(b) Selecting period for sharing fuure acquisition savings. The length of he specified period of sharing future cquisition savings, upon which the estinated requirements or the "royalty" eriod will be based, shall be at least ne year, and may be as much as three ears, from the scheduled completion of eliveries under the instant contract or he acceptance of the cost reduction proosal, whichever is later, as determined ppropriate by the contracting officer to duce a significant value engineering ffort. Circumstances such as the followng will normally warrant selection of a eriod longer than one year:

(1) Acquisition of the item in the fuure will involve an extended period of anufacture, so that few, if any, delivries of the item may be expected in the first year or so of performance under future contract;

(2) Current contract volume is for mited quantities, but increased producion quantities are expected in following ears, so that potential savings will inrease progressively in succeeding years; (3) Use of the item being procured or ts relationship to other items or systems nay require such an extensive period of est and evaluation before any proposed shange could be accepted that subtantial cost savings under the instant contract are unlikely; or

(4) Complexity of the item being proured would require high initial implementation costs to incorporate a proposed change, so that a substantial ncentive would be required in order to ncourage change proposals.

(c) Estimated requirements (“lump um") sharing method. Consideration of the following factors, among others, may nfluence the determination to use the lump-sum" sharing method, based on stimating future requirements:

(1) The quantity of items to be prosured by the contracting Department for he sharing period to be used can be estimated with a reasonable degree of certainty at the time the solicitation for he current contract is prepared, for xample

(i) Where the contract is for items set forth in the Department of Defense Five Year Force Structure and Financial Program; or

(ii) Where extensive historical data exist which indicate stability of requirements over an extended period and from which future requirements can be predicted with reasonable accuracy;

(2) The disclosure of the estimated future requirements would not compromise national security;

(3) Requirements will be procured through a large number of contracts, e.g., a common item with multiple sources where each contract will be for the supply of only a small portion of total requirements;

(4) An identical item is procured by more than one procuring activity or purchasing office so that administrative costs, such as costs of maintaining records of actual purchases, would substantially diminish the overall savings to the Government.

When this estimated future requirements method of sharing future acquisition savings is to be used, the contracting officer shall set forth the estimated requirements for the sharing period in the value engineering clause. In computing these requirements, the quantities to be procured shall be limited to procurements by the contracting Department or procuring activity (where all or practically all of the requirements will be purchased by a particular procuring activity) for substantially the same end item as that called for under the instant contract, and shall be estimated over a one- to three-year period, as considered appropriate in accordance with paragraph (b) of this section. When the estimated requirements represent quantities to be procured by more than one procuring activity, particular care shall be exercised at the time a value engineering change proposal is accepted to assure that copies of the acceptance are expeditiously furnished to all procuring activities involved, so that they may reflect the change in their contracts and thereby avoid duplicate payment to contractors of savings already shared on quantities included in the estimated requirements. The procedures to be followed in determining and paying the contractor's savings share based on estimating future requirements are set forth in the value engineering clause (see § 1.1707-3(a)).

(d) Royalty sharing method. The "royalty" sharing method may be more appropriate than estimating future requirements ("lump sum" method) when:

(1) The contracting Department's future requirements for the sharing period cannot be estimated with the degree of certainty required by paragraph (c) of

this section, e.g., where historical data indicate that annual requirements may fluctuate widely;

(2) The disclosure of the estimated future requirements would compromise national security;

(3) The use of the item makes it probable that the requirements for the item being procured may substantially change or be canceled by changes in defense concepts and programs;

(4) The item being procured is characterized by a limited number of sources and is centrally procured by a single purchasing office so that records of future procurements can be collected and maintained economically; or

(5) The item being procured is a product of a rapidly developing technology, so that the usefulness of any value engineering change to current specifications may be of relatively short duration. When the "royalty" sharing method is determined to be appropriate the "royalty" period shall be specified in the value engineering clause. Instructions with the clause provide that when production of the item involves an unusually extended period of time (eg., ship construction), the clause may be changed to provide that only the date of award of future contracts for the item, rather than the scheduled delivery dates thereunder, must fall within the sharing period in order for the contractor to receive royalties for items accepted by the Government under such future contracts. The procedures to be followed in determining and paying the contractor's "royalty" share are set forth in the value engineering clause (see § 1.1707-3b)).

