[Audit Report on the Value Engineering Program, Department of the Interior]
[From the U.S. Government Printing Office, www.gpo.gov]

Report No. 97-I-1293

Title: Audit Report on the Value Engineering Program, Department
       of the Interior

Date: September 29, 1997

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H-IN-MOA-001-96

United States Department of the Interior

Memorandum

Secretary for Policy, Management and Budget

Subject: Audit Report on the Value Engineering Program, Department of the Interior
(No.  97-I-1293)   

This report presents the results of our audit of the Departm ent of the Interior's value
engineering program.

The objective of the audit was to determine whether:

(1) the

Department's value engineering cost savings and cost avoidances for fiscal year 1995 were
reported accurately and (2) the Department's policies and procedures were adequate to
implement the requirements of revised Office of Management and Budget Circular A-l 3 1,
"Value Engineering. " This audit was performed in response to your June 18, 1996, request,
which fulfilled the revised Circular's requirement that an audit should be requested by the
agency head after the Circular has been issued. Based on our review, we found that:

- The cost savings/avoidances reported in the Department's Annual Value Engineering
Report to the Office of Management and Budget were substantially correct. However,
changes were made to the report after its submission to Management and Budget that were
not communicated to that agency. As a result, the cost savings/avoidances in the report were
overstated by about $1.378 million.

- The Department had not fully implemented the value engineering program in that it had

not enforced the requirements to prepare Annual Value Engineering Plans and to maintain
files on all projects, programs, systems, and products that meet the criteria for use of value

engineering techniques.

- The Department generally complied with the requirements of the Circular in the areas

of facility design and construction. However, the Department needs to ensure that its
engineering program is expanded to include all eligible construction projects and

value

other

nonconstruction programs and management operations, as required by the Circular; the
Departmental Manual (369 DM 1); and the February 10, 1996, amendment to the Office of
Federal Procurement Policy Act.

- The Department's method of funding the value engineering program did not provide
an incentive to encourage bureaus and offices to perform required value engineering studies.
As a result, the full potential of the Department's value engineering program and related cost
savings/avoidances were not realized.

 
Although the Department had not performed all of the required value engineering studies,
it has performed reviews to increase economy and efficiency in program operations. For
example, in accordance with the National Performance Review, the Department had
conducted the second largest number of reviews (30 programs) of any Federal agency. The
reviews, which are expected to improve the systems, products, and services provided to the
Department's customers, were conducted without consideration of the potential reportable
cost savings/avoidances generated.

We provided the draft of this report to your office on August 5, 1997, and requested
comments by September 15, 1997. Since we have not received your response by the due
date, this final report is being issued without the benefit of your comments, and all of the
report's recommendations are therefore considered to be unresolved (see Appendix 5).

In accordance with the Departmental Manual (360 DM 5.3), we are requesting a written
response to this report by October 3 1, 1997. The response should provide the information
requested in Appendix 5.

The legislation, as amended, creating the Office of Inspector General requires semiannual
reporting to the U.S. Congress on all audit reports issued, actions taken to implement audit
recommendations, and identification of each significant recommendation on which
corrective action has not been taken.

We appreciate the assistance of Office of the Assistant Secretary for Policy, Management
and Budget personnel in the conduct of our audit.

 
CONTENTS

Page

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..l

APPENDICES

1. DIFFERENCES IN REPORTED AND ACTUAL COST
SAVINGS/AVOIDANCES FOR THE ANNUAL VALUE
ENGINEERING REPORT FOR FISCAL YEAR 1995 . . . . . . . . . . . . . . . . . . 11
2. STATUS OF RECOMMENDATIONS IN PRIOR
VALUE ENGINEERING AUDIT REPORTS . . . . . . . . . . . . . . . . . . . . . . . . . 12
3. OFFICES VISITED AND/OR CONTACTED . . . . . . . . . . . . . . . . . . . . . . . . 16
4. STATUS OF IMPLEMENTATION OF OFFICE OF
MANAGEMENT AND BUDGET CIRCULAR A-131 . . . . . . . . . . . . . . . . . 17
5. STATUS OF AUDIT REPORT RECOMMENDATIONS . . . . . . . . . . . . . . . 19

