oversight

Department of Defense Value Engineering Program Needs Top Management Support

Published by the Government Accountability Office on 1977-11-16.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                            DOCO4MT RB"INI

04145 - (B32144175]
Department of Defense     .Vlue
                           !    dring frOt ds Voed: To.
Management Support. PAD-7i ; .  65 167. ~vamb~E, '.6, 19g7. 40
pp. + 2 appendices    (Q pp.).
Report to the Joqgress; by Ener B. :Stats, Comptrce.llex General.
Issue Area: Federal Prok:urrm'nt of (soeds and Sjrvic"s (1900i;
    Federal Procurement of g(ods a.        c;m: oti.y'ng the
    Corgress of Status of IXportgnt Procuremeat Progzras (1905).
Contact: .Procuredent ad Syst6as acgursition Dpti
Budget Function: NatiorAl Defense: It6oQM Systems (057);
    National Defense: Department of Defense - Procuremert S
    Contrac ts (058).
Organizertion Concerned: .epartment ot Defense.
Congressional Relevance: House Committee on Armed Services;
    Senate Coamittee on Araed Services; Congress.
          The Department of Defense (COD) value engineering
proqraa for contractors was set up to stimulate contractors to
develop and propose cost saving changes to contracts requiring
unnecessary expense. Although savings cn sace major prograss
have been impressive and show that costs for major Difuensu
weapon systems can be cut down considerably, few systems have
active value enqineering programs,   rindings/Conclusions: The
program has alredy saved over $700 million, tut savings have
declined sharply since 1971, and the program has fallen far
short of its potential. savings for 1975 and 1976 were tbe
lorest since 1967. Host major progLams being developed and
produced during 1976 had no savings at all, including many with
very high price tags. The lack of Defense management acceptance
 and support has been the basic and most critical factor impeding
the performance of the value evaluation program, and correction
of this weakness is the most essential need of the progra&. The
lack of management support has been the most pronounced in the
Eavy and the Air Force. Savings of S1 killion in the Lezt 4
years can be achieved if DOD s assessment of the progras's
minimum savinqs potential is realized,   Recommendations: The
Secretary of Defense should take steps to guarantee aggressive
support and active promotion of the value engineering program by
service secretaries and managers and, in conjunction with
Congressional Appropriations Committee hearings on major weapon
systems, infore the Congress of value engineering Ercgram
savings on those systems. (Author/SC)
 REPORT TO THE CONGRESS

 BY THE COAiPTROLLER GENERAL
 OF THE TUNITED STA TES




Department Of Defense
Value Engineering Program
Needs Top Management Support

The Defense value engineering program-, de-
signed to motivate contractors to help cut
costs, is saving far less than it can. A lack of
support by top-level Defense managers has
been the basic cause. If Def nse can i mprove
management support to achieve its estimate
of the program's minimum savings potential,
$1 billion can be saved in the next 4 years.
GAO recommends action to insure aggressive
support and active promotion of the program
by the service secretaries and managers.




PSAD-78-5                       NOVEMBER 16, 197.
              COMPTROLLER GENERAL OF THE UNITED
                                                STATES
                        WASHINGTON. D.C. 20546




8-165767




To the President of the Senate and the
Speaker of the House of Representatives

     This report examines the performance of a major
Department of Defense cost saving program and discusses
its basic weakness.

     Our review of this program was prompted by our in-
terest in the effectiveness of Defense efforts to control
the acquisition and ownership costs of military equipment.

     We made our review pursuant to the Budget and Account-
ing Act, 1921 (31 U.S.C. 53), and the Accounting and Audit-
ing Act of 1950 (31 U.S.C. 67).

     Copies of this report are being sent to the Acting
Director, Office of Management and Bur.cet; the Secretary
                                                          of
Defense; and the Secretaries of the Army, Navy, and Air Force.




                                 Comptroller General
                                 of the United States
  COMPTROLLER GENER'L'S                    DEPARTMENT OF DEFENSE
  REPORT TO THE CONGRESS                   VALUE ENGINEERING PROGRAM
                                           NEEDS TOP MANAGEMENT SUPPORT
               DIGEST

               The Department of Defense value engineering
               program for contractors was set up to stimulate
               contractors to develop and propose cost saving
               changes to contracts requiring unnecessary ex-
               pense. (See p. 1.)

               Defen'se says the program can save at least
               $250 million a year.   (See p. 11.) The program
               has already saved over $700 million. However,
               savings have declined sharply since 1971, and
               the program has fallen far short of its poten-
               tial.   Savings in 1975 and 1976 were the lowest
               since 1967.   (See pp. 4 and 5.)

               Some major weapon system programs have been
               a source of large esaings:
              -- Five weapon systemn programs alone accounted
                 for $24 million, or over half of all savings
                 in 1976.
              -- One program alone accounts for $50 million
                 in savings over the past 6 years.  (See
                 pp. 7 and 8.)
              But, while the savings on some major programs
              have been impressive and show that costs for
              major Defense weapon systems can be cut down
              considerably, few systems have active value
              engineering programs. Their savings potential
              is largely untapped.

              Most major programs being developed and produced
              during 1976 had no savings at all, including
              many with very high price tags, such as the

              --$6 billion Air Force F-16 fighter,

              -- $18.8 billion Navy Trident submarine
                 and missile, and



ctSe  't. Upon removal, the rporto
cr   date should be notc hereon.     iPSAD-78-5
 -- $5.9 billion Army Patriot missile.
    (See pp. -to 11.)
 Defense managers' lack of acceptance and sup-
 port has been the basic factor weakening the
 value engineering program for contractors.
 The lack of support has been the most pro-
 nounced in the Navy and Air Force.
 (See p. 12.)

 Without aggressive support from top-level
 service management, the program probably will
 never approach its full potential.
Savings of $1 billion in the next 4 years
can be achieved if Defense's assessment
of the program's minimum savings potential
is realized.  (See p. 11.)

