oversight

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)

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




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Enclosure II                     Enclosure II




(120166)



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