 
INTRODUCTION

BACKGROUND

organized effort directed at analyzing the functions of a program, product, facility, or
procedure to generate alternatives that will satisfy the user's needs at the lowest possible
cost. These analyses can be performed by both in-house and contractor personnel. The
Circular requires Federal departments and agencies to use value engineering to identify and
reduce nonessential acquisition and program costs. To ensure that systemic value engineering
improvements are achieved, the Circular also requires Federal agencies to: (1) designate a
senior-level management official to monitor and coordinate agency value engineering efforts;
(2) develop criteria and guidelines for both in-house personnel and contractors to identify
programs/projects that have the most potential to yield savings from the application of value
engineering techniques; (3) assign responsibility to the senior-level management official to
grant waivers of the requirement to conduct value engineering studies on certain programs
and projects; (4) provide training in value engineering techniques to agency staff responsible
for developing, reviewing, analyzing, and carrying out proposals, change proposals, and
evaluations; (5) ensure that funds necessary for conducting agency efforts are included in
annual budget requests; (6) maintain files on projects, programs, systems, and products that
meet agency criteria for requiring the use of value engineering techniques; (7) comply with
the requirements of the Federal Acquisition Regulation, including the use of the value
engineering clauses as stated in Parts 48 and 52; (8) develop annual plans for using value
engineering; and (9) report annually to the Office of Management and Budget on value
engineering activities.

The Departmental Manual (369 DM 1.2), which implements the Circular, requires that value
engineering be used in the planning, design, construction, repair, and rehabilitation or
renovation of facilities and in administrative and management programs to improve
operations, identify and remove nonessential capital and operating costs, and improve and
maintain optimum quality of program and acquisition functions. The Manual states that
bureaus/offices which administer Federal grant programs involving construction, repair, and
rehabilitation of facilities are to encourage grantees to implement value engineering wherever
possible. The Manual also states that all bureaus/offices having contractual authority for
procurement/construction are to implement contractor value engineering change proposals
programs in accordance with the Federal Acquisition Regulation and the United States Code.

On February 10, 1996, the Office of Federal Procurement Policy Act (41 U.S.C. 401 et seq.)
was amended by Section 4306 of the National Defense Authorization Act for Fiscal Year
1996 (Public Law 104-106), which requires that each executive agency establish and

1

 
maintain cost-effective value engineering procedures and processes. Pursuant to the
amendment, value engineering procedures and processes are to be applied to programs,
projects, systems, products, equipment, buildings, facilities, services, or supplies, whether
they are performed by agency or contractor personnel.

OBJECTIVE AND SCOPE

We performed our audit in response to the June 18, 1996, request from the Assistant
Secretary for Policy Management and Budget. The objective of the audit was to determine
whether: (1) the Department's value engineering cost savings/avoidances for fiscal year 1995
were accurately reported and (2) the Department's value engineering policies and procedures
were adequate to implement the requirements of revised Office of Management and Budget
Circular A-l31 and related laws and regulations.

Our review was conducted at the Office of Policy, Management and Budget in Washington,
D.C., and at the Departmental and bureau offices listed in Appendix 3. To accomplish our
objective, we reviewed Office of Management and Budget and Department of the Interior
policies and guidance concerning the value engineering program. We interviewed or
contacted Departmental and bureau officials involved in the value engineering program and
U.S. Army Corps of Engineers officials in Washington, D.C., to obtain information about
the Corps value engineering program. In addition, we reviewed the accuracy of the cost
savings/avoidances associated with 26 of the 43 projects included in the Department's 1995
value engineering report to the Office of Management and Budget. The 26 projects
represented $16.4 million of the $22.4 million in cost savings/avoidances included in the
1995 report.

Our audit was conducted in accordance with the "Government Auditing Standards," issued
by the Comptroller General of the United States. Accordingly, we included such tests of

records

and other auditing procedures that were considered necessary

under the

circumstances. As part of our audit, we evaluated the system of internal controls for the

value engineering program to the extent that we considered necessary to accomplish the audit
objective. The internal control weaknesses identified are discussed in the Findings and
Recommendations section of this report. If implemented, the recommendations should
improve the internal controls in these areas.

We also reviewed the Department of the Interior's Annual Statement and Report, which is
required by the Federal Managers' Financial Integrity Act, for fiscal years 1994 and 1995
and determined that there were no reported weaknesses within the objective and scope of our
audit.

PRIOR REPORTS

The Office of Inspector General has issued three audit reports since 1989 that were related
to the value engineering program as follows:

2

 
- The report "Survey of Value Engineering, Department of the Interior" (No. 89-59),
issued on March 27, 1989, stated that the Department had not adequately monitored the
bureaus' value engineering programs because accurate and complete program data were not
maintained and criteria and guidance on program operations and activities had not been
issued. As a result, according to the report, the Department could not ensure that the most
cost-effective value engineering initiative had been implemented. The report presented four
recommendations to correct deficiencies in the Department's program and estimated that an
effective program could save about $58 million annually (see Appendix 2) . The Department

with the four recommendations.

