Use of Value Engineering in Defense Acquisitions
Gao ID: GAO-03-590R May 23, 2003
Value engineering (VE) is a recognized technique for reducing costs while maintaining or improving productivity and quality. The Department of Defense's (DOD) VE program consists of both government- and contractor-developed cost-reduction projects designed to reduce a system's life-cycle costs. In response to Congress' request, we agreed to provide information on (1) the role the VE program has played in supporting cost reduction in DOD weapons system programs and (2) the alternative measures program managers take to reduce costs and/or incentivize contractors.
In summary, we found that the VE program has made a minimal contribution to cost reduction in DOD. Value engineering is only one of a number of approaches used by the services to control costs, and its use varied significantly from project to project. In part, its limited use is attributable to new cost-reduction initiatives introduced by the department since the 1990s and in part due to the cumbersome processes required to implement the program. Perhaps, more importantly VE projects are typically undertaken during production or after a system has been fielded. At this point, opportunities for substantially reducing costs are more limited. Our work on commercial best practices suggests that the opportunities to significantly influence costs occur earlier in the life cycle of a system. Generally we found significant variance in both the use and support of value engineering throughout the services. For example, neither the Air Force or the Navy have full time staff resources dedicated to the VE program and consider VE just one of many tools available to reduce costs. At one Navy buying activity, we could not identify any VE projects, while at other Air Force and Navy buying activities we identified isolated instances where VE projects were being undertaken. In contrast, the Army has a more structured program with staff resources committed to managing the program and developing VE projects. However, even within the Army, there were variances in management emphasis from command to command. For the 11 weapons system programs we examined, we found that DOD program managers use a variety of strategies as alternatives to or in conjunction with VE. But how or when VE or other strategies are used varies by project. Like VE, other strategies often seek to motivate contractors to submit cost-reduction ideas and sometimes provide opportunities for contractors to share in the savings. Some program managers said they consider the VE tool or methodology, but said they use other approaches better suited to their programs or integrated into their management approach. The limited use of the VE program has been the result of a changing acquisition environment and the administrative burdens associated with the program. DOD introduced a variety of new cost-reduction initiatives in the 1990s as it looked for ways to reduce costs and create a more efficient acquisition environment. DOD also changed its procedures and processes to foster greater efficiency and cost effectiveness. For example, DOD encouraged programs to replace military specifications and standards with performance specifications, giving contractors configuration control and resulting in less need for contractors to submit changes to DOD for approval. Administrative requirements also contributed to limited contractor participation in the VE program. The proposal process is seen as complex and resource intensive.
GAO-03-590R, Use of Value Engineering in Defense Acquisitions
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May 22, 2003:
The Honorable John Ensign:
Chairman:
The Honorable Daniel Akaka:
Ranking Minority Member:
Subcommittee on Readiness and Management Support:
Committee on Armed Services:
United States Senate:
Subject: Use of Value Engineering in Defense Acquisitions:
Value engineering (VE) is a recognized technique for reducing costs
while maintaining or improving productivity and quality. DOD's VE
program consists of both government-and contractor-developed cost-
reduction projects designed to reduce a system's life-cycle costs. In
response to your request, we agreed to provide information on (1) the
role the VE program has played in supporting cost reduction in DOD
weapons system programs and (2) the alternative measures program
managers take to reduce costs and/or incentivize contractors. This
letter transmits the information we presented to your staff at a
briefing on February 27, 2003 (see encl. I).
To complete our review, we identified the extent VE projects were being
undertaken at several buying activities.[Footnote 1] We also reviewed
the relevant statute, regulations, and guidance and interviewed key DOD
and contractor officials. We also made use of our work on commercial
best practices that identified opportunities leading organizations use
to reduce life-cycle costs. We did not rely on DOD reports of VE
savings because the DOD inspector general had determined in earlier
audits that the reports included savings from other, non-VE
initiatives. To identify the measures program managers take to reduce
costs, we reviewed the approaches taken on 11 weapons system programs.
At the buying activities we covered, we selected programs for review
that were in production and/or previously reported VE savings. We
performed our work between August 2002 and March 2003 in accordance
with generally accepted government auditing standards.
Summary:
In summary, we found that the VE program has made a minimal
contribution to cost reduction in DOD. Value engineering was only one
of a number of approaches used by the services to control costs, and
its use varied significantly from project to project. In part, its
limited use was attributed to new cost-reduction initiatives introduced
by the department since the 1990s and in part due to the cumbersome
processes required to implement the program. Perhaps, more importantly
VE projects are typically undertaken during production or after a
system has been fielded. At this point, opportunities for substantially
reducing costs are more limited. Our work on commercial best practices
suggests that the opportunities to significantly influence costs occur
earlier in the life cycle of a system.[Footnote 2]
Generally we found significant variance in both the use and support of
value engineering throughout the services. For example, neither the Air
Force or the Navy have full-time staff resources dedicated to the VE
program and consider VE just one of many tools available to reduce
costs. At one Navy buying activity, we could not identify any VE
projects, while at other Air Force and Navy buying activities we
identified isolated instances where VE projects were being undertaken.
