Value Engineering, 78399-78400 [2013-30816]

Agencies

• Management and Budget Office
• Office of Federal Procurement Policy

[Federal Register Volume 78, Number 248 (Thursday, December 26, 2013)]
[Notices]
[Pages 78399-78400]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-30816]



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OFFICE OF MANAGEMENT AND BUDGET

Office of Federal Procurement Policy


Value Engineering

AGENCY: Office of Federal Procurement Policy, Office of Management and 
Budget.

ACTION: Notice of Final Revision to Office of Management and Budget 
Circular No. A-131, ``Value Engineering''.

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SUMMARY: The Office of Federal Procurement Policy (OFPP) in the Office 
of Management and Budget (OMB) is publishing final revisions to OMB 
Circular A-131, Value Engineering, to update and reinforce policies 
associated with the consideration and use of value engineering (VE). VE 
is a well-established commercial practice for cutting waste and 
inefficiency that can help Federal agencies reduce program and 
acquisition costs, improve the quality and timeliness of performance, 
and take greater advantage of innovation to meet 21st century 
expectations and demands. The revisions are designed to ensure that the 
Federal Government has the capabilities and tools to consider the use 
of VE for new and ongoing projects, whenever appropriate.

FOR FURTHER INFORMATION CONTACT: Curtina Smith, OFPP, 
csmith@omb.eop.gov.

SUPPLEMENTARY INFORMATION:

A. Overview

    VE refers to an organized effort to analyze functions of systems, 
equipment, facilities, services, and supplies for the purpose of 
achieving an agency's essential functions at the lowest life-cycle 
cost, consistent with required levels of performance, reliability, 
quality, and safety. VE challenges agencies to continually think about 
their mission and functions--in the most basic terms--in order to 
determine if their requirements are properly defined and if they have 
considered the broadest possible range of alternatives to optimize 
value. It promotes ``share-in-savings'' by encouraging contract holders 
to identify ways to reduce the cost of performance on existing 
contracts and share with the government in the savings produced from 
the results. Most importantly, VE enables agencies to achieve greater 
fiscal responsibility and operate within tighter budgetary constraints. 
By identifying and eliminating unnecessary program and acquisition 
costs that do not contribute to the value, function, and performance of 
the product or service, VE can permit programs to continue delivering 
the same, or an even higher, level of service for less money--a 
critical capability for managing in a fiscally austere environment.
    Industry first developed VE during World War II as a means of 
continuing production, despite shortages of critical materials and 
labor, by analyzing functions to generate alternative materials or 
systems to accomplish the required tasks at a lower cost. The Federal 
Government subsequently adopted this tool as a mechanism to incentivize 
contractors to continually think of ways to drive greater efficiency in 
their production methodologies by allowing them to share with the 
Government in the savings generated by their value engineering change 
proposals.
    Over the past several decades, a number of agencies have 
successfully integrated the use of VE analysis into their management 
activities. These agencies have reported life-cycle savings through the 
use of VE in a broad range of acquisition programs, including those 
involving defense systems, civil works, transportation, construction, 
engineering, environmental, and manufacturing projects. According to 
recent reports of VE activities submitted to OMB, VE has generated 
billions of dollars in savings and cost avoidance. For example, the 
Department of Defense (DOD) reported cumulative savings of over $10 
billion in FYs 2011 and 2012. The Department of Transportation's 
Federal Highway Administration reports that annual savings for 
Federally-funded state construction projects have ranged from just over 
$1 billion to nearly $2 billion between FYs 2010 and 2012. The 
Department of State reports that it has used VE to identify hundreds of 
millions of dollars in total life cycle savings since FY 2008--saving 
well over $40 for every one dollar invested in VE studies.
    In 1988, OMB issued Circular A-131 to help agencies in their 
efforts to establish and improve VE programs so that they realize the 
benefits of using VE techniques to reduce nonessential contract and 
program costs. See 53 FR 3140. The Circular was revised in 1993 to 
require the use of VE as a management tool. See 58 FR 31056. OMB's 
Office of Federal Procurement Policy issued a series of memoranda in 
the 1990s to remind agencies of their responsibilities under the 
program.
    Despite the demonstrated ability of VE to facilitate more fiscally 
responsible management and smarter buying, and its continued popularity 
in the private sector, Federal agency use of VE has waned in recent 
years. Insufficient management attention and questions about its 
applicability to performance based contracting and other buying 
practices have resulted in VE not being considered in situations where 
it could have helped agencies save resources. The revisions being made 
to the Circular are designed to clarify the role of VE in helping 
agencies meet twenty-first century demands and deliver better value to 
the taxpayer.

