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Value Engineering Change Proposal


Phoenix

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I am working on a major acquisition program. My query concerns a Performance Based CPIF Contract with a 50/50 share. Period of performance of the item in question is 4 years. About a year into the contract, the contractor submitted a Value Engineering Change Proposal. This falls in the category of ?Instant Contract savings?. No collateral savings, or future savings.

FAR 52.248-1 is in the contract. This is a voluntary VECP. Sad to say that little or no action has taken place and years have passed. No one in this shop has done a VECP, so off I go doing research on ?how?. My agency does not have specific guidance on the details.

The proposed change would require the contractor ?not? to perform a particular element of the building the product. The function of the end product does not change. Only an adjustment to the performance specification is required. The technical folks are in agreement with the change.

I understand the government obtains savings by not incurring the costs that were expected at award. I?m unclear as how the contractor shares in these savings because cost is paid as incurred or by milestones. Where does the contactor?s ?share? show up?

I have read that the cost-based portion of the incentive pool should be adjusted so that contractor is not rewarded twice for the same activity. HOW IS THIS DONE?

IAW FAR 52.248-1(h)

Contract adjustment. The modification accepting the VECP (or a subsequent modification issued as soon as possible after any negotiations are completed) shall?

(5) Provide the Contractor?s share of any net acquisition savings under the instant contract in accordance with the following:

(ii) Cost-reimbursement contracts?add to contract fee.

If I am to add to the contractor?s fee, what is the basis of calculation?

There is nothing in the contract prohibiting making an adjustment to targets. In my mind no adjustment to target cost would by default reward the contractor in fee for being in an under run. Ok assuming that there are no over/under runs withstanding. Is that faulty logic?

If it appears that I?m dazed and confused. . . it?s because I am.

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Guest Vern Edwards

Yes, and you are dazing and confusing me. I'm not sure what you are asking. Please restate your question in clear and specific terms. No compound questions, please.

What exactly do you want to know?

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Guest Vern Edwards

Excellent questions! The answers to questions 1 and 2 were easy, but I was stymied by questions 3 and 4. The value engineering clause at FAR 52.248-1 is impenetrably obscure. So I called a known expert on the clause and put your questions 3 and 4 to him. As soon as I told him what clause I was asking about he started laughing and said that the VE clause is the worst in FAR. He said that there is no way to figure out what to do with an incentive contract in response to a VECP on the basis of the language in the clause and in FAR Part 48. People can tell you what they do, but they can't show you how they derived their approach from the language of the clause. He said that all you can do is what seems to make sense. So the answers to questions 3 and 4, below, are what we worked out on the phone. Here are my answers, for which I alone am responsible:

1. How do I capture the government savings when the costs will not be expended because of the change?

I'm not sure what you mean by "capture," but if you mean how do you determine the amount of the government's savings, the answer is that the contractor must estimate the savings and then the parties negotiate to an agreement about it. See FAR 52.248-1( c).

2. What is the contractors "share" in savings?

In an incentive contract, the share rate is the same as provided by the cost incentive share ratio. In your case, the contractor's share would be 50 percent of the instant savings. See the table in FAR 52.248-1(f)(3).

3. Do I adjust fee? 4. Do I adjust target cost?

Yes, you adjust the target fee and the target cost. The best way to explain is by example. Suppose a CPIF contract with a target cost of $10,000,000 and a target fee of $1,000,000 and a 50/50 share ratio. Suppose further that the contractor submits a VECP with an estimated instant savings of $100,000 and that the parties agree on that amount and the government accepts the VECP. The CO should modify the contract to reduce the target cost by $100,000 and to increase the target fee by 50 percent of that amount, $50,000, which is the contractor's share. See FAR 48.104-2(a)(2)(ii), which says: "When the instant contract is an incentive contract, the contractor shares in instant contract savings through the contract?s incentive structure."

That's the best that I can do. It is entirely possible that I have got it wrong. I have looked high and low for clear cut guidance and have found none. What I have written reflects my best thinking about your questions. Fascinating clause, 52.248-1. It is unintelligible on this matter.

