IMPROVING PROFITS THROUGH PRIME/SUBCONTRACTOR VALUE ENGINEERING

The value engineering contractual provisions of the Defense Acquisition Regulation (Part 17) and their successor Federal Acquisition Regulation (Part 48), prescribe the use of both incentive clauses (VEI) and program requirements clauses (PRC). VEI clauses are voluntary on the part of the contractor, while the PRC constitutes a line item of work which is funded in the contract and is mandatory on the part of the contractor. The PRC-type of clause could be extended to the prime-subcontractor interface, whether or not a prime has a similar clause with the government, and might be a useful incentive to reduce costs. The rewards of a PRC are more modest than a VEI, and the contracting mechanisms appear to be more straightforward. The aerospace and electronics industry VE community has little evidence that the PRC is being used in the prime-supplier interface; therefore, this manual is directed at the VEI clause approach where the rewards for slightly increased risks are more generous.

This manual focuses on the initial, essential step: namely, the establishment of contractual incentives and mutual working relationships between prime and subcontractor that will stimulate submission and acceptance of value engineering change proposals. A principal measure of the success of a prime/subcontractor value engineering program is the quantity and quality of value engineering change proposals (VECPs) that are successfully and profitably negotiated between them. The preparation and acceptance of VECPs is a most vital end product of this relationship and is also treated briefly herein.