- The report "Survey of Value Engineering, Bureau of Reclamation" (No. 89-60), issued
on March 27, 1989, stated that the Bureau had not devoted sufficient resources and attention
to promote contractor-submitted value engineering change proposals or to conduct and
implement in-house studies. The Bureau also did not maintain adequate records on its value
engineering program activity. As a result, according to the report, few studies had been
performed, and potential cost savings/avoidances of only $3 1.7 million of the $329.2 million
had been implemented. The report presented six recommendations to correct the deficiencies
in the Bureau's program. The Bureau agreed with the six recommendations (see
Appendix 2).

- The report "Followup of Recommendations Pertaining to the Department of the
Interior's Value Engineering Program" (No. 92-I-l 030), issued on July 17, 1992, reviewed
the status of the 10 recommendations contained in the two prior reports and found that 4
recommendations had been implemented and the remaining 6 recommendations had been

partially implemented.

The status of recommendations in the three prior value engineering audit reports is presented
in Appendix 2.

 
FINDINGS AND RECOMMENDATIONS

A. FISCAL YEAR 1995 VALUE ENGINEERING ANNUAL REPORT

We found that the cost savings/avoidances of $22.4 million reported by the Department of
the Interior in its Annual Value Engineering Report submitted to the Office of Management
and Budget for fiscal year 1995 were substantially correct.* Office of Management and
Budget Circular A-l31 requires that value engineering program results be reported to
Management and Budget by December 31 of each year. Subsequent to submission of the
1995 report, Departmental officials reduced the cost savings/avoidances included in the
report because of transcription errors and refinements of cost savings/avoidance estimates.
The errors generally occurred when amounts were transcribed from project files to bureau
reports and also because reported cost savings/avoidances for some projects had been based
on estimates that were revised after the reporting period. Although most of the errors were
corrected before we conducted our review, the Department did not notify Management and
Budget of the corrections. Departmental officials said that they did not notify Management
and Budget of subsequent revisions to the report because such notification was not required
by the Circular or the Departmental Manual. As a result, the cost savings/avoidances were
overstated by $1,377,800, and the study cost of a project was understated by $5,000.

Understatement and Overstatement of Cost Savings/Avoidances

The total of cost savings/avoidances reported to Management and Budget by the Department
for fiscal year 1995 was $22,427,840 for 43 projects administered by the Bureau of
Reclamation, the National Park Service, the U.S. Fish and Wildlife Service, and the Bureau
of Indian Affairs. The total cost of performing studies on these 43 projects was reported as
$1,253,940. However, we found that the cost savings/avoidances reported for 5 of the 43
projects (the 5 projects were from the Bureau of Reclamation) were overstated by a net of
$1,377,800, which consisted of 4 projects overstated by $1,577,800 and 1 project understated
by $200,000. We also found that the cost of performing one study was understated by
$5,000. In addition, we found that although the total of the cost savings/avoidances reported
on the summary portion of the Annual Value Engineering Report was $22,427,840, the total
of the cost savings/avoidances reported on the detailed listing of individual projects portion
of the Annual Report was $22,148,957. Departmental officials could not account for the
discrepancy.

Bureau of Reclamation. The Bureau of Reclamation reported a total of $12,573,200
in cost savings/avoidances on the 21 projects that the Bureau studied. The total cost of
performing these studies was reported as $256,900. Based on our review of the files for the
18 largest studies, which had total reported cost savings/avoidances of $11,460,700, we

20f the Department's 10 bureaus, 4 conducted value engineering studies and reported savings during
fiscal
year 1995.

4

 
found that, although the files generally contained adequate data to support the information
contained in the Annual Report, there were several errors. The Bureau had identified the
errors (see Appendix 1) in the amount of reported cost savings/avoidances after the reporting

period and before our review as follows:

   - One project had a total of $1,300,000 in cost savings/avoidances instead of the
reported $1,480,000, and another project had a total of $329,000 in cost savings/avoidances
instead of the reported total of $773,900. The overstatements, totaling $624,900, were
caused by transcription errors.

   - One project had a total of $733,000 in cost savings/avoidances instead of the
reported $1,385,900, or an overstatement of $652,900, and another project had a total of cost
savings/avoidances of $400,000 instead of the reported $200,000, or an understatement of
$200,000. The net overstatement of $452,900 occurred because the reported amounts were
based on verbal estimates provided before the December 3 1 reporting deadline. In addition,
the Bureau reported cost savings/avoidances of $300,000 on a project that was also claimed
by the U.S. Air Force.

In addition to cost savings/avoidances discrepancies, we found that the Bureau incorrectly
reported the value engineering study costs for one project because of clerical errors. The
study, which actually cost a total of about $10,000, was reported as costing $5,000, or a net
understatement of $5,000.

  National Park Service. The National Park Service reported a total of $3,821,000 in
cost savings/avoidances on the nine projects that were studied. The total cost of performing
these studies was reported as $144,177. Of the nine projects studied, we reviewed the files
for four projects, which had total reported cost savings/avoidances of $1,100,083, and found
that the files contained adequate data to support the information contained in the Annual
Report.