B. Circular Revisions

    On June 8, 2012, OMB's OFPP issued a notice in the Federal Register 
of proposed changes to Circular A-131 (See 77 FR 34073, available at 
http://www.whitehouse.gov/sites/default/files/omb/procurement/a131-circular-changes-draft.pdf), which proposed revisions that would:
     Reflect present-day buying strategies and practices by 
explaining that VE can be used with other management improvement tools, 
such as lean six sigma, and clarifying that consideration of VE should 
not exclude services, such as those acquired with performance-based 
specifications, and construction, including projects where design-build 
methods are used;
     Adjust the threshold for considering the application of 
VE, primarily to take into account inflation;
     Reduce the number of projects on which agencies are 
required to report to OMB, update the reporting format to include a 
description of the methodology used to calculate savings, and eliminate 
requirements for a detailed cost summary of program results from 
inception to date; and
     Remove the provision from the current Circular requiring 
agency IGs to conduct an automatic audit of VE programs every two 
years, instead allowing agency management to work with their IGs to 
consider when review of VE activities may be warranted and relying on 
review of agency VE programs to be considered over time through 
internal control assessments of acquisition functions conducted in 
connection with OMB Circular A-123, Management Accountability and 
Control.
    As a result of public comments (discussed below) and discussion 
with Federal agencies, OFPP is finalizing the proposed Circular with 
certain changes and additional refinements. Specifically, these changes 
and refinements to the Circular, which largely address matters relating 
to scope, agency responsibilities, and application, include:
     Establishing a definition of ``value engineering study'' 
for purposes of the Circular to recognize that VE may be

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tailored and scaled based on factors such as the cost or complexity of 
the project, the stage in the project lifecycle, and project schedule.
     Clarifying that VE is a process generally performed in a 
workshop environment by a multidisciplinary team of contractor and/or 
in-house agency personnel (such as an integrated project team (IPT)), 
which is facilitated by agency or contractor staff that is experienced, 
trained and/or certified in leading VE teams through a series of 
specific phases.
     Directing agencies subject to the Chief Financial Officers 
Act (CFO Act) to identify a senior accountable official responsible for 
ensuring the appropriate consideration and use of VE, including 
maintaining agency guidelines and procedures for identifying agency 
programs and projects with the most potential to yield savings from VE 
studies and reporting results to OMB.
     Requiring CFO Act agencies to maintain guidelines and 
procedures for identifying programs and projects with the most 
potential to yield savings from VE studies.
     For new projects and programs, increasing the threshold 
for considering VE from $1 million to $5 million, to recognize that the 
application of VE has the greatest value early in the investment 
lifecycle on high dollar programs and projects.
     For existing projects and programs, granting to agencies 
the discretion to determine the extent to which VE shall be applied, 
but requiring agencies to establish criteria to help agency managers 
determine when VE may be suitable.
     Clarifying that documentation must be maintained to 
explain the basis of waivers and, where VE studies are conducted, the 
reason for not implementing recommendations made in the studies.
     Emphasizing that VE can also be used with acquisition and 
commodity management techniques, such as strategic sourcing and modular 
contracting, to improve performance and quality, lower cost, manage 
risks more effectively, and shorten project delivery.
    The complete text for the final revised OMB Circular A-131, ``Value 
Engineering'' is available on the OMB Web site at http://www.whitehouse.gov/omb/circulars_a131/.

