provisions into all contracts of sufficient size and duration to offer reasonable likelihood for cost reduction, other than construction contracts. As used in this subpart, value engineering is an effort above and beyond what a contractor might do on his own initiative or is required or encouraged to do by contract provisions not specifying value engineering. Value engineering involves continuing and intensive appraisal of an item being procured and of all elements influencing its cost with the purpose of eliminating or modifying anything that contributes to the cost of the item but is not necessary to the required performance, quality, maintainability, standardization, or interchangeability of the item. Contract provisions for value engineering are of three kinds:

(a) Value engineering

incentives

which provide for the contractor to share in cost reductions that ensue from proposals he submits,

(b) Value engineering program requirements which obligate the contractor to maintain value engineering efforts in accordance with an agreed program; and

(c) A combination of value engineering program requirements and value engineering incentives.

§ 1.1702 Value engineering incentives. § 1.1702-1

Description.

A value engineering incentive is a contract provision that contemplates that the contractor, as a result of performing value engineering, will submit cost reduction proposals to the Government for changes in the contract specifications, purchase description, or statement of work. The changes may include the elimination or modification of any requirements found to be in excess of actual needs regarding, for example, design, components, materials, material processes, tolerances, testing requirements and procedures, or packaging requirements. The Government may elect to adopt a cost reduction proposal and put it into effect through a change order. If so, the contract price will be reduced by a stipulated percentage of the decrease in performance costs that results from the change order, the stipulated percentage having been agreed to in the contract; or in appropriate cases, the fee will be increased by a stipulated percentage of the net savings that result from the change order.

§ 1.1702-2 Application.

(a) Except for construction contracts, a value engineering incentive shall be included in all fixed-price type and costplus-incentive-fee contracts that do not contain a clause providing for a value engineering program requirement either alone or combined with incentives, in accordance with § 1.1703, of $100,000 or more that incorporate firm specifications (or a precise purchase description or detailed statement of work), unless the Head of the Procuring Activity has determined as to the item or class of items being procured that value engineering has no potential for cost reduction as, for example, where the item is a commercial product whose design and cost are controlled by the commercial market. Value engineering incentives also may be included in contracts of less than $100,000 in the discretion of the contracting officer.

(b) Contract clauses providing value engineering incentives are set forth in § 1.1705-1.

(c) The precise extent to which the contractor should share in cost reduction must be tailored to the particular procurement situation. For advertised contracts, the percentage shall be stated in the Value Engineering Incentive clause in the invitation for bids. For negotiated contracts, a percentage shall be stated in the solicitation, although this percentage may be a subject of negotiation before award. Normally, the contractor's share in any cost reduction shall be 50 percent of the amount by which the contract price is reduced as the result of the adoption of the cost reduction proposal. In any case, the most important factor in fixing the percentage is the extent of potential benefits to the Government from value engineering. These benefits do not necessarily vary with the cost or complexity of a product. If extensive subsequent procurement is foreseen or the specifications that are involved have broad application, a procurement of a relatively uncomplicated and inexpensive product may nevertheless warrant a relatively substantial incentive share for the contractor. In no event, however, shall the contractor's share exceed 75 percent.

(d) When a value engineering incentive is to be included in a contract that also will include performance incentives

that might be affected by changed specifications resulting from value engineering, the contract should include an appropriate provision to permit equitable revisions to the performance incentive provisions in the event that the adoption of a cost reduction proposal in effect alters the basis on which the performance incentive was negotiated.

(e) Since value engineering is an effort above and beyond what a contractor is ordinarily required to do, special incentives are provided for its use. Because these incentives provide for substantial sharing by the contractor, and further, because the principle to be employed in Department of Defense value engineering activities is reward based on risk, contractors should fund value engineering efforts themselves. Therefore, when a value engineering incentive is to be included in a contract, the contracting officer should exercise caution in evaluating proposals to be certain that the price or cost estimates given by the prospective contractors do not include or provide funds for such value engineering.

