May 21, 1993
TO THE HEADS OF EXECUTIVE DEPARTMENTS AND ESTABLISHMENTS
SUBJECT: Value Engineering
1. Purpose
2. Supersession
Information
3. Authority
4.
Background
5. Relationship to other management
improvement processes
6. Definitions
7. Policy
8. Agency responsibilities
9. Reports to OMB
10. Inspectors General
audits
11. Related Guidance
12.
Effective date and Implementation
13. Sunset
review
14. Inquiries
1. Purpose. This Circular requires Federal
Departments and Agencies to use value engineering (VE) as a management tool,
where appropriate, to reduce program and acquisition costs.
2. Supersession Information. This Circular
supersedes and cancels OMB Circular No. A-131, Value Engineering, dated
January 26, 1988.
3. Authority. This Circular is issued pursuant to 31
U.S.C. [[section]]1111.
4. Background. For the purposes of this Circular,
value analysis, value management, and value control are considered synonymous
with VE. VE is an effective technique for reducing costs, increasing
productivity, and improving quality. It can be applied to hardware and
software; development, production, and manufacturing; specifications,
standards, contract requirements, and other acquisition program documentation;
facilities design and construction. It may be successfully introduced at any
point in the life-cycle of products, systems, or procedures. VE is a technique
directed toward analyzing the functions of an item or process to determine
"best value," or the best relationship between worth and cost. In other words,
"best value" is represented by an item or process that consistently performs
the required basic function and has the lowest total cost. In this context, the
application of VE in facilities construction can yield a better value when
construction is approached in a manner that incorporates environmentally-sound
and energy-efficient practices and materials.
VE originated in the industrial community, and it has spread to the
Federal Government due to its potential for yielding a large return on
investment. VE has long been recognized as an effective technique to lower the
Government's cost while maintaining necessary quality levels. Its most
extensive use has been in Federal acquisition programs.
An August 1991 recent audit of VE in the Federal Government by the
President's Council on Integrity and Efficiency concluded that more can and
should be done by Federal agencies to realize the benefits of VE. Reports
issued by the General Accounting Office and agency Inspectors General have also
consistently concluded that greater use of this technique would result in
additional savings to the Government.
5. Relationship to other management improvement
processes. VE is a management tool that can be used alone or with other
management techniques and methodologies to improve operations and reduce costs.
For example, the total quality management process can include VE and other cost
cutting-techniques, such as life-cycle costing, concurrent engineering, and
design-to-cost, approaches, by using these techniques as analytical tools in
process and product improvement.
VE contributes to the overall management objectives of streamlining
operations, improving quality, reducing costs, and can result in the increased
use of environmentally-sound and energy-efficient practices and materials. The
complementary relationship between VE and other management techniques increases
the likelihood that overall management objectives are achieved.
6. Definitions.
a. Agency. As used in this Circular, the term "agency" means an
Executive department or an independent establishment within the meaning of
sections 101 and 104(1), respectively, of Title 5, United States Code.
b. Life-cycle cost. The total cost of a system, building, or
other product, computed over its useful life. It includes all relevant costs
involved in acquiring, owning, operating, maintaining, and disposing of the
system or product over a specified period of time, including environmental and
energy costs.
c. Cost savings. A reduction in actual expenditures below the
projected level of costs to achieve a specific objective.
d. Cost avoidance. An action taken in the immediate time frame
that will decrease costs in the future. For example, an engineering improvement
that increases the mean time between failures and thereby decreases operation
and maintenance costs is a cost avoidance action.
e. In-house savings. Net life-cycle cost savings achieved by
in-house agency staff using VE techniques.
f. Contracted savings. Net life-cycle cost savings realized by
contracting for the performance of a VE study or by a Value Engineering Change
Proposal submitted by a contractor.
g. Total Quality Management (TQM). A customer-based management
philosophy for improving the quality of products and increasing customer
satisfaction by restructuring traditional management practices. An integral
part of TQM is continuous process improvement, which is achieved by using
analytical techniques to determine the causes of problems. The goal is not just
to fix problems but to improve processes so that the problems do not recur.
Value engineering can be used as an analytical technique in the TQM process.
h. Value Engineering. An organized effort directed at analyzing
the functions of systems, equipment, facilities, services, and supplies for the
purpose of achieving the essential functions at the lowest life-cycle cost
consistent with required performance, reliability, quality, and safety. These
organized efforts can be performed by both in-house agency personnel and by
contractor personnel.
i. Value Engineering Change Proposal (VECP). A proposal
submitted by a contractor under the VE provisions of the Federal Acquisition
Regulations (FAR) that, through a change in a project's plans, designs, or
specifications as defined in the contract, would lower the project's life-cycle
cost to the Government.
j. Value Engineering Proposal (VEP). An in-house
agency-developed proposal, or a proposal developed by a contractor under
contract to provide VE services, to provide VE studies for a Government
project/program.
7. Policy. Federal agencies shall use VE as a
management tool, where appropriate, to ensure realistic budgets, identify and
remove nonessential capital and operating costs, and improve and maintain
optimum quality of program and acquisition functions. Senior management will
establish and maintain VE programs, procedures and processes to provide for the
aggressive, systematic development and maintenance of the most effective,
efficient, and economical and environmentally-sound arrangements for conducting
the work of agencies, and to provide a sound basis for identifying and
reporting accomplishments.
