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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