  U.S. Fish and Wildlife Service. The Fish and Wildlife Service reported a total of
$2,898,757 in cost savings/avoidances for the 10 projects studied. The total cost of
performing these studies was reported as $40,636. Based on our review of the files for two

of the largest studies, which had total reported cost savings/avoidances of $1,482,000, we
found that the files contained adequate information to support the data contained in the
Annual Report.

   Bureau of Indian Affairs. The Bureau of Indian Affairs reported a total of $2,856,000
in cost savings/avoidances on three projects studied. The costs of performing these studies
was reported as $78,590. Based on our review of the files for two of the projects, which had
total cost savings/avoidances of $2,449,000, we found that the files contained adequate
information to support the data contained in the Annual Report.

We found that the Department was aware of most of the differences in the Annual Report at
the time of our review but had not informed the Office of Management and Budget of these

5

 
discrepancies. Although neither Circular A- 13 1 nor the Departmental Manual requires that
the Office of Management and Budget be notified of errors or other discrepancies corrected
after the December 31 reporting deadline, we believe that the Office of the Assistant
Secretary for Policy, Management and Budget should report such changes so that the
integrity of the Department's Annual Value Engineering Report is maintained.

Recommendation

We recommend that the Assistant Secretary for Policy, Management and Budget establish
formal written procedures to inform the Office of Management and Budget of any
corrections made to cost savings/avoidances amounts or to other data after the Department's
Annual Value Engineering Report is submitted.

Assistant Secretary for Policy, Management and Budget Response and
Office of Inspector General Reply

The Assistant Secretary for Policy, Management and Budget did not provide a response to
the draft report. Therefore, the recommendation is considered unresolved (see Appendix 5).

 
B. IMPLEMENTATION OF THE VALUE ENGINEERING PROGRAM

Although the Department's value engineering policies and procedures generally were in
compliance with the requirements of Office of Management and Budget Circular A- 13 1, the
Department did not implement value engineering in areas other than facility design and
construction. For instance, the Circular requires that Federal departments use value
engineering to identify and reduce nonessential acquisition and program costs, and it sets
forth the requirements to implement value engineering programs. Also, the Departmental
Manual (369 DM 1.2) requires that value engineering be used in planning, designing,
repairing, and renovating facilities; managing programs to improve operations; identifying
and removing nonessential capital and operating costs; and improving and maintaining
optimum quality of program and acquisition functions. The program was not fully
implemented because the Department had not enforced the following requirements: (1) that
bureaus/offices should prepare and implement annual value engineering plans; (2) that files
should be maintained on all projects, programs, systems, and products which meet the
criteria for the use of value engineering techniques; and (3) that nonconstruction program,
project, and activity areas should be included in the Department's value engineering efforts
and subjected to value engineering analysis. In addition, we found that 9 of the 10 bureaus
had only one person designated (as a collateral responsibility) to coordinate value
engineering studies and that the Department's method of funding the program did not
provide incentives for bureaus and offices to perform the required studies. As a result, the
full potential of the Department's value engineering program was not realized because only
4 of the Department's 10 bureaus had conducted studies and reported value engineering
savings during fiscal year 1995. Although it was not possible for us to estimate the full
impact on the Department, we believe that if the program had been fully implemented in all
potential areas, the Department could have realized millions of dollars in annual costs
savings and other benefits in fiscal year 1995.

Facility Design and Construction

Although the Department had implemented the program in the areas of facility design and
construction, it was not applying value engineering to all potential construction projects or
obtaining the required waivers. The Departmental Manual (369 DM 1.7) states that all
construction, repair, rehabilitation, and renovation projects over $500,000 are to be studied
or waivers (exclusions) are to be obtained (if it is determined that estimated savings do not
economically justify study and redesign costs) and that all projects over $1 ,OOO,OOO are to
be studied. The Department's goal is cost savings/avoidances of 4 percent of the projects'
aggregate value.

Although we found documentation which showed that 51 value engineering studies were
performed or formally waived during fiscal year 1995, we could not determine how many
other contracts or modifications should have been or were studied for value engineering
purposes. However, the Bureau of Reclamation's annual value engineering report noted that
studies were not performed or waivers were not obtained for 10 construction projects,
totaling $20,317,000. We estimated that these 10 projects could have resulted in cost

7

 
savings/avoidances of at least $812,680 based on the Department's standard 4 percent return
on studies and the total cost of $20,317,000. Also, we found that the Bureau of Indian
Affairs had not established criteria for the granting of waivers. Accordingly, we concluded
that the full potential for value engineering cost savings/avoidances was not realized and that
the Department should ensure that value engineering studies are performed or formally
waived on all of those projects that meet the dollar threshold criteria.