RECOMMENDATIONS
The Secretary of Defense should
-- take steps to guarantee aggressive support
   and active promotion of the value engineering
   program by service secretaries and managers
   (see p. 18) and
-- in conjunction with Congressional Appropri-
   ations Committee hearings on major weapon
   systems, inform the Congress of value engi-
   neering program savings on those systems
   (see p. 18).
AGENCY COMMENTS

The Department of ,efense agrees that it should
take steps to insure support and promotion of
the progra? by the service secretaries and man-
agers.  Ic believes that actions by the Office
of the Secretary of Defense in the past year
constitute such measures.  (See p. 19.)
GAO agrees that the earlier actions are con-
structive, but believes that more are needed.




                     ii
              The Department of Defense expressed
              cern about the method to be            some con-
                                           used to inform the
              Congress of savings on major
                                            weapon systems,
              but suggested that some derivative
              service reports to the Office        of the annual
                                             of  the  Secretary
              of Defense might be developed
              (See p. 19.)                   for  this  purpose.




' ear Shapt
                                 iii
                       Contents



DIGEST                                              t

CHAPTER

      1     iNTRODJCTION                            l
                Value engineering profile           1
                DOD value enginee:ilq program       I
                tcur previous reI.oDrts on value
                   engineering                      2
                Scope of revlev                     3

      2     VE PROGRAM SAVINGS PERFORMANCE          4
                DOD overall                         4
                Air Force                           5
                Navy
                Army                                7
                Major programs in general           7
                Billicn-dollar major programs       9
                     Air Force
                     Navy                          10
                     Army                          11
                Savings potential                  11

      3     WHAT'S WRONG WITH THE VE PROGRAM?      12

      4     CONCLUSIONS AND RECOMMENDATIONS        17
                Conclusions                        17
                necomnlendations                   18

      5     AGENCY (OMMENTS AND OUR EVALUATION     20

APPE1NDIX

      I     Comments fr-m the Department of
              Defense                              21

  II        Principal officials responsible for
              administering activities discussed
              in this report                       23

                        ABBREVIATIONS

DOD         Department of Defense
GAO         General Accounting Office
VE          value engineering
                               CHAPTER 1

                             INTRODUCTION

VALUE ENGI- ERIN" PROFILE
     The con :.-i{   of value engineering is largely a by-product
of ma :erial o        3
                     cages during World War II.   These shortages
led to the c¢caticn of innovative material and design
alternatives and it was found, in many cases, that the
alternate approaches functioned as well, or better, and
cost less. From th.s beginning, an analytical discipline
'ater evolvEJ in private industry which was structured to
zhallenge the proposed wsty of doing things and systemat-
ically sear-h for less costly alternatives. Commonly
known as valu- engineering, it is sometimes termed value
ar_-iysis, valvr control, value improvement, or value
mataaement
      Value engineering involves a systematic analysis of
_ach function to be performed by an item with the object ve
of auh; eving the function at the lowest overall cost con-
sistent W'th performance, reliability, quality, and maintain-
ability r-TuiremertF. In essence, the prevailing viewpoint
of value engineering analysis is that while anything provid-
irg le~s than the essential functional capability is unaccept-
able, anyt}'ing providing more is unnecessary and wasteful
and =rould be eliminated or modified. These features or
characteristics of an item which exceed actual needs and
-oni:riiije nothing to essential functional capability are
often cdlled "gold plating."

DOD VALUE ENGINEERING PROGRAM
      The Department of Defense (DOD) established its value
engineering (VE) program in 1963, and it consists of two
distinct elements. The first is an in-house effort wherein
Vi- is performed by Defense personnel. The second is DC 's
VE program for contractors which was created to stimulate
trem, to develop and submit VE proposals for changes
to tho3e contract specifications, purchase descriptions,
or statements of work which the contractors feel impose
costly, nonessential requirements. The incentive is
provided by giving the contractor a share of the savings
resulting from the change proposals it submits.
     The VE program for contractors is implemented through
the inclusion of value engineering clauses in contracts.
Two different types of clauses are used--an incentive
clause and a program requirement clause.



                                 1
     The VE incentive clause is intended to encourage
the contractor to voluntarily develop and submit VE
change proposals and rewards it with a share of the
savings resulting from each proposal that is accepted.
This clause is used principally on production contracts,
     The VE program requirement clause cbligates the
contractor to conduct a sustained VE effort at a prescribed
level. This effort is directly reimbursed as a contract line
item, and the contractor also shares in the savings resulting
from each accepted proposal. The contractor's sharing rate
under this arrangement is considerably less than under the
incentive clause. The program requirement clause is designed
primarily for contracts covering conceptual validation and
full-scale development phases of a prog'am.

     VE clauses are unique in that they provide the only
incentive specifically designed for cost reduction contract
changes. All other incentives are designed to apply only
within the scope of work of the contract.

     The Assistant Secretary of Defense, Installations and
Logistics, is responsible for providing overall policy guid-
ance for the program and for reviewing program performance.
(Installations and Logistics was redesignated Manpower Re-
serve Affairs and Logistics earlier this year. Later pages
of this report, however, still refer to Installations and
Logistics, since that designation was in force during the
specific time frame of the references.)

     The direct responsibility for program promotion and
implementation in the services is vested in the Secretaries
of the Army, Navy, and Air Force. This includes insuring
that key Defense personnel--program/p -ject directo:s and
managers and others--encQurage contractors to develop and
submit cost saving VE change proposals.

OUR PREVIOUS REPORTS ON
VALUE ENGINEERING

      We have a longstanding interest in the iuse of VE as
a means to help reduce Government acquisition and ownership
costs and have previously issued the following:

     -- A report to the Congress in May 1975 which led to
        the establishment of a value engineering program
        by the Environmental Protection Agency to reduce
        the cost of waste treatment ~jants.




                             2
         -- A report to the Congress it,May 1974 on the need
            for increased use of value engineering in Federal
            construction.
         --A report to Representative Larry Winn, Jr., in
           May 1972 recommending that the Maritime Administration
           reinstate and improve value engineering provisions
           in ship construction contracts.

