This is the accessible text file for GAO report number GAO-03-590R entitled 'Use of Value Engineering in Defense Acquisitions' which was released on May 23, 2003. This text file was formatted by the U.S. General Accounting Office (GAO) to be accessible to users with visual impairments, as part of a longer term project to improve GAO products' accessibility. Every attempt has been made to maintain the structural and data integrity of the original printed product. Accessibility features, such as text descriptions of tables, consecutively numbered footnotes placed at the end of the file, and the text of agency comment letters, are provided but may not exactly duplicate the presentation or format of the printed version. The portable document format (PDF) file is an exact electronic replica of the printed version. We welcome your feedback. Please E-mail your comments regarding the contents or accessibility features of this document to Webmaster@gao.gov. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. Because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. May 22, 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.[Footnote 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. Summary: In summary, we found that the VE program has made a minimal contribution to cost reduction in DOD. Value engineering was 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 was attributed 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.[Footnote 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 1990 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. 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: Signed by Katherine V. Schinasi: Enclosures: Enclosure I: [See PDF for image] [End of figure] Enclosure II: Comments from the Department of Defense: ACQUISITION, TECHNOLOGY AND LOGISTICS: OFFICE OF THE UNDER SECRETARY OF DEFENSE: 3000 DEFENSE PENTAGON WASHINGTON, DC 20301-3000: MAY 01 2003: Ms. Katherine V. Schinasi: Director, Acquisition and Sourcing Management U.S. General Accounting Office: 441 G Street, N.W. Washington, D.C. 20548: Dear Ms. Schinasi: This is the Department of Defense (DoD) response to the GAO draft report, "VALUE ENGINEERING," dated April 2, 2003 (GAO Code 120166/GAO- 03-590R). The Department agrees with GAO's finding that value engineering is a useful tool for reducing costs and is taking steps to ensure that program managers can use this and other cost savings tools to a greater extent. DoD uses many cost savings approaches as a function of the specific circumstances and there never has been a single "preferred approach.": In its report, the GAO states "the value engineering (VE) program has made a minimal contribution to cost reduction in DoD." The Department considers this statement to be confusing. During this inquiry, the GAO did not consider current reports of value engineering savings due to a 1996 Inspector General (IG) finding of reporting errors in the value engineering process. Currently, DoD VE Program savings conform with the IG resolution on how to resolve those errors and, in FY 2002, $2.5 billion of VE savings and cost avoidances were reported. My point of contact for this report is Dr. Jay Mandelbaum and he can be reached at (703) 695-0472 or Jay.Mandelbaum@ osd.mil. Sincerely, Glenn F. Lamartin: Director Defense Systems: Signed by Glenn F. Lamartin: [End of section] (120166): FOOTNOTES [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. [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).