Other Program Areas

Circular A-l 3 1 requires that the value engineering program, in addition to facilities design
and construction, be applied to computer hardware and software; development, production,
and manufacturing processes; contract specifications, standards, and requirements; and other
acquisition program documentation. In addition, the February 10, 1996, amendment to the
Act (Public Law 104-l 06) defined value engineering as "an analysis of the functions of a
program, project, system, product, item of equipment, building, facility, service, or supply
of an executive agency, performed by qualified agency or contractor personnel, directed at
improving performance, reliability, quality, safety, and life cycle costs."  A revised
Departmental Manual (369 DM 1.7) requirement was issued on May 18, 1995, which
expanded the program into nonconstruction-related areas. However, the Department reported
that only two value engineering studies had been performed in fiscal year 1995 on
nonconstruction projects, and, at the time of our review, Departmental officials said that they
did not have plans to expand the program in these areas.

Circular A-l 3 1 requires that each agency develop annual plans for using value engineering
studies, and the Departmental Manual (369 DM 1.8(A)) re q uires that bureau/office heads
prepare and implement a value engineering plan of action. In addition, the Circular requires
that files be maintained on projects, programs, systems, or products which are in compliance
with agency criteria for requiring the use of value engineering techniques. However, we
found that the Department had not enforced the requirement for bureaus/offices to prepare
annual plans or plans of action and maintain the required files for nonconstruction projects.

Although the Department has not performed value engineering studies in most of its
nonconstruction program areas, it has performed reviews to increase economy and efficiency
in program operations. For example, in accordance with the National Performance Review,
the Department, at the time of our review, was conducting reinvention laboratories in 30
programs (second in the Federal Government to the Department of Defense) in areas such
as travel and finance. The purpose of the reinvention laboratories is to redesign processes
or systems to significantly improve the effectiveness and efficiency of products and services
provided to the Department's customers. The potential cost savings/avoidances and other
benefits from these efforts had not been estimated at the time of our review.

Because the Department's value engineering studies have been successful in reducing costs
and/or increasing efficiencies in the areas of construction and rehabilitation, the number and
the total value of nonconstruction programs that have value engineering potential are
significant, and both the Act and the Circular require that value engineering studies be

8

 
performed in these areas, we believe that the Department should enforce the requirements
that: (1) annual plans should be prepared and implemented for the use of value engineering
techniques by each bureau and office in the areas of construction and nonconstruction and
(2) files should be maintained on all projects, programs, systems, and products which meet
the Departmental criteria for the use of value engineering techniques.

Alternative Program Funding

The Department's method of funding the value engineering program did not appear to
encourage bureaus and offices to perform value engineering studies. Circular A-13 1 requires
that funds necessary for conducting agency value engineering efforts be included in annual
budget requests to the Office of Management and Budget. However, Departmental bureaus
and offices have generally not requested funding for value engineering studies. Therefore,
resources for conducting each study were taken from project and/or program budgets.
Several Departmental program officials stated that conducting these studies diverted
personnel resources from the immediate mission activities of bureaus and offices and did not
directly benefit these offices. Departmental officials said that most of the effort and costs
for the studies were incurred during the design/planning stages of projects or programs but
that most of the program benefits or cost savings occurred during the construction stages of
projects or programs. Since different offices and appropriations may have been involved in
the design and construction stages, there was little incentive for offices to use limited
resources to conduct value engineering studies. In addition, each Departmental bureau/office
except for the Bureau of Reclamation, had only one person (on a collateral duty basis)
designated to coordinate value engineering studies. We believe that the lack of coordinators
for value engineering studies contributed to the fact that only 4 of the Department's 10
bureaus had conducted studies and reported value engineering savings during fiscal year
1995.

To obtain a perspective on funding and performance of required value engineering studies,
we interviewed an official of the U.S. Army Corps of Engineers, which is considered by
many Federal agencies to be the Federal Government's leader in the performance of value
engineering studies ($126 million reported in value engineering cost savings/avoidances for
fiscal year 1995). According to the official, the Corps had established a revolving fund to
finance its value engineering studies using a percentage of the savings generated by the
studies. Therefore, according to the official, the performing office could receive benefits
made possible through the studies without incurring additional costs or having to seek a
reprogramming action. The official further stated that the establishment of the revolving fund
was "very successful" and "greatly increased" the number of studies performed. Based on
the Corps success in increasing the number of value engineering studies, we believe that the
Department should consider requesting legislation that would enable the Department to fund
studies through the use of a revolving account funded by value engineering cost
savings/avoidances realized on completed projects or programs.