For each cost reduction proposal submitted that evidences merit, the contracting officer shall require that the contractor support the submission with full information regarding each of the following:

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

(b) 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 such change (e.g., suggested revision);

(c) An estimate of the reduction in performance costs that will result from adoption of the proposal taking into account the cost of implementation by the contractor, and the basis for estimate;

the

(d) An estimate of any effects the proposed changes would have on other costs to the Government, such as Government furnished property costs, costs of related items, and costs of maintenance and operation;

(e) 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 remain

(a) Two kinds of contract provisions are prescribed in connection with value engineering program requirements. The first covers the value engineering program requirement alone. The second covers the use of the program requirement combined with incentives. A value engineering program requirement is a contract provision that obligates the contractor to engage in a program requiring a specified level of value engineering effort. A value engineering program requirement, with or without incentives, differs from a value engineering incentive in that it will be stated in the contract as a line item and the cost or price will be separately identified. It also differs in that the benefits from such a program derive not only from specific proposals for changes in specifications, purchase descriptions, or statement of work, but also from a continuous value engineering effort by the contractor in all or selected phases of contract performance and reports reflecting the results of such effort. The use of a funded value engineering program may be appropriate in cases where a contract does not include a firm specification, a precise purchase description, or a detailed statement of work.

(b) The value engineering program requirement with incentives combines the features of the straight value engineering incentive with the straight funded program requirement. It obligates the contractor to engage in a program requiring a specified level of value engineering effort and provides for him to share in substantial cost reductions resulting from proposals submitted by him and adopted by the Government.

(c) Generally, the principle employed in value engineering is to base reward on risk. However, in those cases where a value engineering program requirement

with incentives is used, the risk to the contractor is quite small. Therefore, under a value engineering program requirement with incentives, the contractor's identifiable direct costs of value engineering that will be treated as allowable costs (or recognized in contract pricing) are limited to those amounts provided therefor in the contract.

§ 1.1703-2 Application.

(a) Except for construction contracts and other contracts specifically excepted by the head of the procuring activity, either value engineering program requirements or value engineering program requirements combined with incentives shall be included in all cost-reimbursement type contracts of $1,000,000 or more except where, (1) the principal purpose of the contract is for basic research, feasibility studies, or other such efforts; or (2) in the case of a cost-plus incentive fee contract, a value engineering incentive is used in accordance with § 1.1702-2. Value engineering program requirements alone or combined with incentives may be used in cost-reimbursement type contracts of lesser amounts, or in other contracts, at the discretion of the head of the procuring agency or his designee in accordance with paragraph (c) of this section, if value engineering incentives alone are not used.

(b) The principal goal of a value engineering program requirement, either alone or combined with incentives is to realize the potentialities of value engineering, insofar as practicable, at a time when it will do the most good, i.e., in the initial stages of the research-designdevelopment-production cycle so that specifications, production drawings and methods reflect the full benefit of value engineering as early as possible. The particular value engineering program to be required should be tailored to the particular contract situation with a view toward this goal, and shall be set forth in the contract schedule as a line item.

(c) In general, it is desirable to limit the use of value engineering program requirements, either alone or combined with incentives, to cost-reimbursement type contracts. Further, since it is intended, when using incentive provisions, to allow the contractor to share in substantial cost reductions, the program requirement with incentives should be used only when there is a reasonable likelihood that any cost savings can be clearly identified and measured. When

the potential for cost reduction exists but the measurement of such savings in terms of contract price would be infeasible, e.g., under a cost-reimbursement type research or early development contract, the program requirement alone should be used. Value engineering program requirements with incentives do provide elements of cost control and stimuli toward value engineering efforts which may not always be present in a contract containing a straight value engineering incentive provision. Consequently, it may be desirable to use value engineering program requirements with incentives where other contract provisions place relatively little emphasis on cost control or where experience indicates that a straight value engineering incentive will not produce results that are commensurate with the contract's potential for successful value engineering. On the other hand, particularly in fixed-price type contracts, inclusion of value engineering program requirements necessarily increases initial contract costs to the Government. Therefore, before authorizing use of a value engineering program requirement in fixedprice type contracts, the Head of the Procuring Activity or his designee must be careful that its use will be very likely to result in net savings to the Government. Normally, program requirements, either alone or with incentives, will not be used in firm fixed-price type contracts. (d) The contract clause requiring a value engineering program is set forth in § 1.1705-2.