C. Public Comments

    In response to its June 8, 2012 notice of proposed changes to 
Circular A-131, OFPP received public comments from thirteen 
respondents, including a number of comments expressing support for the 
renewed attention on this management tool. Copies of the public 
comments received are available for review at http://www.regulations.gov/#!docketDetail;D=OFPP-2012-0002. A short summary of 
the comments and OFPP's responses and changes adopted in the final 
revised Circular are described below:
    1. Applicability. Several respondents commented on the 
applicability of the Circular's policy. Specifically, concern was 
raised that the requirement for agencies to use VE ``where 
appropriate'' is too vague and should be clarified.
    OFPP seeks to focus the application of VE where it is likely to 
have the greatest value while allowing agencies to tailor the use of 
the tool to meet their mission needs. To clarify this goal, the final 
Circular requires VE for all new agency projects and programs if the 
project cost estimate is at least $5 million, except where the agency 
expressly waives the requirement. This threshold (which is 
substantially higher than the $1 million threshold in the current 
version of the Circular) recognizes that VE generally has the greatest 
impact when it is applied early in the investment lifecycle to higher 
dollar programs and projects. That said, agencies are encouraged to 
establish a lower threshold for their agency, as appropriate, after 
taking into account: (i) The historical costs of their major 
acquisitions, (ii) projects that have a significant impact on lifecycle 
costs or agency operations, and (iii) projects with a significant 
potential for repeat savings, such as manufacturing projects where 
savings can be applied to future units produced.
    The final Circular gives agencies discretion to determine the 
extent to which VE shall be applied to existing programs and projects, 
but requires agencies to establish criteria to help agency managers 
determine when VE may be suitable. Criteria might include a combination 
of factors such as the priority of the program or project to the agency 
and the presence of cost overruns, performance shortfalls and/or 
schedule delays.
    Furthermore, the final Circular requires CFO Act agencies to 
designate a senior accountable official to strengthen accountability 
for the meaningful consideration of VE. This official's 
responsibilities include (i) maintaining agency guidelines and 
procedures, (ii) making training available for program, project, 
acquisition, information technology, and other agency personnel, (iii) 
developing plans for using VE and ensuring that funds necessary for 
conducting agency VE studies are identified and included in annual 
budget requests to OMB, and (iv) making sure VE activities are 
appropriately documented and results are reported to OMB.
    2. Measurement of net life-cycle cost savings. One respondent 
stated that coverage in the proposed revisions discussing how to 
measure the net life-cycle cost savings from value engineering, 
conflicts with the Federal Acquisition Regulation (FAR) clause 52.248-
1(b) ``Government costs,'' which states that the term does not include 
the normal administrative cost of processing the Value Engineering 
Change Proposal (VECP). The respondent stated that the Circular should 
be revised to include administrative costs in the overall life-cycle 
cost within the context of executing the value engineering function at 
the agency level.
    OFPP has revised the wording of the final Circular to clarify that 
the net life-cycle cost savings from value engineering is determined by 
subtracting the Government's cost (including administrative costs of 
processing VECPs that were excluded in calculating VECP saving shares) 
of performing the value engineering function over the life of the 
program from life-cycle savings generated by value engineering 
function.
    3. Coverage in the FAR. One respondent stated that the current 
coverage of VE in the FAR is complex and should be updated to (1) 
reflect a more streamlined and user-friendly approach to the value 
engineering change proposal process, (2) encourage broader application 
of VE in situations where use of VE could save money and allow both 
parties to share in the savings.
    OFPP agrees that successful use of VE requires that application to 
Federal contracts be clear and practical to use. OFPP intends to work 
with FAR Council members to consider potential regulatory revisions 
that might help to simplify its application in Federal acquisition. It 
also intends to work with the Federal Acquisition Institute and the 
Defense Acquisition University on appropriate training materials for 
the acquisition workforce.

Joseph G. Jordan,
Administrator for Federal Procurement Policy.
[FR Doc. 2013-30816 Filed 12-24-13; 8:45 am]
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