 
Recommendations

We recommend that the Assistant Secretary for Policy, Management and Budget:

1. Ensure that Departmental bureaus and offices prepare and implement comprehensive
value engineering annual plans or plans of action and ensure that value engineering studies
are performed or formally waived on all projects which meet the criteria of revised Office
of Management and Budget Circular A-131.

2. Require that files be maintained on all projects, programs, systems, and products
which meet Departmental criteria requiring the use of value engineering techniques.

3. Consider seeking legislation to enable funding of value engineering studies through
the use of a revolving account which will be funded entirely by value engineering cost
savings/avoidances realized on completed projects or programs.

Assistant Secretary for Policy, Management and Budget Response and
Office of Inspector General Reply

The Assistant Secretary for Policy, Management and Budget did not provide a response to
the draft report. Therefore, the three recommendations are considered unresolved (see
Appendix 5).

10

 
APPENDIX 1

DIFFERENCES IN REPORTED AND ACTUAL
COST SAVINGS/AVOIDANCES FOR THE
ANNUAL VALUE ENGINEERING REPORT
      FOR FISCAL YEAR 1995

    Proi ect Title



LC Utilities/Campground


Lemhi Fish Passage Locks


Rye Patch Dam Modifications

  Actual
Cost Savings/
Avoidances




$1,300,000


   329,000


   733,000

Reported
Cost Savings/
Avoidances




$1,480,000


   773,900


  1,385,900

Difference



($180,000)


(444,900)


(652,900)

Cold Springs Dam Modifications        400,000         200,000        200,000

Remediation Underground Storage

0          300,000       (300.000)

Reasons for
Difference

Transcription error.

Transcription error.

Analysis after report
was submitted reduced
the savings.

Analysis after report
was submitted
increased the savings.

Savings are correct;
however, they were
also claimed by
another agency.

Total

$2,762,000       $4,139.800     ($1,377,800)

11

 
APPENDIX 2
Page 1 of 4

  STATUS OF RECOMMENDATIONS IN
PRIOR VALUE ENGINEERING AUDIT REPORTS

The audit report "Followup of Recommendations Pertaining to the Department of the
Interior's Value Engineering Program" (No. 92-I-1030), issued in July 1992, reviewed the
status of the 10 recommendations in two prior reports. Based on the followup report and
our current review, we have included the status of the prior recommendations as follows:

"VALUE ENGINEERING, DEPARTMENT OF THE INTERIOR"
(Report No. 89-59)

Recommendation 1. Establish formal management oversight responsibilities to
monitor and promote value engineering programs within each applicable bureau and
maintain current data on the program that will demonstrate program effectiveness.

The followup report stated that because the Departmental Manual had been updated on
January 8, 1992, the recommendation was considered implemented.

During our current review, we found that each bureau/office had designated a program
coordinator and we therefore consider the recommendation implemented. However, because
we found that the Department needed to ensure that bureaus and offices prepared and
implemented value engineering annual plans or plans of action covering the application of
value engineering studies in the areas of construction and nonconstruction administrative and
management programs we made a new recommendation to address this problem (see
Recommendation B. 1 in this report).

Recommendation

2 .

Provide

accurate

annual

Departmental

summary

value

engineering program information to the Office of Management and Budget, as required
by Circular A-l31.

The followup report stated that although the Departmental Manual and a draft of a Value
Engineering Guidance Handbook had been prepared and would provide sufficient guidance
to enable the Department to assemble and provide the required reports, the recommendation
was considered only partially implemented because the Handbook was in a draft stage.

During our current review, we found that the Handbook was published in 1992, and the
Departmental Manual was revised in May 1993. In addition, although we found that the
fiscal year 1995 Annual Value Engineering Report submitted to the Office of Management
and Budget was substantially correct, the Department needed to establish formal procedures
to inform the Office of Management and Budget of any corrections made to cost
savings/avoidances amounts or to other data after the Department's Annual Value
Engineering Report was submitted (see Recommendation A.1 of this report). Therefore, we
consider the follow-up report's recommendation resolved but not implemented.

12

 
APPENDIX 2
Page 2 of 4

Recommendation 3. Establish criteria and guidelines to identify those programs and
projects that are most appropriate for value engineering.

The followup report stated that criteria in the Departmental Manual limit mandatory
coverage to the design, construction, and rehabilitation of facilities and encourages
application to grant programs involving facilities. Because it did not include administrative
and management programs, the recommendation was considered only partially implemented.

During our current review, we found that the Handbook and the revised Departmental
Manual established adequate criteria and guidelines and we therefore consider the
recommendation implemented. However, because we found that the Department had not
enforced the requirement that bureaus/offices should prepare and implement annual plans
and maintain files on all projects, programs, systems, and products which meet the criteria
for the use of value engineering techniques, we made a new recommendation to address this
problem (see Recommendations B.1 and B.2 of this report).