         -- A report to the Congress in August 1969 on the oppor-
            tunities for increased savings by improving the man-
            agement of DOD's value engineering program for con-
            tractcrs.
SCOPE OF REVIEW
     We found in the review leadirng to our August 1969 report
to the Conqress that the DOD VE program for contractors had
not produced the desired results. The purpose of this review
was to reexamine tne progress and current status of that
prof;t ri..   I

     Al.nough the program is also applicable to other DOD
agencies. we concentrated our review on the three military
services oince most of total Defense procurement is made
by them, and the effectiveness of the program is largely
dependent unon what they do. To illustrate, about 99 per-
cent of DOD s fiscal year 1975 and 1976 total procurement
obligation authority was fir Army, Navy, and Air Force
procurement, and, over 97 percent of the total VE pr grtam sav-
ings reported in the past 5 years was produced by the
services.

     The attention given to the military services, nowever,
should not be taken as an indication that we belJiee important
savings opportunities do not exist or should not be pursued
in other Defense agencies. We also recognize that there
probably is good potential for '7Z savings on many smaller
procurement programs.

     We interviewed DOD, Army, Navy, and Air Force Headquar-
ters officials and reviewed documents, records, and reports
related to the DOD VE program for contractors. We also
participated in a Value Engineering Congress sponsored by
the Air Force Systems Command at Andrews Air Force Base
early this year. Her':, representatives of 2O major defense
contractors and Air Furce and other agency representatives
conferred in a 2-day workshop to identify the pr-blems
impeding the VE program for contractors and to jointly
develop recommended solutions.



                                a
                                    CHAPTER 2

                      VE PROGRAM SAVINGS PERFORMANCE

      The DOD VE program        for contractors has produced
 reported savings to the        G----rnment of over $700 million
 during the 13-year life        of the program through June 1976.
 We found, however, that        savings have declined substantially
 in the past 5 years and        that the program has fallen far
 short of its potential.
 DOD OVERALL
      As seen in figure 1, annual savings trended upward
 to a peak of nearly $95 million in fiscal year 1971 and
 have since dropped to about half that level. Savings in
 1975 and 1976 were the lowest since 1967.
      An upturn in 1976 was the first break in the downward
 pattern since 1971. It was due mainly to an increase in
 Navy's savings but, as discussed further on page 7, this
 increase does not appear to be a significant future trend
 indicator.

                                      FIGURE 1

                         DOD VE PROGRAM FOR CONTRACTORS
            ANNUAL AND TOTAL SAVINGS TO GOVERNMENT OVER LIFE OF PROGRAM
     100
      90
      8
      7O
Co    e



      40 -
      C~9                              $709 MILLION
                                          TOTAL




               65    E6   67   68         70    t7     2   73   74    7
                                      F'SCAL YEAR

                                                  4~~~~~~~~~~~~~~~~
     The dollars charted in figure 1 are the actual savings
resorted each year and, if adjusted for inflation, the de-
cline since 1971 would be even more pronounced. We did
not a-tempt to analyze the actual rates of inflation for
the vdrious categories of defense hardware in this period,
but if an average annual rate of only 5 percent were assumed,
savings of $41.4 million in 1975 and $47.6 million In 1976
would be equivalent to about $34 million and $37 million, re-
spectively, in 1971 dollars. When compared to the $94.5 mil-
lion reported in 1971, the adjusted 1975 and 1976 savings
then show constant dollar decreases of over 60 percent.

     We examined the levels of procurement authorized in this
period to determine to what extent the decline in VE savings
since 1971 might have resulted from less buying. We learned
that DOD's unadjusted annual total procurement obligation
authority was higher in all but 1 year of the period 1972
through 1976 than it was in 1971. Uniformly applying the
same assumed 5 percent annual inflation rate adjustment used
on VE savings, we found that average constant dollar obliga-
tion authority in that period was down less than 8 percent
and the lowest, which was granted in 1975, was about 18 per-
cent less than fiscal year 197i. Fiscal year 1976 obligation
authority increased substantially and nearly equaled 1971
in constant dollars. In light of this, we believe that re-
duced procurement was not a major factor in the sharp decline
in VE program savings.
     The VE savings performance of each of the military serv-
ices during the period from the program. peak in fiscal year
1971 through 1976 is shown in figure 2 on page 6. The dol-
lars charted are the savings actually reported in each year
and have not been adjusted for inflation.

AIR FORCE

     The Air Force accounted for two-thirds of the total VE
savings produced by the services in 1971 and, while in all
but 1 later year it continued to maintain a higher level of
savings than the Army or Navy, its abrupt drop in 1972 and
subsequent failure to recover has been a prominent factor
in the overall decline of the DOD VE progzam for contractors.
The Air Force Systems Command is responsible for the develop-
ment and acquisition of the Air Force space and ballistic
missile, aeronautical, and electronic systems. The Systems
Command has been the source of most of Air Force's VE savings,
and the decline in Air Force savings is essentially a reflection
of this Command's performance.




                            5
                            FIGURE 2
              DOD VE PROGRAM FOR CONTRACTORS
ANNUAL AND TOTAL SAVINGS TO THE GOVERNMENT BY MILITARY
                                                       SERVICES
                FOR FISCAL YEARS 1971 THRU 1978
                         $ IN MILLIONS


                                    AIR FORCE




         i~o                                     i



          ;.:Il       1972        1973         1374       75   79


                                        NAVY
         60O

        ,1
                             F   81 TO7AL

        20


         1971                    1973          1974   175      -976


                                    ARMY
        60
        10
               IT197i~~~~                             _

       30 -




        1977        17           1973       1974      1c       1977
                                                                  6




                                        6
 NAVY

      The Navy achieved a substantial savings increase in
1972 which partially offset the Air Force drop in that
year.   But Navy's performance fell sharply in 1973 and it
too has failed to recover. Since 1972 the Navy has
consistently produced the least savings. Although Navy's
savings increased in 1976, this does not appear to signal
a significant recovery trend. The increase came primarily
from a few high-value cost reduction changes on Naval Air
Systems Command acquis tions. An Air Systems Command
official advised us tLat there had been no substantive
change or improvement in that Command's VE program which
would support an expectation for a continuing upward trend
in savings productivity. Naval Sea Systems Command and
Naval Supply Systems Command savings actually declined
49 percent and 86 percent, respectively, in 1976.
ARMY

