Why
should a contractor bother?
Contractors
who submit an accepted VECP-- share in any gross
savings! Some contracts base the share on
the financial risk of the agency or organization involved.
Most have a set percentage of the gross savings (usually
55-percent) plus reasonable development costs. Some contracts
allow the contractor to obtain a percentage of "collateral
costs." The return for these can easily
exceed the contractor's entire expected profit for the contract
service they are providing. Typically, the
contractor receives all or a portion of their cost to develop
the proposal. If the government agency involved in the instant
contract provides VECP development services, the contractor's
share is reduced to 25-percent of the gross savings (nearly
55-percent of the net savings).
Why
do they include this clause in their contracts?
After
contract award, there is little reason for the contractor
to reduce acquisition or life-cycle cost. Since profits
are derived from the contract cost, reducing that cost should
reduce the expected profit. The VE Incentive Clause dramatically
changes this situation. It allows the contractor to increase
their profit by sharing the net savings in four areas: their
instant contract, concurrent contracts, future contracts
(usually limited to a duration of three years in the future),
and collateral (maintenance, operations, and support) savings.
Exact shares are defined in the regulations implementing
the clause. In the Federal government, this is the Federal
Acquisition Regulations (FAR's). In the Federal government,
the VECP generated nearly one billion in cost savings in
1996 alone. In one office of an agency, the office generated
over $460 million in net VECP savings (1991-1993 period)
and shared $158 million with their prime contractors and
subcontractors.
Does your contract qualify?
The
VE Incentive Clause applies to all Federal contracts except
those that are Research and Development (R&D) and for
professional services only (such as engineering design and
planning services). The highest probability for obtaining
successful VECP's is the construction contract, renovation
contracts, and similar supply type contracts. The VECP must
be submitted by the contractor that is the prime contractor
and must be for a contract that is in place (instant contract).
How does SAMI fit in this?
Identifying,
generating, and assisting in transmitting a VECP
Systematic
Analytic Methods and Innovations understands the VE Incentive
Clause, contracts, and business operations. We are highly
skilled in identifying opportunities for submitting a VECP
that will increase your profit and submitting the result.
We will enter into a partnership with you to achieve a successful
VECP. We meet with you and your employees and operate "value
sessions" as necessary to generate as many VECP's as
we can.
In
most cases, the VE Incentive Clause puts the VECP development
risk on the contractor. We minimize this risk and share
in it. As a result, we share in the added profit too. We
will perform a review of VECP potential at no cost to you.
If we think there is potential for increased profits through
the VECP process, you pay our travel to the site and a minimal
charge for oversite of a development review. This is done
so you can claim the review costs, of our contract with
you, under the VE Incentive Clause development stipulations.
Once the VECP is accepted, the net savings for the contract
for which the VECP is being submitted, is negotiated. This
is your increased profit (it will include a reimbursement
for our initial development review). You keep 85-percent
of the net savings. This is a profit you didn't expect to
obtain at all. SAMI receives 15-percent of this net negotiated
increased profit. (This percentage fee is not reimbursable
in the "instant contract" under the VE Incentive
Clause, as our contract is with you.) In this way, we don't
get a profit unless you win an increased profit through
the VECP.
Already
have an idea on your contact but don't know the best way to
proceed?
If
you already have your concept, we can help you put it together
into a proposal that has a high probability of acceptance.
In this situation, a daily services fee may be used in place
of the sharing of the return. (Since we didn't share in
the concept generation and its risk.) These consultation
services are usually fully reimbursable when the VECP is
accepted.
Cautions.
To be accepted as a VECP, your concepts cannot propose a
change in contract-type only, deliverable end-item quantity
only, or a change to R&D test quantities due solely
to results of previous testing.
Prefer
to go it alone?
Use of VECP's can significantly improve a contractor's financial position. The Federal government, many local governments, and businesses use the VE Incentive Clause to encourage contractors to
submit cost reduction ideas. Contractors who voluntarily use their own resources to develop and submit VECP's gain the most. They usually obtain 55% of the savings. However, to maximize impact the contractor needs to manage the VECP operations carefully. If
the government initially funds the idea development cost, the contractor only shares 25%. To obtain success, the contractor needs make proposals easy to understand and present them in a form that speeds technical and financial evaluation. Training in both
the contractual aspects of Value Engineering and the Value Method is recommended by the government. SAMI can train your staff for this purpose. Also, you can use our new resource, vecp.com to obtain your VECP.
Please visit VECP.com for additional details.