Recommendation 4. Establish guidelines to evaluate and process value engineering
proposals from contractors and in-house sources on a timely basis to ensure proper
resolution of those proposals.

The follow-up report stated that the draft Handbook provided adequate policies and
procedures and that the recommendation would be considered fully implemented when the
Handbook was issued.

The Department's response to the followup report indicated that it would ensure that the
prior report's (No. 89-59) recommendations were fully implemented and that steps would
be taken to include all areas in the program.

During our current review, we found that the Handbook established adequate guidelines to
evaluate and process value engineering proposals on a timely basis and we therefore consider
this recommendation implemented.

"SURVEY OF VALUE ENGINEERING, BUREAU OF RECLAMATION"
(Report No. 89-60)

Recommendation 1. Require Reclamation's value engineer or another high-echelon
official to prepare a value engineering promotional brochure for distribution by
regional procurement offices.

The followup report stated that because the Bureau had prepared and distributed a
promotional brochure, the recommendation was considered implemented.

13

 
APPENDIX 2
Page 3 of 4

Recommendation 2. Require all regions to actively promote the value engineering
program to contractors, including issuing promotional brochures.

The followup report stated that the Departmental Manual provided sufficient guidance for
promotion of the program to contractors; however, not all Bureau regions had adequately
implemented the requirement. After the completion of the audit fieldwork, the Bureau took
steps to correct the problem. Based on the steps taken, the recommendation was considered
implemented.

Recommendation 3. Require that the Assistant Commissioner - Engineering and
Research (a) identify those programs and projects which may better benefit from value
engineering techniques and (b) review the current procedure that requires value
engineering studies to be performed only on those projects greater than $10 million to
determine if a lower threshold should be established.

The followup report stated that the Bureau was in the process of adopting the Departmental
Manual criteria. However, because it had not yet incorporated the criteria into Bureau
guidance, the recommendation was considered only partially implemented.

During our current review, we found that Bureau guidance was revised in July 1996 to reflect
Office of Management and Budget program guidelines and we therefore consider the
recommendation implemented.

Recommendation 4. Establish an independent review team at the Denver Office to
evaluate the adequacy of design team responses to value engineering study
recommendations and ensure appropriate consideration is given to all potential
savings.

The follow-up report stated that because the Bureau established the Value Engineering
Program Committee, the recommendation was considered implemented.

Recommendation 5. Require all regions to accurately report value engineering results
to Reclamations's value engineer, as required under Reclamation Instruction
Part 139.l.B(3).

The followup report stated that there was a lack of adequate documentation to support the
information reported to the program coordinator and to ensure that the monitoring of value
engineering proposals and activities was adequate. The follow-up report further stated that
because the Bureau agreed to incorporate the Manual documentation requirements into its
program, the recommendation was considered partially implemented.

During our current review, we found that the Bureau had adequate documentation to support
the information reported to the program coordinator and we therefore consider this
recommendation implemented.

14

 
APPENDIX 2

Page 4 of 4

Recommendation 6. Require Reclamation's value engineer to accurately report the
results of the value engineering activities to management on an annual and comparative
basis and to actively promote the value engineering program throughout Reclamation.

The followup report stated that because the Bureau had agreed to incorporate Manual
documentation requirements into its program, the recommendation was considered partially
implemented.

Although the Bureau of Reclamation did not agree with the report's conclusions that it had
not implemented the prior report's recommendations, the Bureau agreed to take the actions
specified to fully implement the recommendations.

During our current review, we found that the Bureau accurately reported the results of value
engineering activities to mangement and was actively promoting the program. Therefore,
we consider the recommendation implemented.  However, because we found that the
Department needed to ensure that revisions made to estimated cost savings/avoidances
subsequent to the submission of the Annual Value Engineering Report were reported to the
Office of Managment and Budget, we made a new recommendation to address this problem
(see Recommendation A.1 in this report).

15

 
I

APPENDIX 3

OFFICES VISITED AND/OR CONTACTED

Office

Office of the Secretary
Office of the Assistant Secretary for
Policy, Management and Budget

Bureau of Reclamation
Denver Office

National Park Service
Denver Service Center

U. S. Fish and Wildlife Service
Branch of Engineering Services*
Service Engineering Center

Bureau of Indian Affairs
Facilities Management and Construction Center

U. S. Geological Survey
Facilities Management Office*

Bureau of Land Management
Colorado State Office*

Office of Surface Mining Reclamation and Enforcement
Reclamation and Regulatory Policy Directorate*

Office of Insular Affairs
Washington Office*

Minerals Management Service
Washington Office*

U.S. Army Corps of Engineers
Office of the Chief of Engineers

Location

Washington, D.C.

