    Use of Value Engineering in Defense Acquisitions (23-MAY-03,
    GAO-03-590R).

    Value engineering (VE) is a recognized technique for reducing
    costs while maintaining or improving productivity and quality.
    The Department of Defense's (DOD) VE program consists of both
    government- and contractor-developed cost-reduction projects
    designed to reduce a system's life-cycle costs. In response to
    Congress' request, we agreed to provide information on (1) the
    role the VE program has played in supporting cost reduction in
    DOD weapons system programs and (2) the alternative measures
    program managers take to reduce costs and/or incentivize
    contractors.
    -------------------------Indexing Terms-------------------------
    REPORTNUM:   GAO-03-590R
        ACCNO:   A06979
      TITLE:     Use of Value Engineering in Defense Acquisitions
         DATE:   05/23/2003
      SUBJECT:   Cost accounting
    	     Cost analysis
    	     Defense cost control
    	     Defense procurement
    	     Internal controls
    	     Strategic planning
    	     Weapons systems
    	     Life cycle costs
    	     Systems development life cycle

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    GAO-03-590R

    GAO- 03- 590R Value Engineering

    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 Page 2

    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 costs occur earlier in the life
    cycle of a system. 2 Generally we found significant variance in both the
    use and support of value

    engineering throughout the services. For example, neither the Air Force or
    the Navy have full- time staff resources dedicated to the VE program and
    consider VE just one of many tools available to reduce costs. At one Navy
    buying activity, we could not identify any VE projects, while at other Air
    Force and Navy buying activities we identified isolated instances where VE
    projects were being undertaken. In contrast, the Army has a more
    structured program with staff resources committed to managing the program
    and developing VE projects. However, even within the Army, there were
    variances in management emphasis from command to command.

    For the 11 weapons system programs we examined, we found that DOD program
    managers use a variety of strategies as alternatives to or in conjunction
    with VE. But how or when VE or other strategies are used varies by
    project. Like VE, other strategies often seek to motivate contractors to
    submit cost- reduction ideas and sometimes provide opportunities for
    contractors to share in the savings. Some program managers said they
    consider the VE tool or methodology, but said they use other approaches
    better suited to their programs or integrated into their management
    approach.

    The limited use of the VE program has been the result of a changing
    acquisition environment and the administrative burdens associated with the
    program. DOD introduced a variety of new cost- reduction initiatives in
    the 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).

    GAO- 03- 590R Value Engineering Page 3 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 GAO- 03- 590R Value Engineering Page 32 (120166)

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