In contrast, the Army has a more structured program with staff
resources committed to managing the program and developing VE projects.
However, even within the Army, there were variances in management
emphasis from command to command.
For the 11 weapons system programs we examined, we found that DOD
program managers use a variety of strategies as alternatives to or in
conjunction with VE. But how or when VE or other strategies are used
varies by project. Like VE, other strategies often seek to motivate
contractors to submit cost-reduction ideas and sometimes provide
opportunities for contractors to share in the savings. Some program
managers said they consider the VE tool or methodology, but said they
use other approaches better suited to their programs or integrated into
their management approach.
The limited use of the VE program has been the result of a changing
acquisition environment and the administrative burdens associated with
the program. DOD introduced a variety of new cost-reduction initiatives
in the 1990 as it looked for ways to reduce costs and create a more
efficient acquisition environment. DOD also changed its procedures and
processes to foster greater efficiency and cost effectiveness. For
example, DOD encouraged programs to replace military specifications and
standards with performance specifications, giving contractors
configuration control and resulting in less need for contractors to
submit changes to DOD for approval. Administrative requirements also
contributed to limited contractor participation in the VE program. The
proposal process is seen as complex and resource intensive.
We are not making recommendations in this letter. We believe that
program managers should continue to have the option of using VE where
appropriate. However, given the varied use of VE and the availability
of other cost-savings measures, management emphasis on VE as a
preferred approach to reducing costs is not justified.
Agency Comments and Our Evaluation:
In its written comments (see encl. II) on a draft of this letter, DOD
stated that it agrees that VE is a useful tool for reducing costs.
However, DOD also commented that our report did not consider that the
fiscal year 2002 VE statistics showed $2.5 billion of VE savings and
costs avoidances.
We reviewed but did not rely on the annual reports in making our
assessment of VE. The DOD Inspector General had found that past reports
did not accurately reflect VE savings. The fiscal year 2002 report, as
in prior years, includes savings from a number of initiatives, not just
VE. The data request for fiscal year 2002 referenced criteria contained
in an audit resolution agreement with the Inspector General. The
agreement states "—DOD Components should be encouraged to integrate VE
with other similar programs and capture the savings in the annual VE
report whenever possible.":
We are sending copies of this report to the Secretary of Defense, the
Director, Office of Management and Budget, and interested congressional
committees. We will also make copies available to others upon request.
In addition, the report will be available at no charge on the GAO Web
site at http://www.gao.gov.
Should you or your staff have any questions on matters discussed in
this report, please contact me on (202) 512-4383 or Karen Zuckerstein
at 202-512-6785. Principal contributors to this report were Maria
Durant, Jean Harker, Carlos Garcia, Noel Lance, and Bradley Terry.
Katherine V. Schinasi:
Director, Acquisition and Sourcing Management:
Signed by Katherine V. Schinasi:
Enclosures:
Enclosure I:
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[End of figure]
Enclosure II: Comments from the Department of Defense:
ACQUISITION, TECHNOLOGY AND LOGISTICS:
OFFICE OF THE UNDER SECRETARY OF DEFENSE:
3000 DEFENSE PENTAGON WASHINGTON, DC 20301-3000:
MAY 01 2003:
Ms. Katherine V. Schinasi:
Director, Acquisition and Sourcing Management U.S. General Accounting
Office:
441 G Street, N.W. Washington, D.C. 20548:
Dear Ms. Schinasi:
This is the Department of Defense (DoD) response to the GAO draft
report, "VALUE ENGINEERING," dated April 2, 2003 (GAO Code 120166/GAO-
03-590R).
The Department agrees with GAO's finding that value engineering is a
useful tool for reducing costs and is taking steps to ensure that
program managers can use this and other cost savings tools to a greater
extent. DoD uses many cost savings approaches as a function of the
specific circumstances and there never has been a single "preferred
approach.":
In its report, the GAO states "the value engineering (VE) program has
made a minimal contribution to cost reduction in DoD." The Department
considers this statement to be confusing. During this inquiry, the GAO
did not consider current reports of value engineering savings due to a
1996 Inspector General (IG) finding of reporting errors in the value
engineering process. Currently, DoD VE Program savings conform with the
IG resolution on how to resolve those errors and, in FY 2002, $2.5
billion of VE savings and cost avoidances were reported.
My point of contact for this report is Dr. Jay Mandelbaum and he can be
reached at (703) 695-0472 or Jay.Mandelbaum@ osd.mil.
Sincerely,
Glenn F. Lamartin:
Director Defense Systems:
Signed by Glenn F. Lamartin:
[End of section]
(120166):
FOOTNOTES
[1] These buying activities were the Army Aviation Missile Command,
Army Tank and Automotive Command, Air Force Materiel Command, Space and
Naval Warfare System Command, and Naval Sea Systems Command. They were
selected to cover all services and a range of programs.
[2] U.S. General Accounting Office, Best Practices: Setting
Requirements Differently Could Reduce Weapon Systems' Total Ownership
Costs, GAO-03-57 (Washington D.C.: Feb. 11, 2003).