     Army's VE savings performance has been relatively
stable and, although the Army has not achieved real sustained
growth in savings, it has exceeded its fiscal year 1971 per-
formance in terms of unadjusted savings dollars in all but
1 year since 1971. This is something the Navy accomplished
only once and the Air Force not at all in this periods

     While the Army ranked well below the Air Force and not
greatly higher than the Navy in terms of total savings  from
1971 through 1976, the amount which each service buys must
also be considered in an evaluation of their relative per-
formance.  For example, in fiscal years 1975 and 1976. the
Army, with only 15 percent of the combined total procurement
obligation authority of all three services, produced 38 per-
cent of the savings, the Air Force, with 2.4 times as much
obligation authority, produced only 45 percent of the sav-
ings; and the Navy, with nearly as much obligation authority
as the Army and Air Force combined, produced only 17 percent
of the savings. By this measurement, the Air Force VE pro-
gram was only about half as productive, and the Navy program
only one-seventh as productive as Army's in 1975 and 1976.

MAJOR PROGRAMS IN GENERAL

     Major programs have been defined by DOD, in part, as
acquisitions which have an estimated research and develop-
ment cost in excess of $50 million or an estimated production
cost in excess of $200 million. The thresholds were in-
creased to $75 million and $300 million, respectively, in
January 1977. These programs have been a source of substan-
tial savings under the DOD VE program for contractors. The


                            7
Air Force F-15 fighter aircraft program is a rotable example.
Savings to DOD resulting from contractor-initiated VE change
proposals are reported to have totaled more than $50 million
on the F-15 over the past 6 years.
     In fiscal year 1976, Navy's major program VE savinqs
were only $652,000--less than 7 percent of Navy's total
savings--but major programs were the source of 74 percent
of the combined total VE savings reported by the Army
and the Air Force. Army's major program savings amounted
to $9.7 million and accounted for 59 percent of Army's total
1976 VE savings. Two programs alone, the Army Ammunition
program with savings of $6.6 million and the Dragon missile
with savings of $1.3 million, accounted for most of Army's
major program savings.
     Air Force's major program savings amounted to $17.9
million and accounted for 87 percent of Air Force's
total 1976 VE savings. Here also, two programs--the F-15
with savings of $14.1 million and the Airborne Warning
and Control System (AWACS) airc:aft with savings of $1.5
million--accounted for most of the Air Force major program
savings.

     A total of only five major programs--three Air Force and
two Army--were the source of over 50 percent of DOD's total
fiscal year 1976 VE savings.

     While the savings on some major programs have been
impressive and indicate high-level savings potential
for DOD major weapon systems, the Lystems with active VE
programs are few in number, and their potential is largely
untapped. Most major programs in development and production
in fiscal year 1976 had no VE savings.

     Only 14 out of a total of 88 major DOD programs we
checked reported any VE savings in 1976. The Army and the
Air Force each reported savings i1l 1976 on only 10 major
programs and the Navy only 4. Over three-fourths of the
88 programs contained VE clauses in their contracts, but
65 percent of those with VE contract clauses produced
no savings.

     All 43 production programs we checked had VE contract
clauses, but only 19 produced savings. All Army production
programs generated savings, but 81 percent of the Navy and
58 percent of the Air Force production programs did not.

     Nearly two-thirds of the 32 full-scale development pro-
grams we checked had VE contract clauses, but only 2 of those
those generated savings. None of the Army's 12 full-scale


                             8
development programs produced VE savings in fiscal year 1976
and only 4 had VE clauses. The Navy's two full-scale devel-
opment programII3 had no VE contract clause  and produced no
savings. Although the Air Force provide     VE contract clauses
for all but 2 of its 18 full-scale development programs, 88
percent of those with VE contract clauses generated no sav-
ings.

     Six out of a combined total of 13 programs we checked
in the advanced development or validation phase had VE
contract clauses and half of those with VE clauses produced
no savings. Eight of the 13 were Air Force programs; 5 of
these had VE contract clauses and 3 of those generated sav,-
ings. No Army or Navy advanced development programs produced
VE savings in 1976.

BILLION-DOLLAR MAJOR PROGRAMS
     We were especially interested in DOD's VE savings
performance on its most expensive weapon systems, We included
in the 88 major programs we examined nearly all of those in
production or development during fiscal year 1976 which were
identified on a DOD inventory of major acquisitions as hav-
ing an estimated acquisition cost exceeding $1 billion.
Eleven of these were Air Force programs, 24 were Navy, and
10 were Army, costing a total of $73 billion, $102 billion,
and $24 billion, respectively. The estimated combined acqui-
sition cost of all 45 programs was almost $200 billion as
of June 30, 1976.
     We found that 78 percent of these high-cost programs,
including many with recent substantial inflation cost in-
creases, had no VE savings in 1976.
Air Force

     Five of the 11 Air Force billion-dollar programs were
in production. Three production programs and one full-scale
development program produced VE savings, but the balance
of two production programs, th-ee full-scale development
programs, one validation phase program, and one advanced
development program did not. Included among the seven Air
Force billion-dollar programs with no VE savings in fiscal
year 1976 were the:

     -- B-1 bomDer aircraft, in full-scale development
        and estimated at $21.6 billion as of June 30, 1976.
        (Production of this aircraft has since been canceled.)

     -- F-16 fighter aircraft, in full-scale development and
        estimated at $6 billion.


                             9
        -- Advanced Medium Short Takeoff and Landing Transport
           (AMST) aircraft, in validation and estimated at
           $6 billion.

        -- Advanced Tanker Cargo Aircraft (ATCA), in advanced
           development and estimated at $2.9 billion.

        -- Short Range Attack Missile (SRAM), in production
           and estimated at $2.4 billion.

All but the B-1 and AMST programs had VE clauses in 1976.

