United States General Accounting Office Washington, DC 20548 May 23, 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.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. 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. GAO-03-590R Value Engineering Summary 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 2 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. 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). Page 2 GAO-03-590R Value Engineering 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 Enclosures Page 3 GAO-03-590R Value Engineering Enclosure I Enclosure I Page 4 GAO-03-590R Value Engineering Enclosure I Enclosure I Page 5 GAO-03-590R Value Engineering Enclosure I Enclosure I Page 6 GAO-03-590R Value Engineering Enclosure I Enclosure I Page 7 GAO-03-590R Value Engineering Enclosure I Enclosure I Page 8 GAO-03-590R Value Engineering Enclosure I Enclosure I Page 9 GAO-03-590R Value Engineering Enclosure I Enclosure I Page 10 GAO-03-590R Value Engineering Enclosure I Enclosure I Page 11 GAO-03-590R Value Engineering Enclosure I Enclosure I Page 12 GAO-03-590R Value Engineering Enclosure I Enclosure I Page 13 GAO-03-590R Value Engineering Enclosure I Enclosure I Page 14 GAO-03-590R Value Engineering Enclosure I Enclosure I Page 15 GAO-03-590R Value Engineering Enclosure I Enclosure I Page 16 GAO-03-590R Value Engineering Enclosure I Enclosure I Page 17 GAO-03-590R Value Engineering Enclosure I Enclosure I Page 18 GAO-03-590R Value Engineering Enclosure I Enclosure I Page 19 GAO-03-590R Value Engineering Enclosure I Enclosure I Page 20 GAO-03-590R Value Engineering Enclosure I Enclosure I Page 21 GAO-03-590R Value Engineering Enclosure I Enclosure I Page 22 GAO-03-590R Value Engineering Enclosure I Enclosure I Page 23 GAO-03-590R Value Engineering Enclosure I Enclosure I Page 24 GAO-03-590R Value Engineering Enclosure I Enclosure I Page 25 GAO-03-590R Value Engineering Enclosure I Enclosure I Page 26 GAO-03-590R Value Engineering Enclosure I Enclosure I Page 27 GAO-03-590R Value Engineering Enclosure I Enclosure I Page 28 GAO-03-590R Value Engineering Enclosure I Enclosure I Page 29 GAO-03-590R Value Engineering Enclosure I Enclosure I Page 30 GAO-03-590R Value Engineering Enclosure I Enclosure I Page 31 GAO-03-590R Value Engineering Enclosure II Enclosure II (120166) Page 32 GAO-03-590R Value Engineering This is a work of the U.S. government and is not subject to copyright protection in the United States. 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Use of Value Engineering in Defense Acquisitions
Published by the Government Accountability Office on 2003-05-23.
Below is a raw (and likely hideous) rendition of the original report. (PDF)