§1.1703-4 Collateral savings.

In addition to contractor sharing in instant contract and future acquisition savings. the value engineering clause normally shall provide for contractor participation in any ascertainable net reduction in the Government's ever-al projected posts including but not limited to cost of operation, maintenance logistic support and Government-furnished property, where such collateral savings result from the change propose submirted by the contraria. This additional incentive enables the contractor to share in collateral savings less any increase in ARCUSİTİON COsis whether or not there is any change in the acquisition cost of the hem. However when the Head of the Procuring ACVRT & his designee de

The precise extent to which the com tractor should share savings resultin from decreases in his cost of performan and in future acquisition costs must tailored to the particular procuremen For advertised contracts, the percentag of contractor sharing shall be stated i the Value Engineering Incentive clau in the invitation for bids. For negotiate contracts, the percentages of contrac sharing shall be stated in the vall engineering clause in the request for pr posals, although the percentages may i a subject of negotiation prior to awar In two-step formal advertising, althoug discussion of the appropriate percen ages of contractor sharing is permissib in connection with step one, the percent ages shall be specified in the Value En gineering Incentive clause in the invita tion for bids that is issued at the begin ning of step two.

$1.1704-2 Value engineering incentiv

percentages.

(a) Instant contract savings. In fr fixed-price contracts, fixed-price com tracts providing for escalation, fixed-price contracts providing prospective redetermination, the tractor's share in the cost reducta on the instant contract normai should be 50 percent and in no ever shall be greater than 75 percent; how ever, if such contracts are not awarde on the basis of adequate price compet tion, a contractor's share of less tha 50 percent may be appropriate. In an in centive-type contract, if it is determine thai costs and savings can be estimate With reasonable accuracy, the contra Lor's share may be as much as 50 pe cent: if costs and savings cannot be est mated with reasonable accuracy. h share should be in accordance with th maximam overal cost incentive shar ing race of the contract

b Future acquisition sarings. Wher the value engineering clause provides a contractor sharing in future acquis savings. the contractor's percemag share should normally be significan

ss than his percentage share on the istant contract and shall never exceed . Normally, the percentage share in iture acquisition savings should be om 20 to 40 percent. Other things being qual, a longer period of sharing future cquisition savings (see § 1.1703-3 (b)) hould make for a lower percentage are, and vice versa, within the 20-40 ercent range.

(c) Collateral savings. When a collatal savings provision is included in any ntract, the contractor's percentage are of collateral savings in such areas Government-furnished property

ther than Government-furnished marial under the instant contract), operions, and logistic support shall be 10 ercent of projected savings which it is timated will accrue to the Governent during an average or typical year's se of the item incorporating the change. he contracting officer's determination the amount of projected collateral vings shall be final and shall not be bject to the Disputes clause. With repect to savings due to a reduction in he amount of Government-furnished aterial under the instant contract, the ontractor's share shall be the same as is share in instant contract savings. 1.1704-3 Value engineering program requirement percentages.

(a) Instant contract savings. In a xed-price type contract other than an icentive contract, the contractor's share a the cost reduction on the instant conact may be as much as 25 percent. In n incentive-type contract, if it is deermined that costs and savings can be stimated with reasonable accuracy, the ontractor's share in the cost reduction n the instant contract may be as much s 25 percent; if costs and savings canot be estimated with reasonable accuacy, his share should be in accordance ith the maximum overall cost incentive haring rate of the contract. In costlus-a-fixed-fee contracts, the contracor's share of the savings should nornally be 10 percent and shall not exceed his figure.

(b) Future acquisition savings. Where he clause provides for contractor sharng in future acquisition savings, the contractor's percentage share should normally be significantly less than his percentage on the instant contract and shall never exceed it. In a fixed-price type or cost-plus-incentive-fee contract, a percentage of from 10 to 20 percent

would be appropriate. In a cost-plus-afixed-fee contract, 5 percent is normal. (c) Collateral savings. See § 1.17042(c).

§ 1.1705 Other considerations.

§ 1.1705-1 Submission of identical value engineering change proposals under more than one contract.