8. Agency responsibilities. To ensure that systemic
VE improvements are achieved, agencies shall, at a minimum:
a. Designate a senior management official to monitor and coordinate
agency VE efforts.
b. Develop criteria and guidelines for both in-house personnel and
contractors to identify programs/projects with the most potential to yield
savings from the application of VE techniques. The criteria and guidelines
should recognize that the potential savings are greatest during the planning,
design, and other early phases of project/program/system/product development.
Agency guidelines will include:
- Measuring the net life-cycle cost savings from value engineering. The
net life-cycle cost savings from value engineering is determined by subtracting
the Government's cost of performing the value engineering function over the
life of the program from the value of the total saving generated by the value
engineering function.
- Dollar amount thresholds for projects/programs requiring the
application of VE. The minimum threshold for agency projects and programs which
require the application of VE is $1 million. Lower thresholds may be
established at agency discretion for projects having a major impact on agency
operations.
- Criteria for granting waivers to the requirement to conduct VE
studies, in accordance with the FAR 48.201(a).
- Guidance to ensure that the application of VE to construction
projects/programs and other projects/programs, will include consideration of
environmentally-sound and energy efficient considerations to arrive at
environmentally-sound and energy efficient results.
c. Assign responsibility to the senior management official designated
pursuant to [[section]]8a above, to grant waivers of the requirement to conduct
VE studies on certain programs and projects. This responsibility may be
delegated to other appropriate officials.
d. Provide training in VE techniques to agency staff responsible for
coordinating and monitoring VE efforts and for staff responsible for
developing, reviewing, analyzing, and carrying out VE proposals, change
proposals, and evaluations.
e. Ensure that funds necessary for conducting agency VE efforts are
included in annual budget requests to OMB.
f. Maintain files on projects/programs/systems/products that meet
agency criteria for requiring the use of VE techniques. Documentation should
include reasons for granting waivers of VE studies on projects/programs which
met agency criteria. Reasons for not implementing recommendations made in VE
proposals should also be documented.
g. Adhere to the acquisition requirements of the FAR, including the use
of VE clauses set forth in Parts 48 and 52.
h. Develop annual plans for using VE in the agency. At a minimum, the
plans should identify both the in-house and contractor projects, programs,
systems, products, etc., to which VE techniques will be applied in the next
fiscal year, and the estimated costs of these projects. These projects should
be listed by category, as required in the agency's annual report to OMB. VEP's
and VECP's should be included under the appropriate category. Annual plans will
be made available for OMB review upon request.
i. Report annually to OMB on VE activities, as outlined below.
9. Reports to OMB. Each agency shall report the
Fiscal Year results of using VE annually to OMB, except those agencies whose
total budget is under $10 million or whose total procurement obligations do not
exceed $10 million in a given fiscal year. The reports are due to OMB by
December 31st of the calendar year, and should include the current name,
address, and telephone number of the agency's VE manager.
The report format is provided in the Attachment.
Part I of the report asks for net life-cycle cost savings achieved
through VE. In addition, it requires agencies to show the project/program
dollar amount thresholds the agency has established for requiring the use of VE
if greater than $1 million. If thresholds vary by category, show the thresholds
for all categories. Savings resulting from VE proposals and VE change proposals
should be included under the appropriate categories.
Part II asks for a description of the top 20 fiscal year VE projects
(or all projects if there are fewer than 20). List the projects by title and
show the net life-cycle cost savings and quality improvements achieved through
application of VE.
Part III requires agencies to submit a detailed schedule of
year-by-year cost savings, cost avoidances and cost sharing with contractors
for each program/project for which the agency is reporting cost savings or cost
avoidances. The aggregate total of all schedules shall equal the totals
reported in Part I.A. of the annual report.
10. Inspectors General audits. Two years after the
issuance of this revised Circular, Agency Heads shall ask the Inspectors
General (IGs) to audit agency value engineering programs to (1) validate the
accuracy of agency reported value engineering savings and (2) assess the
adequacy of agency value engineering policies, procedures and implementation of
this revised Circular. Periodically thereafter, agency IGs shall audit agency
reported VE savings as the need arises.
11. Related Guidance. In general, value engineering
investments should have positive net present value when discounted with the
appropriate interest rate, as described in OMB Circular No. A-94, section 8.c.
For detailed guidance on value engineering, refer to the appropriate sections
of the Federal Acquisition Regulations.
12. Effective date and Implementation. This
Circular takes effect within 30 days of its publication in the Federal
Register. Heads of departments and agencies are responsible for taking all
necessary actions to assure effective implementation of these policies, such as
disseminating this Circular to appropriate program and other staff, developing
implementation strategies and initiating staff training. Since these policies
must be implemented in the Federal Acquisition Regulation (FAR), agencies
should not duplicate the development of implementing procurement regulations
being undertaken by the Federal Acquisition Regulatory Councils. However,
implementation of these policies in the FAR must be accomplished within the
time period specified below, with inclusion in agency solicitations and
resulting contracts, as appropriate, to occur immediately thereafter.
Pursuant to subsections 6(a) of the Office of Federal Procurement
Policy Act, as amended, (41 U.S.C. 401 et seq.), the Federal Acquisition
Regulatory Councils shall ensure that the policies established herein are
incorporated in the FAR within 180 days from the date this Circular is
published in final form in the Federal Register. Promulgation of final
FAR regulations within that 180 day period shall be considered issuance in a
"timely manner" as prescribed in 41 USC 405(b)."
13. Sunset review. The policies contained in this
Circular will be reviewed by OMB five years from the date of issuance.
14. Inquiries. Further information about this
Circular may be obtained from the Office of Management and Budget (OMB), 725
17th Street, NW, Washington, DC 20503, Telephone (202) 395-6803.
Leon Panetta
Director
