A Value Engineering Change Proposal (VECP) is a contractual mechanism provided by Federal, state, International, and private businesses. It gives a financial incentive to get contractors and subcontractors to reduce the cost of systems, supplies, and services for contracts in-progress, and to apply for use in future contracts. It saves the contracting group money in the instant contract and future ones through generating new ways of doing business that saves the organization money. The contractor benefits by making substantial (as they see it) profits. The contracting organization benefits by reducing the costs of their current contract (at no loss in functionality), and future efforts.

Qualifying for a VECP

The contract must have the VE Incentive Clause in it. By law and regulation, almost ALL governmental contracts have the clause. For example, in the Federal government, a VE Incentive Clause is required in all contracts over $100,000 and can be requested in smaller ones (usually all contracts over $10,000). The contracting officer has no obligation to accept a VECP and the risk for the contractor's development costs resides with the contractor. However, if conditions are met, the Contracting Officer is obligated (by law) to do all they can to ensure the VECP has a good chance of being accepted. [Additional Requirements]
The VECP must, at a minimum, require a change to a contract to implement
Further, the VECP MUST save money on the "instant contract." It must lower overall the overall cost; without degrading performance, reliability, maintenance, or safety.

Why Bother?

Contractors

Why should a contractor bother? Simple, added profit. Contractors who submit an accepted VECP-- share in any gross savings! Some contracts base the share on the financial risk of the agency or organization involved. Most have a set percentage of the gross savings (usually 55-percent) plus reimbursement of any reasonable development costs. Some contracts allow the contractor to obtain a percentage of "collateral costs." The return for these can easily exceed the contractor's entire expected profit for the contract service they are providing. Typically, upon acceptance, the contractor receives all, or a portion of their cost, to develop the proposal. In some rare situations, the government will even provide VECP development service. However, in this case, the contractor's share is reduced to 25-percent of the gross savings (a reduction of nearly 55-percent of the net savings return to the contractor).

Contracting Officers and COTR's

Why does the government or contracting group care? Simple. Reduced costs, in the current and future contracts. Here is the situation, after contract award, there is little reason for the contractor to reduce acquisition or life-cycle cost. Since the contractors expected profits are derived from the contract cost, reducing that cost should reduce the expected profit. The VE Incentive Clause dramatically changes this situation. It allows the contractor to increase their profit by sharing the net savings in three areas: their instant contract, concurrent contracts, and collateral (maintenance, operations, and support) savings. Exact shares are defined in the regulations implementing the clause. In the Federal government, this is the Federal Acquisition Regulations (FAR's). In the Federal government, the VECP generated nearly 20 billion in cost savings in 1996 alone. In one office of an small agency, the office generated over $460 million in net VECP savings (1991-1993 period) and shared $158 million with their prime contractors and subcontractors. In one large contract, just one, the contractor generated more than $48 million of savings to the government and over $50 million in contractor shared savings.

VE Incentive Clause (VECP) Requirements

The information given below is general. More specific information is given in our training and during the use of our VECP generation (contractor) and review (CO) systems. Also, please note that specific state and Federal agencies may differ slightly from this general discussion. If you need detailed information for the group you are involved with, if you are concerned about the group you are dealing with, we recommend you contact us for details regarding that organization (small fee).

General. Any proposal submitted to the CO under the VE Incentive Clause must first meet validity requirements. Only proposals meeting these requirements are evaluated and considered to be a VECP. No technical or economic consideration should be given to the proposal until it is ruled by the contracting officer (CO) to be a valid VECP. Below are the main common areas of consideration (additional details given within enhanced system and training).

Validity. To be considered as a valid VECP, several requirements must be met by the contractor's proposal. In the Federal government, and most states, these requirements relate back to the clause's legal conditions for determining the potential for acceptable adoption in the contract. In general, the proposal must:

Originate Voluntarily From the "Instant Contract." The subject proposal must originate voluntarily from an active contact (instant) by the person or company (contractor) having the primary contract with the contracting agent (government). Proposals originating from a subcontractor must be submitted by the primary contractor to be considered as a VECP, as the subcontractor is not the party with the contractual responsibility to the government. (Their contract is with the prime or a secondary contractor.) Proposals originating from the contracting agent (government) are not a VECP and usually considered to be changes at their "convenience."

Require a Contract Change. In all cases, the proposal must necessitate a change to the contract. If a change is not required, the contractor does not need to submit a proposal and can proceed without consulting anyone. Therefore, unless otherwise specified in the contract in effect, any involved savings are solely the contractor's (subject to other clause issues).

Reduce Actual Contract Costs. In the Federal, and most state and International governments, the proposal must result in an actual overall reduction in the contract price and/or estimated cost to the involved agency or state. If the proposal would save contract funds but have implementation costs which negate the initial savings, no actual reduction in estimated cost to the agency or state exists.

Not Involve Invalid Proposal Changes. Some types of proposals are specified in the VE Incentive Clause as not meeting acceptance requirements. The federal definitions for unacceptable proposal types are changes in:

Deliverable end item quantities only (e. g., five mid-sized cars instead of six mid-sized cars).

Research and development (R&D) end items or R&D test quantities that are due solely to the result of previous testing of the involved contract (e. g., R&D efforts to determine number of generators needed has found one rather than the expected two will work).

Variations to the contract type only (e. g., change contract from fixed-fee to performance).

Maintain Essential Functions or Characteristics. To be considered acceptable, the VECP must perform the basic functions and meet the basic purposes of the original contract. The measurement parameter to be used is to consider if essential functions or characteristics of the contract would be impaired by acceptance of the proposal. For example, for a contract to install heating and cooling units, the result of a VECP to change the units must continue to meet or exceed the thermal, noise, exhaust, and other requirements that the original contracted units were designed and specified to provide. A FAST diagram demonstrating that this has been obtained is recommended by all contracting groups, but is not a required element (however, it helps acceptance).

Include Evaluation Information. The proposal must include enough information that the contracting agent can evaluate the VECP. The Federal minimum requirements are listed in FAR 52.248-1(c), "VECP Preparation." If the proposal involves proprietary, confidential, patent, or other features, this must be disclosed as it effects the ultimate value of the VECP. Failure to disclose a third party proprietary, confidential, patent, or other feature, can cause the contractor to be liable for damages. Failure to disclose the contractor's own proprietary, confidential, patent, or other features, may negate their proprietary rights, as unless otherwise negotiated, the use of the concept is retained by the government or contracting group. This is in return for the payment for the VECP. While not required, using Value Engineering to help you generate the proposal is advised, and the processes documentation assists the contracting officers and others in the evaluation process, thus generating a higher acceptance level.

Include Time Requirements. If the time requirements are critical, the proposal must include the schedule that must be adhered to allow the VECP activity change to take place.

Overwhelmed?

Some feel that way, don't try, and as a result, never obtain the added profits and contract savings. That is part of the reason we created VECP consulting. Our systems walk even the least experienced person through the process, for both the contractor and CO end (as needed, as we have successfully advised both for over 30 years). Further, in the enhanced systems, we give even more information and guidance, so as to ensure everyone meets the stated purpose of the VECP, "a VECP program benefits everyone." (A statement that is even on all the recommended forms.)