Contractors should be encouraged to submit cost reduction proposals under any of their contracts where the likelihood of savings is present even though an identical proposal may have been accepted under another contract with the contractor or another contractor. When identical value engineering change proposals are submitted under more than one contract for substantially the same items, either with the same contractor or with different contractors, and both are accepted, the value engineering clauses provide that (a) instant contract savings shall be paid under each contract, (b) future acquisition savings and collateral savings will be paid only to the extent provided for by the contract under which the proposal is first received by the contracting officer and not pursuant to the other contract, and (c) the royalty sharing provision (if any) in the contract under which the proposal is first received will nevertheless not operate with respect to the other contract under which the Government accepts the proposal and pays instant contract savings. [32 F.R. 16401, Nov. 30, 1967]

(b) Cost-type contracts. In accordance with paragraph (a) of this section, value engineering shall not be allowed as a direct charge against cost-type contracts containing the Incentive clause, and shall be allowed as a direct charge against cost-type contracts containing the Program Requirement clause only to the extent proper to cover the required value engineering program. In either case, the cost of value engineering is an allowable indirect charge to the extent that, under Part 15 of this chapter, it is reasonable in the conduct of the contractor's business as a whole and allocable to the particular contract.

(c) Negotiated fixed-price type contracts. With respect to negotiated fixedprice type contracts, the normal price negotiation policies and techniques in Subpart H, Part 3 of this chapter, shall be followed in determining whether and to what extent the cost of value engineering may be included in the contract price.

(d) Developmental costs. Notwithstanding the provisions of paragraphs (b) and (c) of this section, developmental costs of successful value engineering proposals shall be deductible from overall cost savings in accordance with § 1.1703-2(f) and the provisions of the applicable instant contract sharing provision in § 1.1707-2.

§ 1.1705-4 Effect of value engineering payments.

The sharing of cost savings with a contractor under a value engineering incentive or program arrangement constitutes payment for services rendered and does not constitute profit or fee for purposes of the statutory limitations imposed by 10 U.S.C. 2306(d).

§ 1.1706 Evaluation and acceptance.

(a) The expeditious processing of, evaluation of, and determination as to the acceptability of any value engineering change proposal under a contract (including the determination as to which clause is applicable if the contract contains both a Value Engineering Incentive and a Value Engineering Program Requirement clause) shall be the responsibility of the contracting officer, whose decision shall be final and shall not be subject to the Disputes clause of the contract.

(b) If the contract contains both a Value Engineering Incentive and a Value Engineering Program Requirement clause and the contracting officer

determines that a proposal submitt pursuant to the Incentive clause is with the scope of the value engineering pr gram, that proposal shall be treated all purposes as if it had been submitt pursuant to the Program Requireme clause.

(c) When it is determined that a ceptance of a value engineering chan proposal will result in overall cost duction to the Government, the contra ing officer shall accept the proposal giving the contractor written not thereof reciting acceptance pursuant the value engineering clause. Where pe formance under the contract has not y been completed and application of t proposed changes to the remaining pe formance is advisable and appropria the written notice of acceptance may given by issuance of a change order. I sufficient time to evaluate and impleme a proposal prior to completion of pe formance of the contract under which was submitted shall not be a cause f rejection. In such cases, where futu acquisition savings or collateral saving would result from incorporating th changes into the requirements, the con tracting officer should accept the pro posal for incorporation into future pro curements by giving written notice o acceptance to the contractor, and the contract shall be modified accordingly

(d) Before accepting a cost reduction proposal under a value engineering clause providing for contractor sharing in collateral savings or in future acquisition savings based on estimated requirements the contracting officer must make sur that sufficient funds are available for ex penditure under the instant contract t cover any increase in the contract price which will result from such acceptance When necessary, the contract unde which the proposal was accepted shall be modified to provide funds sufficient to cover the savings sharing payments to the contractor.

(e) When a cost reduction proposal has been accepted under a value engi neering clause providing for contractor sharing in future acquisition savings on a "royalty" basis, any appropriation under which a contract is awarded incorporating the proposal must provide funds sufficient to cover the royalty payments which will accrue as a result of the deliveries under the later contract. Although the royalty payments will be made pursuant to the contract under which the cost reduction proposal was

accepted, they shall be made from the appropriation supporting the succeeding contract which incorporates the value engineering change.