Navy

     Twenty of the 24 Navy billion-dollar programs were in
production and had VE contract clauses, but only 3 produced
VE savings in 1976.  The balance of two full-scale develop-
ment programs and two advanced development programs producedi
no savings.  Included among the 21 Navy billion-dollar pro-
grams with no VE sarings in fiscal year 1976 were the:

       -- Trident submarine and missile, in production
          and estimated at $18.8 billion as of June 30,
          1976.

       -- F-18 fighter aircraft, in full-scale development
          and estimated at $12,8 billion.

       -- F-14A fighter aircraft, in production and
          estimated at $8.7 billion.

       -- CVN-68 Class aircraft carrier, in production
          and estimated at $4.6 billion.

       -- P-3C patrol aircraft, in production and estimated
          at $3.5 billion.

       --A-7E attack aircraft, in production and estimated
         at $3.2 billion.

       -- Tomahawk cruise missile, in advanced development
          and estimated at $2.3 billion.

       -- Unde:sea Sound Surveillance System (SOSUS), in
          production and estimated at $2.1 billion.

       --Destroyer Tender, in production and estimated at
         $1.3 billion.

       -- Fleet Oiler, in production and estimated at
          $1.2 billion.



                              10
Except for the F-18, all of the above programs had VE con-
tract clauses in 1976.

Army

     Three of the 10 Army billion-dollar programs were
in production and generated VE savings, but the balance
of 5 full-scale development and 2 advanced development
programs did not. Included among the seven Army billion-
dollar programs with no VE savings in fiscal year 1976
were the:

       -- Patriot missile, in full-scale development and
          estimated at $5.9 billion as of June 30, 1976.
       -- Utility Tactical Transport Aircraft System (UTTAS)
          helicopter, in full-scale development and estimated
          at $3.4 billion.
       -- XM-1 tank, in advanced development and estimated
          at $4.9 billion.
       -- Advanced Attack Helicopter (AAH), in advanced develop-
          ment and estimated at $3.5 billion.
Although Patriot had a VE clause in its contract, UTTAS,
which was also in full-scale development during 1976, did
not. Neither the XM-1 nor the AAH advanced development
programs had VE clauses.

SAVINGS POTENTIAL

     In 1975 the Director, Defense Research and Engineering,
and the Acting Assistant Secretary of Defense, Installations
and Logistics, jointly urged revitalization of the DOD
VE program for contractors and stated that the program
had a potential of saving the Government at least $250
million a year. This level of savings is eauivalent to
less than 1.5 percent of DOD's fiscal year 1975 total pro-
curement obligation authority and, in view of the savings
reported on those few major weapon systems with active VE
programs, we have no reason to believe that this is an
excessive estimate of the program's inherent worth.

     VE program s3vings totaled only $282 million during the
period 1972 through 1976. Based on DOD's assessment of the
program's minimum savings potential of $250 million a year,
savings of $1 billion could be realized in the next 4 years.




                               11
                           CHAPTER 3

               WHAT'S WRONG WITH THE VE PROGRAM?

     We wanted to know why, particularly during a period of
mounting cost pressure and budgetary concern, the DOD VE
program for contractors had slipped so badly and fallen
                                                         so
short of its cost saving potential.  We found that the
basic underlying cause has been a lack of management support
for the program.  This lack of support has been most
pronounced in the Navy and the Air Force.

     A 1975 report, prepared by the Office of the Ass-stani
Secretary of Defense, Installations and Logistics, identified
the Navy VE program as the least productive and cited the
following reasons for its poor performance:

     -- No Navy management support for the VE program except
        in Naval Air Systems Command.

     --No Navy effort to provide funding for the program.

     -- Sharp reductions in che number of Navy VE personnel
        assigned to support the program.

     --No training for Navy personnel in the use and adminis-
       tration of VE contract clauses since 1970.

     The same report noted degeneration of the Air Force
Systems Command program since 1971 and related this decline
to a drastic cut by Systems Command in its VE staffing.
Inadequate funcing for the Air Force VE program was also
cited as a problem.

     An official of the Air Force Directorate of Procurement
Policy gave a briefing at GAO on the performance of the
Air Force VE program in 1973.  The record of that briefing
shows the Air Force believed that the elimination of all
full-time VE positions by Systems Command had resulted
in a relaxation of management emphasis on the VE program
and a subsequent lack of positive direction and control.

     A permanent DOD VE Committee had been formed in 1964
and was assigned the responsibility for review of VE program
performance and problems.  The membership includes senior
representatives from the military services, and the Commit-
tee is chaired by a representative of the Office of the
Assistant Secretary of Defense, Installations and Logistics.
We discussed the state of the program with the chairman
and with each of the military service representatives
                                                      in
1975 and again in 1976.


                            12
      The official, serving as tie Navy representative to the
DOD VE Committe'e. ir,1975, told is that many in the Navy,
irnclLdirg ranking people, did not support the VE program.
The official informed us that, in addition to a lack of
Command support, most Naval project officers did not favor
and would not promote the VE program since it added to
ti;eir workload and because 'he implementation costs of
VE chance proposals can require an outlay of current year
proj a..tdollars for a savings return wFtich might not be
realz-rd until future years. He said the Navy VE program
als-u o]ffered from a lack of funding and a lack of skilled
VE earsonrel.
       The official t)ol.d s that the Naval Air Systems Command
was the only Navy CommanJ that had a VE program for contrac-
tocs and that the ¢ppo.ition to VE was particularly strong
irn thie Naval Sea Syostems Col..mand. He said Sea Systems Com-
mand maintained that it hired only the most capable engineers
and, although he i.id not share the belief, Sea Systems Com-
mand believed that this practice assured that it obtained
the bea-t designed equipment produced at the lowest cost.
Furthermore, he stated that Sea Systems Command felt that
acceptance of proposals for cost saving design changes from
contractors would reflect unfavorably on the ability of the
Comma.-d's engineers by giving the impression that ships
could be dejirned for lower production cost.
      A somewhat similar attitude toward VE was expressed by
a  spokesman  for the Naval Facilities Engineering Command
in  hearings  befc:e the House Subcommittee on Military Con-
struction Appropriations in 1975.    In response to a question
from a Subcommittee member relating to t0e use of value en-
gineering in the design of Naval facilities, the Navy offi-
cial said, in essence, that good basic engineering involves
an analysis of all the costs of a facility and, if the engi-
neering design job is done right, there is no place for
"value" engineering. This official felt that "value" engi-
neering was a term used by people who were uninformed about
engineer ing.
     When we returned to discuss the status of the Navy
VE program for contractors in 1976, a different person
was serving as the Navy representative to the DOD VE
Committee, He and two other Navy officials who joined
the discussion told us that lack of Navy's acceptance of
the VE program was still the principal factor restraining
its growth. They said the Navy, particularly Naval Sea
Systems Command, was not convinced that the program was
beneficial or properly applicable to the Navy.  In support
of Navy's reluctance to accept the program, they told
us they believed there was a significant difference between