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Thank you!! I came to those same conclusions for target cost and target feel.

The comments of your expert on the VE clause are comforting. I've about worn the words off the page reading and trying to apply them to the situation. Bottom line. . . do what make sense and document, document, document.

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Guest Vern Edwards
Thank you!! I came to those same conclusions for target cost and target feel.

The comments of your expert on the VE clause are comforting. I've about worn the words off the page reading and trying to apply them to the situation. Bottom line. . . do what make sense and document, document, document.

There it is.

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Yes, you adjust the target fee and the target cost. The best way to explain is by example. Suppose a CPIF contract with a target cost of $10,000,000 and a target fee of $1,000,000 and a 50/50 share ratio. Suppose further that the contractor submits a VECP with an estimated instant savings of $100,000 and that the parties agree on that amount and the government accepts the VECP. The CO should modify the contract to reduce the target cost by $100,000 and to increase the target fee by 50 percent of that amount, $50,000, which is the contractor's share. See FAR 48.104-2(a)(2)(ii), which says: "When the instant contract is an incentive contract, the contractor shares in instant contract savings through the contract?s incentive structure."

Isn't adjusting the target cost and target fee as described precisely what the quoted language leads you away from? If you make no adjustment to the target cost and target fee, the result will be exactly the same as if you make one, due to "the contract?s incentive structure."

In the example provided, if you make the suggested adjustment, and the contract comes in at the new target cost ($9,900,000), the contractor will earn the adjusted target fee ($150,000). If no adjustments are made to the target cost and target fee, and the contract comes in at the same $9,900,000, the contractor will earn the target fee ($100,000) plus 50% of his underrun (50% of $100,000 underrun - $50,000), for a total fee earned of $150,000. So the same result ensues in either situation. Why bother going through the target cost and fee adjustments?

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Guest Vern Edwards
Isn't adjusting the target cost and target fee as described precisely what the quoted language leads you away from? If you make no adjustment to the target cost and target fee, the result will be exactly the same as if you make one, due to "the contract?s incentive structure."

In the example provided, if you make the suggested adjustment, and the contract comes in at the new target cost ($9,900,000), the contractor will earn the adjusted target fee ($150,000). If no adjustments are made to the target cost and target fee, and the contract comes in at the same $9,900,000, the contractor will earn the target fee ($100,000) plus 50% of his underrun (50% of $100,000 underrun - $50,000), for a total fee earned of $150,000. So the same result ensues in either situation. Why bother going through the target cost and fee adjustments?

What are you going to do--modify the contract to accept the VECP without showing the settlement agreement on savings and share? By modifying the targets you set a new baseline that reflects the impact of the VECP.

The language of the clause led me to where I ended up, so there it is. If you leads you elsewhere, so be it.

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I agree with Vern's interpretation. That's how I read the clause.

We need to manage the budget/target and the contractor "earns" its share of the cost savings in the fee adjustment per the clause.

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You mentioned the following:

The proposed change would require the contractor ?not? to perform a particular element of the building the product. The function of the end product does not change. Only an adjustment to the performance specification is required. The technical folks are in agreement with the change.

FAR 52.248-1 definitions include the following:

"

?Value engineering change proposal (VECP)? means a proposal that?

(1) Requires a change to this, the instant contract, to implement; and

(2) Results in reducing the overall projected cost to the agency without impairing essential functions or characteristics; provided, that it does not involve a change?

(i) In deliverable end item quantities only;

(ii) In research and development (R&D) end items or R&D test quantities that is due solely to results of previous testing under this contract; or

(iii) To the contract type only.

"

I work in the area of helping clients with VECP's and while I encourage the use of the VE Incentive Clause as much as possible, I am wondering if your above statement that it only removes a contract clause (not replacing it with an alternative), would violate the definition for a valid VECP. I would need more understanding of the contract to comment further, but the quoted statement would concern me if I were advising a client.

Sam

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