(e) Contract clauses requiring value engineering programs with incentives are set forth in § 1.1705-3.

(f) When a value engineering program requirement with incentives is to be included in a contract that also will include performance incentives that might be affected by changed specifications resulting from value engineering, the contract should include an appropriate provision to permit equitable revisions to the performance incentive provisions in the event that the adoption of a cost reduction proposal in effect alters the basis on which the performance incentive was negotiated.

(g) (1) Where a value engineering program requirement with incentive is included in a contract, the contractor shall not share in the adopted cost reductions until such reductions exceed the total Government funding by an appropriate amount. Five times the total

If it is determined, in accordance with § 1.1702, to include a value engineering incentive clause in a contract, the applicable clause of those set forth below shall be used.

(a) The following clause is for the use in firm fixed-price type contract and fixed-price contracts with escalation.

VALUE ENGINEERING INCENTIVE (DEC. 1962)

(a) The Contractor may submit cost reduction proposals for changing the drawings, designs, specifications, or other requirements of this contract. Any such proposal shall be submitted in such form as the Contracting Officer may prescribe. The cost reduction proposals contemplated by this clause are proposals based upon sound study by the Contractor that:

(1) Would result in less costly items than those specified herein without impairing any of their essential functions and characteristics, such as service life, reliability, economy of operation, ease of maintenance, and necessary standardized features; and

(ii) Would require, in order to be applied to this contract, a change order to this contract, including the drawings and specifications referenced directly or indirectly herein.

(b) The Government shall not be liable for any delay in acting upon, or for any failure to act upon, any proposal submitted pursuant to this clause. The decision of the Contracting Officer as to the acceptance of any such proposal under this contract shall be final and shall not be subject to the clause of this contract entitled "Disputes". The submission of a proposal by the Contractor shall not in itself affect the obligations of either party under this contract. Unless and until a change order applies such a proposal to this contract, the Contractor shall remain obligated to perform in accordance with its existing terms. (c) The Contracting Officer may accept in whole or in part any cost reduction proposal submitted pursuant to this clause by issuing a change order to this contract which will indentify the cost reduction proposal on which it is based.

(d) If a cost reduction proposal submitted pursuant to this clause is accepted under this contract, an equitable adjustment in the contract price and in any other affected provisions of this contract shall be made in accordance with this clause and the "Changes" clause of this contract. The equitable adjustment in the contract price shall be established by determining the total estimated decrease in the Contractor's cost of performance resulting from the adoption of the cost reduction proposal (taking into account the cost of implementation by the Contractor) and reducing the contract price by percent (‒‒‒‒‒‒%)* of such decrease. The resulting contract modification will state that it is made pursuant to this clause.

(e) Cost reduction proposals submitted under the provisions of any other contract may also be submitted under this contract for consideration pursuant to the terms of this clause. Any such proposal shall indicate (i) the dates of any previous submissions, (ii) the numbers of any contracts under which submitted, and (iii) the previous actions by the Government, if known.

(f) The Contractor may restrict the Government's right to use any sheet of a value engineering proposal or of the supporting data, submitted pursuant to this clause, in accordance with the terms of the following legend if it is marked on such sheet:

This data furnished pursuant to the value engineering incentive clause of contract

shall not be disclosed outside the Government, or be duplicated, used, or disclosed, in whole or in part, for any purpose other than to evaluate a value engineering proposal submitted under said clause; provided, that, if such a proposal is accepted by the Government by issuance of a change order under the "Changes" clause of said contract after the use of this data in such an evaluation, the Government shall have the right to duplicate, use, and disclose this data, in any manner and for any purpose whatsoever, and have others so do. This restriction does not limit the Government's

right to use information contained in this data if it is or has been obtained from another source.