                             13
the design capability of Navy's engineers, who they viewed
as top-flight, full-time, career professionals, and Army
and Air Force operations people, who they said often per-
formed engineering functions on a temporary or part-time
basis.

     They also told us that the Navy would need top-level
DOD budgetary assistance to make improvements in Navy's
VE program funding and staffing.

      The Air Force representative to the DOD VE Committee
in 1975 told us that the VE program for contractors
                                                     was
not actively promoted in the Air Force and that most Air
Force program directors had little interest in it.   He
stated that the extent to which VE was used to reduce costs
on a major program depended almost entirely upon which
program director and contractor were involved. He cited
instance in which no savings were generated on a major     an
                                                         Air
Force program until there was a change in the program direc-
tors.   The new director expressed a strong interest in receiv-
ing VE change proposals to lower program costs, and the
                                                          con-
tractor then responded with change proposals which did
costs.                                                   reduce

     He also told us that he believed the VE incentive clause
was too permissive in that it left the extent of contractor
participation up to the contractor and that contractore
                                                          feel
they get a better return by investing time and re!ourc.?s
                                                           in
self-initiated projects to generate cost savings which do
not have to be shared with the Government. He felt that
reeducation of program directors, contractors, and top     a
                                                        Air
Force and DOD officials must take place before the VE
                                                       program
could work as it was intended.

     When we returned to discuss the status of the Air Force
VE program in 1976, a different person was assigned as
                                                        the
Air Force representative to the DOD VE Committee.
formed us that the main problem was still a lack of He in-
                                                     adequate
support by Air Force program directors and that there
tinued to be little active promotion of the VE program con-
                                                        by
these key people and little effort to encourage contractor
participation.  He felt the biggest unrealized
for Air Force VE program savings were on Systemsopportunities
                                                  Command
major programs in the full-scale development phase of
                                                       the
acquisition cycle.  He said that funding for the VE program
was inadequate but that a new budgeting concept was
                                                     being
developed by the Air Force which would allocate specific
funds for investment in VE program savings efforts on
                                                       spe-
cific major programs in future Air Force budgets.




                            14
     The Army representative to the DOD VE Committee served
in that capacity both in 1975 and 1976. He informed us
that the principal problem affecting implementation of the
Army VE program for contractors stemmed from failure of
the Army procurement and technical personnel to convince
contractors that the Army really wanted them to submit change
proposals. He said that the procurement and technical per-
sonnel have not taken advantage of available VE training
courses and lack an understanding of the VE concept. This
has resulted in reduced emphasis on the VE program. He also
told us that the Army Training and Doctrine Command, Forces
Command, and European Command had no organized VE programs.
He felt that savings opportunities were being missed and
that the Army VE program for contractors should be expanded
to include these Commands.

     The chairman of the DOD VE Committee believed that DOD's
major weapon systems afforded the greatest opportunities
for VE savings and he stressed the importance of the major
system program or project manager's role in supporting the
VE program and encouraging contractor participation. He
explained, however, that the managers have, in the past, been
concerned primarily with schedules and weapon systems per-
formance and that the VE program for contractors adds to
their workload. As a consequence of these factors, a project
manager tends to ignore the VE program unless he has a partic-
ularly strong savings orientatico;  The chaiLman tcld us
he was aware of cases in which it was alleged that the serv-
ices have acted in ways which discouraged contractor partici-
pation in the program. He informed us that this had involved
such things as refusing to include VE clauses in contracts
when the clauses had been specifically requested by contrac-
tors and attempting to avoid sharing with a contractor any
portion of the savings resulting from the contractor' VE
change roposal.

     Other DOD officials have also emphasized the need for
management support and the importance of improving VE savings
performance on major Defense systems. In a joint memorandum
to the Assistant Secretaries of the military services in
May 1975, the Director, Defense Research and Engineering,
and the Acting Assistant Secretary of Defense, Installations
and Logistics, noted that savings performance varied dras-
tically between services and program offices, and ranged
from zero to millions of dollars on individual major programs.
The memorandum stated that service top-management support
was required to improve the productivity of the VE program.
In a similar vein, the Deputy Assistant Secretary of Defense
(Materiel Acquisition), in a September 1975 memorandum to
the Assistant Secretaries of the services and the Director,
Defense Supply Agency (now Defense Logistics Agency), stated


                            15
 that in order to achieve an improvement in
                                             VE program
 performance, it was essential that savings
                                             on major programs
 be increased.  To that end, the Deputy said the need for
 and v.lue of a dynamic 1'E program for contractors
                                                    must
 be emphasized to Defense program managers.

      In a letter to the   .  Commands in October 1975, the
Comptroller of the Army       _d that many contractors were
not convinced that tne A.    was earnestly sol citing t'eir
participation in the VE program and said that
                                                Army procure-
ment and technical personnel must intensify
                                              their efforts
to motivate contractor participation.    In a January 1976
letter to the Army Commands, the Acting Comptroller
                                                      of the
Army noted that contractors were particularly
                                                sensitive
to the expressed desires of program managers
                                               and woul" re-
spond in the areas emphasized by the managers.
                                                  He said
there was an urgent need for personal involvement
                                                    by Army
program managers and appealed to them to take
                                                action to
improve VE savings performance on their programs.