Denver, Colorado

Denver, Colorado

Arlington, Virginia
Denver, Colorado

Albuquerque, New Mexico

Reston, Virginia

Denver, Colorado

Washington, D.C.

Washington, D.C.

Herndon, Virginia

Washington, D.C

*Contacted only

16

 
APPENDIX 4
Page 1 of 2

    STATUS OF IMPLEMENTATION
OF OFFICE OF MANAGEMENT AND BUDGET
         CIRCULAR A-131

Section 8 of Office of Management and Budget Circular A- 13 1 dated May 2 1, 1993, requires
agencies to take certain actions to ensure that the value engineering program is adequately
implemented. The Department's implementation of each of the actions required at the time
of our review is as follows:

1. Designate a senior management official to monitor and coordinate agency value
engineering efforts.

Responsibility and authority for the Department's program have been assigned to each of the
Department's Assistant Secretaries. The Assistant Secretary for Policy, Management and
Budget has designated the Office of Managing Risk and Public Safety as responsible for
coordinating and monitoring value engineering policies and practices of Departmental
bureaus and performing and managing program studies for the Department.

2. Develop criteria and guidelines for both in-house personnel and contractors to
identify programs/projects with the most potential to yield savings from the application
of value engineering techniques.

We found that the Departmental Manual provided adequate guidelines to identify programs
and projects which had the most potential to yield savings. The Manual did not address the
Circular's requirement that guidance should include consideration of environmentally sound
and energy-efficient considerations to arrive at environmentally sound and energy-efficient
results. However, Departmental program officials told us that this was an "automatic" design
consideration in all Departmental projects to meet the requirements of the Energy Act.

3. Assign responsibility to the senior management official to grant waivers of the
requirement to conduct Value Engineering studies on certain programs and projects.

The Departmental Manual (369 DM 1.9C(8)) states that bureau/office heads are responsible
for assigning responsibility to the value engineering program coordinators for granting
exclusions to the requirement to conduct studies.

4. Provide training in value engineering techniques to agency staff responsible for
coordinating and monitoring program efforts and for staff responsible for developing,
reviewing, analyzing, and carrying out program proposals, change proposals, and
evaluations.

We found that training had been provided to Departmental staff responsible for coordinating
and monitoring program efforts and that training was provided/planned for other staff.

17

 
APPENDIX 4
Page 2 of 2

5. Ensure that funds necessary for conducting agency value engineering efforts are
included in annual budget requests to the Office of Management and Budget.

We found that although the Department provided funds for the staff of the office responsible
for coordinating and monitoring studies (Office of Managing Risk and Public Safety), the
bureaus did not specifically request funds for their value engineering efforts in annual budget
submissions to Management and Budget. This issue is addressed in Finding B of this report.

6. Maintain files on projects/programs/systems/products that meet agency criteria for
requiring the use of value engineering techniques.

We found that the Department's Value Engineering Handbook provided extensive guidance
on the documents and forms to be maintained and used in the conduct of value engineering
studies. In addition, we found that although the bureaus/offices we reviewed maintained
files on construction projects which met review criteria, they did not maintain files on other

types of programs or projects which met Circular A-l 3 1 criteria. This issue is addressed in

Finding B of this report.

7. Adhere to the acquisition requirements of the Federal Acquisition Regulation,
including the use of value engineering clauses set forth in Parts 48 and 52.

Section C of the Department's Value Engineering Handbook contains guidelines on the

inclusion of value engineering clauses in Departmental contracts.

We found that the

Departmental Manual requires value engineering change proposal clauses to be included in

construction contracts. In addition, the Bureau of Reclamation and the National Park Service
provided brochures to the contractors that provide guidance to the contractors and outlined
the benefits of the contractors' participation in the program.

8. Develop annual plans for using value engineering in the agency.

We found that although the Departmental Manual (369 DM 1.8(A)) requires that a plan of
action be prepared and implemented by each bureau/office head, the Department was not
enforcing this requirement. This issue is addressed in Finding B of this report.

9 .

Report annually to the Office of Management and Budget on value engineering

activities.

We found that the Department submitted the required value engineering report to the Office
of Management and Budget for fiscal year 1995, the period covered by our review. This
issue is addressed in Finding A of this report.

18

 
APPENDIX 5

STATUS OF AUDIT REPORT RECOMMENDATIONS

Finding/Recommendation
    Reference

Status

A.1 and B.l-B.3       Unresolved.

Action Reauired

Provide a response to each
recommendation. If concurrence is
indicated, provide a plan identifying
actions to be taken, including target
dates and titles of officials
responsible for implementaion. If
nonconcurrence is indicated, provide
specific reasons for any

nonconcurrence.

19

 
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