution to a complicated engineering problem. While the sum of the dollars saved from a solution to a complicated engineering problem may be greater than that saved from a simple solution to an uncomplicated problem, we see this as a matter of degree only and not of substance.

    Cardan Co., Inc., ASBCA 25765, 82-1 BCA ¶ 15628.

    Value engineering proposals have been accepted covering a wide range of changes, including the correction of errors in the specifications and the elimination of references to some sources. The ASBCA has even found that a contractor’s proposal providing access to the work site earlier than the contract provided constituted a valid VECP. Vemo Company, ASBCA 31911, 88-3 BCA 20977, (1988). In another case, the ASBCA awarded additional compensation to a contractor whose VECP was the reduction in the number of the explosion-proof motors to operate roll-up doors on a fuel systems maintenance facility at Eglin Air Force Base. W. R. Johnson, Inc., ASBCA 40251, 91-3 BCA 24172, (1991).

    Although most “VECPs” involve the substitution of less costly items for the ones specified or the use of methods that differ from the specified methods, the pertinent regulations and case law do not preclude a pure deletion of work as constituting a valid and acceptable “VECP” in which a contractor should share in the savings to the government. Based on the applicable regulations, if a contractor were to propose, as a VECP, that the government delete a portion of its work, and the deletion did not impair the essential functions of the project, then, if the government proceeds to change the contract accordingly, the contractor would be entitled to an equitable adjustment of its contract price to reimburse it for a share in the cost savings associated with deletion of the work. In such a situation, the contracting officer’s acceptance of the VECP and sharing the cost savings with the contractor would not only be in accordance with the regulations but would also be in furtherance of the purpose of the clause, as interpreted by the decisions of the courts and the boards of contract appeals.

    Even in a situation where the deleted work was the subject of an earlier modification issued by the government increasing the contract work, the boards have held that the contractor’s proposal to not perform the additional work, because it was unnecessary, was a valid VECP. Norair Engineering Corporation, ENGBCA 3730, 78-1 BCA ¶ 13190.

    In Norair, the government added a bulkhead to the contract to construct a portion of the Metro subway tunnel in Washington, D. C. The contractor suggested eliminating the bulkhead as a value engineering change. The government initially rejected the VECP and ordered the construction of the bulkhead, but later changed its position. Because the bulkhead was made a part of the contract by the order authorizing its construction, the government’s subsequent deletion of the bulkhead constituted constructive acceptance of the contractor’s proposed value engineering change.

    During the Vietnam war, a contractor who was manufacturing night vision sights for machine guns and recoilless rifles submitted a VECP that would delete the right angle eyepiece on the sights. The ASBCA found the contractor was entitled to compensation for the VECP when the contracting officer denied the proposal but by subsequent change order deleted the eyepiece. The board held that the credit for the deletion belonged to the contractor in that his VECP was received by the government prior to the issuance of either a contract change order or formal indication that such a change order was forthcoming. Xerox Corporation, ASBCA 16374, 73-1 BCA ¶ 9784. In its decision, the board stated:

    Many decisions of the boards involve situations where a contractor alleges that the modification deleting work was in response to a VECP. However, the boards have disposed of a number of these cases by finding that the contractor did not follow the procedures in the contract’s VE clause and therefore was not entitled to a share in the cost savings.

    If a contractor wants to share in the cost savings that can result from his suggestions, it is imperative that the contractor specifically identify his suggestion as a “VECP” and prepare and submit his suggestion in the form and manner provided in its contract.

    Updated: July 9, 2018

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