     In October 1976, the Deputy Commanding General
                                                     for
Materiel Development, Army Materiel Development
                                                 and Readiness
Command, stated in a lette, to Army project
                                             managers that
the Army was not near to iLalizing the full
                                             potential for VE
savings and would not be until it had full
                                            participation in
the VE program by all Army project managers.

      Ovet the past 2 years ar. particularly in
                                                 late 1976,
the Office of the Secretary of Defense issued
                                                various
communications to the military services which
                                                were aimed
at reviving the DOD VE program fo. contractors.
these communications called for increased          In general,
                                           use of the VE
program to offset production cost growth on
                                             major programs
in support of DOD's design-to-cost objectives;
                                                 encouraged
application of the VE program on development
                                              cortLacts; and
asked for the establishment of budget procedures
                                                   and objec-
tives for VE investments on major programs.
                                              Also, a change
to the Armed Services Procurement Regulation
                                              provisions
covering VE contract clauses was under consideration
                                                        in late
1976 and has since been approved.   DOD believed the change
might facilitate wider use of the VE program
                                              on design-to-
cost major programs during development by
                                           elimination of
possible overlap or duplication between design-to-cost
                                                          target
cost incentives and VE contract clause incentives.

     However, most of these efforts were initiated
                                                    too late
to have any bearing on ficcal year 1976 savings
                                                 results, and
we foresee no meaningful indication of their
                                              actual impact on
VE program savings performance until fiscal
                                             year 1977 savings
are reported later this yea[.




                             36
                           CHAPTER 4
                CONCLUSIONS AND R_ 'OMMENDATIONS

CONCLUSIONS

     We believe that a 2ack of Defense management acceptance
and supp)rt has been the basic and most critical factor im-
peding the performance of the DOD VE program fur contractors.
Correction of this weakness is the most essencial need of
the program.
     A Value Engineering Congress sponsored by the Air Force
systems command and composed principally of about 50 represen-
tatives from 20 major Defense contractors and a like number
of Air Force and other agency representatives r-ached a
similar conclusion early this ycT.r. 'hts cnngress con-
sidered the creation of a positive a-ttltde toward ithe VE
program in Defense and contractor org ;_ ations to be the
program's overriding need.

     The problem is not new. The Assistant C3cretary of
Defense, Installations and Logistics, when commeritinn on our
196Q Deport to the Congress on the rced for i        -anaprge-
ment cf the DOD VE program, advised us that the          Limita-
tion to progress then appeared to be the problen      educating
and motivating large numbers of personnel witha.i Doth DOD
and industry. This is still the major problem 8 years later.

     To be productive, the program must have strong contractor
participation but, when key elements of Defense itself fail
to support the program, it cannot be expected that contractors
will feel encouraged to participate in it. We believe that
strong Defense support must first be estabi shel to create
an environment conducive to contractor support and partici-
pation.

     We feel now, as we did in 1969, that the DOD VE program
for contractors is a worthwhile concept with the capability
for achieving significant savings in the cost of acquiring,
operating, and logistically supporting items in the Defense
arsenal.  DOD analysis of fiscal year 1976 savings indicated
that the services were probably getting a return of about
10 to 1 on each dollar directly invested in the program.
However, as stated in chapter 2 of this report, the program
has not achieved its potential and its productivity has
dropped sharply since 1971. Savings in the past 2 years
have amounted to lc3s than 20 percent of DOD's assessment
of the program's minimum potential.



                             17
     Without aggressive support from top-level service
management--extending down through the ranks of ea:h command
to the working-level relationships with contractors--it is
unlikely the program will ever approach its full savings
potential.
RECOMMENDATIONS

     In view of the savings dollars at stake, we recommend
that the Secretary of Defense institute firm measures to
insure that the VE program for contractors will be aggres-
sively supported and actively promoted by all service secre-
taries and managers. Among the measures that can be taken
would be:

     --A strong signal from the Secretary of Defense to
       the service secretaries and managers indicating his
       personal interest in the program and that he expects
       them to give the program their full support.
     -- A requirement that the service secretaries periodi-
        cally inform the Secretary of Defense of their
        progress toward improving VE program savings per-
        formance in each of the military departments.
     -- A requirement that the major program managers period-
        iLally inform the service secretaries of VE program
        savings performance on their major weapon systems.
     -- Providing special recognition for service managers
        with outstanding VE program savings performance in
        their areas of responsibility.
     In addition, we recommend that the Secretary of Defense
inform the Congress of VE program savings results on indi-
vidual major weapon systems in conjunction with DOD's testi-
mony at Congressional Appropriations Committee hearings on
those systems. This would enable the Committees to consider
the extent of DOD's VE program cost saving efforts on high-
cost major weapon systems in their deliberations.




                             18
                          CHAPTER 5
             AGENCY COMMENTS AND OUR EVALUATION
     We brought our findings, conclusions, and recommendations
to the attention of the Secretary of Defense in a June 3, 197%,
draft of our report. DOD's letter of September 9, 1977, com-
menting on our draft report is included as appendix I to this
report.

     DOD concurred in our recommendation that it should
institute firm measures to insure support and promotion
of the VE program by the service secretaries and managers.
The agency believes that initiatives taken by the Office
of the Secretary of Defense in the past year constitute
such action. These initiatives are discussed briefly
on page 16 of this report.

     We agree that the prior initiatives are constructive.
But, in view of the extent of the lack of support by top
service managers which was evident in our review and the
duration of that critical problem, we believe that additional
measures, much l ke those suggested under our recommendation,
are needed to achieve the level of support required to stop
a continued savings loss of $200 million a year.

     DOD expressed some concern about the method to be used
to inform the Congress of VE savings on mejor weapon systems,
but suggested that some derivative of the annual service re-
ports to the Secretary of Defense might be developed for this
purpose. We suggest that the Department of Defense discuss
the matter with the staffs of the Appropriations Committees
to work out an appropriate reporting format. We would be
glad to assist in this matter.