1.1707 Value engineering clauses.

The appropriate form of the basic clause in § 1.1707-1 shall be used, with he appropriate instant contract sharing provision from § 1.1707-2 and the appropriate future acquisition sharing provision from § 1.1707-3 inserted.

1.1707-1 The basic clause.

(a) Value engineering incentive. VALUE ENGINEERING INCENTIVE (JUNE 1967) - (a) (1) This clause applies to those cost reduction proposals initiated and developed y the Contractor for changing the drawings, lesigns, specifications, or other requirements of this contract. This clause does not, howver, apply to any such proposal unless it is dentified by the Contractor, at the time of ts submission to the Contracting Officer, as proposal submitted pursuant to this clause. Furthermore, if this contract also contains "Value Engineering Program Requirement" clause, this clause applies to any given value engineering change proposal only to the extent the Contracting Officer affirmatively determines that it resulted from value engineering efforts clearly outside the scope of the program requirement; to the extent the Contracting Officer does not affirmatively so determine, the proposal shall be considered for all purposes as having been submitted pursuant to the Value Engineering Program Requirement clause, even if it was purportedly submitted pursuant to this clause.

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(2) The cost reduction proposals contemplated are those that:

(i) Would require, in order to be applied to this contract, a change to this contract; and (ii) Would result in savings to the Government by providing

(A) A decrease in the cost of performance of this contract, without impairing any of the items' essential functions and characteristics such as service life, reliability, economy of operation, ease of maintenance, and necessary standardized features, or

(B) Items, regardless of the acquisition cost, producing a net reduction in the cost of Government-furnished property, operations, maintenance, or other areas which exceeds any increased acquisition cost, without impairing any of the items' essential functions and characteristics.

(b) As a minimum, the following information shall be submitted by the Contractor with each proposal:

(i) A description of the difference between the existing contract requirement and the proposed change, and the comparative advantages and disadvantages of each;

(ii) An itemization of the requirements of the contract which must be changed if the

proposal is adopted, and a recommendation as to how to make each such change (e.g., a suggested revision);

(iii) An estimate of the reduction in performance costs, if any, that will result from adoption of the proposal, taking into account the costs of development and implementation by the Contractor (including any amount attributable to subcontracts in accordance with paragraph (e) below) and the basis for the estimate:

(iv) A prediction of any effects the proposed change would have on collateral costs to the Government such as Governmentfurnished property costs, costs of related items, and costs of maintenance and operation;

(v) A statement of the time by which a change order adopting the proposal must be issued so as to obtain the maximum cost reduction during the remainder of this contract, noting any effect on the contract completion time or delivery schedule; and

(vi) The dates of any previous submissions of the proposal, the numbers of the Government contracts under which submitted, and the previous actions by the Government, if known.

(c) (1) Cost reduction proposals shall be submitted to the Procuring Contracting Officer (PCO). When the contract is administered by other than the procuring activity, a copy of the proposal shall also be submitted to the Administrative Contracting Officer (ACO). Cost reduction proposals shall be processed expeditiously; however, the Government shall not be liable for any delay in acting upon any proposal submitted pursuant to this clause. The Contractor does have the right to withdraw, in whole or in part, any value engineering change proposal not accepted by the Government within the period specified in the proposal. The decision of the Contracting Officer as to the acceptance of any such proposal under this contract (including the decision as to which clause is applicable to the proposal if this contract contains both a "Value Engineering Incentive" and a "Value Engineering Program Requirement" clause) shall be final and shall not be subject to the "Disputes" clause of this contract.

(2) The Contracting Officer may accept, in whole or in part, either before or within a reasonable time after performance has been completed under this contract, any cost reduction proposal submitted pursuant to this clause by giving the Contractor written notice thereof reciting acceptance under this clause. Where performance under this contract has not yet been completed, this written notice may be given by issuance of a change order to this contract. Unless and until a change order applies a value engineering change proposal to this contract, the Contractor shall remain obligated to perform in accordance with the terms of the existing contract. If a proposal is accepted after performance under this contract has been completed, the adjustment required shall be ef