Federal Acquisition Regulation; Value Engineering Change Proposals/PAT

DEPARTMENT OF DEFENSE

GENERAL SERVICES ADMINISTRATION

NATIONAL AERONAUTICS AND SPACE ADMINISTRATION

48 CFR Parts 48 and 52

[FAC 97-14; FAR Case 97-031; Item XIV]

RIN 9000-AH84

Federal Acquisition Regulation; Value Engineering Change

Proposals/PAT

AGENCIES: Department of Defense (DoD), General Services Administration

(GSA), and National Aeronautics and Space Administration (NASA).

ACTION: Final rule.

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SUMMARY: The Civilian Agency Acquisition Council and the Defense

Acquisition Regulations Council (Councils) have agreed on a final rule

amending the Federal Acquisition Regulation (FAR) to change the sharing

periods and rates that contracting officers may establish for

individual value engineering change proposals.

EFFECTIVE DATE: November 23, 1999.

FOR FURTHER INFORMATION CONTACT: The FAR Secretariat, Room 4035, GS

Building, Washington, DC, 20405, (202) 501-4755, for information

pertaining to status or publication schedules. For clarification of

content, contact Ms. Linda Klein, Procurement Analyst, at (202) 501-

3775. Please cite FAC 97-14, FAR case 97-031.

SUPPLEMENTARY INFORMATION:

[[Page 51847]]

A. Background

This final rule amends the value engineering change proposal (VECP)

guidance in FAR Parts 48 and 52 to allow the contracting officer to

increase the sharing period from 36 to a range of 36 to 60 months;

increase the contractor's share of instant, concurrent and future

savings under the incentive/voluntary sharing arrangement from 50 to a

range of 50 to 75 percent; and increase the contractor's share of

collateral savings from 20 to a range of 20 to 100 percent on a case-

by-case basis for each VECP. The contracting officer's unilateral

decision on each of these aspects is final. This revision is intended

to incentivize contractors to submit more value engineering change

proposals, by allowing contracting officers to unilaterally increase

both the share percentage and the sharing period, so that contractors

with meritorious proposals may be adequately compensated for the effort

required to prepare and negotiate individual change proposals.

The Councils published a proposed rule in the Federal Register at

63 FR 43236, August 12, 1998. Nine respondents submitted comments on

the proposed rule. The Councils considered all comments in the

development of the final rule.

The Councils are addressing the changes concerning the Contract

Disputes Act under FAR Case 98-017, Review of Award Fee Determinations

(Burnside-Ott). The Councils published this case in the Federal

Register at 64 FR 24472, May 6, 1999 as a proposed rule with a request

for comments.

This rule was not subject to Office of Management and Budget review

under Section 6(b) of Executive Order 12866, Regulatory Planning and

Review, dated September 30, 1993. This rule is not a major rule under 5

U.S.C. 804.

B. Regulatory Flexibility Act

The Regulatory Flexibility Act, 5 U.S.C. 601 et seq. applies to

this final rule. Interested parties may obtain a copy of the FRFA from

the FAR Secretariat.

The Councils prepared a Final Regulatory Flexibility Analysis

(FRFA) and it is summarized as follows:

The objective of the rule is to change the sharing periods and

rates that contracting officers may establish for individual VECPs.

By allowing longer sharing periods and allowing increased contractor

sharing rates for collateral and concurrent savings, more

contractors may find it feasible to submit VECPs. The rule may

increase the number of VECP settlements negotiated between the

Government and private entities, as the additional flexibility in

sharing periods and contractor sharing rates it provides should

incentivize contractors to submit more VECPs. The rule will apply to

all entities, large and small, that propose VECPs under Government

contracts.

The FAR Secretariat has submitted a copy of the FRFA to the Chief

Counsel for Advocacy of the Small Business Administration.

C. Paperwork Reduction Act

The Paperwork Reduction Act does not apply because the changes to

the FAR do not impose information collection requirements that require

the approval of the Office of Management and Budget under 44 U.S.C.

3501, et seq.

List of Subjects in 48 CFR Parts 48 and 52

Government procurement.

Dated: September 14, 1999.

Edward C. Loeb,

Director, Federal Acquisition Policy Division.

Therefore, DoD, GSA, and NASA amend 48 CFR Parts 48 and 52 as set

forth below:

1. The authority citation for 48 CFR Parts 48 and 52 continues to

read as follows:

Authority: 40 U.S.C. 486(c); 10 U.S.C. chapter 137; and 42

U.S.C. 2473(c).

PART 48--VALUE ENGINEERING

2. In section 48.001, revise paragraph (c) of the definition

``Acquisition savings'' and revise the definition ``Sharing period'' to

read as follows:

48.001 Definitions.

Acquisition savings, * * *

(c) Future contract savings, which are the product of the future

unit cost reduction multiplied by the number of future contract units

in the sharing base. On an instant contract, future contract savings

include savings on increases in quantities after VECP acceptance that

are due to contract modifications, exercise of options, additional

orders, and funding of subsequent year requirements on a multiyear

contract.