     In addition, DOD felt we should recognize that 26 out
of 45 major programs in advanced development and full-scale
development had VE clauses in their contracts, even though
the use of the clauses is "optional" in these phases.

     We found that the Armed Services Procurement Regulation
specifically provides that a VE incentive clause shall bc
included in advanced and full-scale development contracts.
unless it is determined that inclusion of the clause would
be in conflict with other contract requirements or that h-ere
is minimal potential for savings. Furthermore, the VE pro ram
requirement clause is designed primarily for use on full-scale
development contracts.
       While we do recognize that the
                                        26 programs had VE
 contract clauses, we think a
 especially when 21 of those    great deal  more can be done,
                              programs produced no savings.
      DOD informed us that the Army
 set goals to increase their          and the Air Force have
                              overall VE investments 50 and
 100 percent, respectively, and
 $500,000 on major programs in to invest an average of
 the Navy will submit its VE     production. The agency said
                              improvement plans soon.
      Although we have not attempted
of the goals, we believe this          to analyze the adequacy
tion. The actual achievement     is a step  in the right direc-
maximum savings return on the   of  investment  goals and the
require sustained aggressive investments, however, will
                               support and promotion of the
VE program by all service secretaries
                                         and managers.




                            20
APPENDIX I                                                      APPENDIX I

                 DIRECTOR OF DEF.NSE RESEARCH AND ENGINEERING
                              WASHNIGTON. 0 C. 20301



                                                                9 SEP 1977


    Mr. R. W. Gitmann
    Director, Procurement and Systems
      Acquisition Division
    U.S. General Accounting Office
    Washington, D.C.  20548

    Dear Mr. Gutmans:

   This is in response to your letter of 3 June 1977 to the
   Secretary of Defense which forwarded copies of your draft
   report on "Top Level Manageuent Support Needed for DoD
   Value Engineering Programs," (OSD Case #4639).

   We welcome suggt tions to improve the Value Engineering (VE)
   contract incenti'e program and have supported the use of VE
   incentives since 19CS. The draft report recognizes many of
   our initiatives for improvement during the past year.

   The report should recognize that even though use of VE clauses
   is optional in 3dvanced development and full-scale development
   contracts, twenty-uix of forty-five Barograms in these phases
   still used the clauses.

   While the report cites most of the ;'urrent uffice of the
   Secretary of DEfense initiatives for improvement, it does
                                                                not
   cover in any significant detail the Service programs.    The
   Army and Air Force, for example, h.'/e set goals to inc¢rease
    rerall vE investment 50 and 100 peztent respectively and to
   average one half million dollars investmen- in VECPs on major
   programs in production. The Navy has agreed to submit their
   plr, fo.: improvement soon

   Thie Office of the Secretary of Defense will monitor khese
   ServL3ss initiatives and take action as appropriate.

   We concur in the recommendation      that the Secretary of Defense
   take steps to *nbure aggressive support and active promotion
   of the Department of Defense VE progranm. We be; !ve the
   office of the Secretary of Defense initiatives an the past
   year constitute such action.




                                 21
APPENDIX I                                                APPENDIX I


We have some concern about the recommendation that the Secretary
of Defense inform Congress of VE savings on major weapons in
conjunction with Congressional Appropriations Committee h3arings.
If the Congress desires VECP data, some derivative of the
annual Service reports to the Office of the Secretary of Defense
would be more meaningful.

                                      Sincerely,




                                      Gerald P. Dinneen
                                      Principal Deputy




                              22
 APPENDIX II                                          APPENDIX II

                       PRI1NCIPAL OFFICIALS
                  RESPONSIBLE FOR ADMINISTERING
               ACTIVITIES DISCUSSED IN THIS REPORT

                                             Tenure of office
                                             EFrFom        To
                     DEPARTMENT OF DEFENSE
SECRETARY OF DEFENSE:
    Dr. Harold Brown                  Jan.    1977    Present
    Donald H. Rumsfeld                Nov.    1975    Jan. 1977
    James R. Schlesinger              June    1973    Nov. 1975
    William P. Clements, Jr.
      (acting)                        Apr.    1973    June   1973
    Elliot L. Richardson              Jan.    1973    Apr.
    Melvin R. Laird                                          1973
                                      Jan.    1969    Jan.   1973
ASSISTANT SECRETARY OF DEFENSE
  (MANPOWER RESERVE AFFAIRS AND
  LOGISTICS) FORMERLY (INSTALLA-
  TIONS AND LOGISTICS):
    Dr. John P. White                May      1977    Present
    Dale R. Babione (acting)         Jan.     1977    May   1977
    Frank A. Shrontz                 Feb.     1976    Jan. 1977
    John J. Bennett (acting)         Mar.     1975    Feb. 1976
    Arthur T. Mendolia               Apr.     1973    Mar.
    Hugh McCullough (acting)                                1375
                                     Jan.     1973    Apr. 1973
    Barry J. Shillito                Jan.     1969    Jan. 1973
                    DEPARTMENT OF THE ARMY
SECRETARY OF THE ARMY:
    Clifford L. Alexander, Jr.       Feb.     1977    Present
    Martin R. Hoffran                Aug.     1975    Jan. 1977
    Howard H. Callaway               July     1973    Aug. 1975
    Robert F. Froehlke               July     1971    June 1973
                   DEPARTMENT OF THE NAVY
SECRETARY OF THE NAVY:
    W. G. Claytor                    Feb.     1977   Present
    J. William Middendorf            June     1974   Feb. 1977
    John W. Warner                   May      1972   June 1974
    John H. Chafee                   Jan.     1969   May   1972




                             23
APPENDIX II                                         APPENDIX II


                                           Tenure of office
                                           From          To
                 DEPARTMENT OF THE AIR FORCE

SECRETARY OF THE AIR FORCE:
    John C. Stetson                 Apr.     1977   Present
    Thomas C. Reed                  Feb.     1976   Apr. 1977
    James W. Plummer (acting)       Dec.     1975   Jan. 1976
    John L. McLucas                 May      1973   Nov. 1975
    Robert C. Seamans, Jr.          Jan.     1969   May   1973




(950304)


                            24