After the issuance of a change order accepting a value engineering proposal, but not prior thereto, such proposal and the supporting data shall, for the sole purpose of supplementing the rights granted to the Government under this paragraph be considered "Subject Data" within the meaning of the "Data" clause of this contract.

The appropriate percentage shall be inserted in accordance with § 1.1702-2.

(b) For fixed-price incentive contracts, insert the clause set forth in paragraph (a) of this section, modified to substitute the following for paragraph (d) thereof:

(d) (1) If a cost reduction proposal submitted pursuant to this clause is accepted under this contract, an equitable adjustment in any affected provision of this contract shall be made in accordance with this clause and the "Changes" clause of this contract. The equitable adjustment in the contract price shall be established by (1) determining the amount of the total estimated decrease in the Contractor's cost of performance resulting from adoption of the cost reduction proposal (taking into account the costs of implementation by the Contractor) and deducting from such amount the Contractor's costs of those value engineering efforts which resulted in the proposal (including direct cost of labor and materials and allocable overhead), and (ii) deducting the amount of the difference from the target cost and adding percent (------%) of the difference to the target profit. The resulting contract modification will state that it is made pursuant to this clause.

(2) Notwithstanding any provision of either subparagraph (1) above or the "Incentive Price Revision" clause of this contract, if any cost reduction proposals submitted pursuant to this clause are accepted under this contract, the total final price of any items affected by such proposals shall not be less than the sum of (i) the total final negotiated cost of such items (established under paragraph (c) of the "Incentive Price Revision" clause), or the maximum total final price of such terms (established under paragraph (d) of the "Incentive Price Revision" clause), whichever is less, and (ii) the aggregate of any equitable adjustments in the target profit established under subparagraph (1) above. Dec. 1962)

*The appropriate percentage shall be inserted in accordance with § 1.1702.2.

(c) For cost-plus-incentive-fee contracts, insert the clause set forth in paragraph (a) of this section, modified to substitute the following for paragraph (d) thereof:

(d) If a cost reduction proposal submitted pursuant to this clause is accepted under this contract, and equitable adjustment in any affected provision of this contract shall be made in accordance with this clause and the "Changes" clause of this contract. The equitable adjustment in the contract price shall be established by (i) determining the amount of the total estimated decrease in the Contractor's cost of performance resulting from adoption of the cost reduction proposal (taking into account the costs of implementation by the Contractor) and deducting from such amount the Contractor's costs of those value engineering efforts which resulted in the proposal (including direct costs of labor and materials and allocable overhead), and (ii) deducting the amount of the difference from the target cost and adding percent (------ %)* of of the difference to the target fee. The maximum and minimum percent limits on the fee in paragraph (i) of the "Allowable Cost, Incentive Fee, and Payment" clause of this contract shall each be increased by adding a percent equal to the quotient of the equitable adjustment in the target fee divided by the revised target cost. The resulting contract modification will state that it is made pursuant to this clause. (Dec. 1962)

*The appropriate percentage shall be inserted in accordance with § 1.1702.2.

(d) For fixed-price contracts providing for prospective price redetermination, insert the clause set forth in paragraph (a) of this section, modified by adding the following to the second sentence of paragraph (d) thereof:

Providea, That for any redetermination of price, under the "Price Redetermination" clause of this contract, having an effective date subsequent to the effective date of any change order issued pursuant to this clause, the redetermined price shall not be reduced as a consequence of such change order by more than percent (------%) of the estimated decrease in that part of the Contractor's cost of performance that is attributable to the pertinent price redetermination period.

*The appropriate percentage shall be inserted in accordance with § 1.1702-2.

§ 1.1705-2 Value engineering program requirement clause.

If a value engineering program is to be required in accordance with § 1.1703, the following clause shall be included in the contract.

VALUE ENGINEERING PROGRAM REQUIREMENT (DEC. 1962)

(a) The Contractor will engage in a value engineering program as specified in the contract schedule and will submit any cost reduction proposal resulting from value engineering in such form as the Contracting