* * * * *

Sharing period, as used in this part, means the period beginning

with acceptance of the first unit incorporating the VECP and ending at

a calendar date or event determined by the contracting officer for each

VECP.

* * * * *

3. In section 48.102, revise paragraphs (g) and (h) to read as

follows:

48.102 Policies.

* * * * *

(g) The contracting officer determines the sharing periods and

sharing rates on a case-by-case basis using the guidelines in 48.104-1

and 48.104-2, respectively. In establishing a sharing period and

sharing rate, the contracting officer must consider the following, as

appropriate, and must insert supporting rationale in the contract file:

(1) Extent of the change.

(2) Complexity of the change.

(3) Development risk (e.g., contractor's financial risk).

(4) Development cost.

(5) Performance and/or reliability impact.

(6) Production period remaining at the time of VECP acceptance.

(7) Number of units affected.

(h) Contracts for architect-engineer services must require a

mandatory value engineering program to reduce total ownership cost in

accordance with 48.101(b)(2). However, there must be no sharing of

value engineering savings in contracts for architect-engineer services.

* * * * *

48.104-1 through 104-3 [Redesignated as 48.104-2 through 48.104-4]

4. Redesignate sections 48.104-1 through 48.104-3 as 48.104-2

through 48.104-4, respectively;

5. Add new section 48.104-1 to read as follows:

48.104-1 Determining sharing period.

(a) Contracting officers must determine discrete sharing periods

for each VECP. If more than one VECP is incorporated into a contract,

the sharing period for each VECP need not be identical.

(b) The sharing period begins with acceptance of the first unit

incorporating the VECP. Except as provided in paragraph (c) of this

section, the end of the sharing period is a specific calendar date that

is the later of--

(1) 36 to 60 consecutive months (set at the discretion of the

contracting officer for each VECP) after the first unit affected by the

VECP is accepted; or

(2) The last scheduled delivery date of an item affected by the

VECP under the instant contract delivery schedule in effect at the time

the VECP is accepted.

(c) For engineering-development contracts and contracts containing

low-rate-initial-production or early production units, the end of the

sharing period is based not on a calendar date, but on acceptance of a

specified quantity of future contract units. This quantity is the

number of units affected by the VECP that are scheduled to be delivered

over a period of between 36 and 60 consecutive months (set at the

discretion of the contracting officer for each VECP) that spans the

highest

[[Page 51848]]

planned production, based on planning and programming or production

documentation at the time the VECP is accepted. The specified quantity

begins with the first future contract unit affected by the VECP and

continues over consecutive deliveries until the sharing period ends at

acceptance of the last of the specified quantity of units.

(d) For contracts (other than those in paragraph (c) of this

subsection) for items requiring a prolonged production schedule (e.g.,

ship construction, major system acquisition), the end of the sharing

period is determined according to paragraph (b) of this subsection.

Agencies may prescribe sharing of future contract savings on all future

contract units to be delivered under contracts awarded within the

sharing period for essentially the same item, even if the scheduled

delivery date is outside the sharing period.

6. In the newly designated section 48.104-2--

a. Remove from the first sentence of paragraph (a)(1) ``normally'';

b. Revise the table in paragraph (a)(1);

c. Remove from the second sentence in paragraph (a)(2)

``subparagraph (1) above'' and insert ``paragraph (a)(1) of this

section'', in its place;

d. Remove from the first sentence of paragraph (a)(3) ``(but see

48.102(g))''; and

e. Remove paragraph (c).

The revised text reads as follows:

48.104-2 Sharing acquisition savings.

(a) * * *

(1) * * *

Government/Contractor Shares of Net Acquisition Savings

[Figures in percent]

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Sharing arrangement

-------------------------------------------------------------------

Incentive (voluntary) Program requirement (mandatory)

Contract type -------------------------------------------------------------------

Concurrent and Concurrent and

Instant future contract Instant future contract

contract rate rate contract rate rate

----------------------------------------------------------------------------------------------------------------

Fixed-price (includes fixed-price-award-fee; \1\ 50/50 \1\ 50/50 75/25 75/25

excludes other fixed-price incentive

contracts).................................

Incentive (fixed-price or cost) (other than (\2\) \1\ 50/50 (\2\) 75/25

award fee).................................

Cost-reimbursement (includes cost-plus-award- \3\ 75/25 \3\ 75/25 85/15 85/15

fee; excludes other cost-type incentive

contracts).................................

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\1\ The contracting officer may increase the contractor's sharing rate to as high as 75 percent for each VECP.

(See 48.102(g) (1) through (7).)

\2\ Same sharing arrangement as the contract's profit or fee adjustment formula.

\3\ The contracting officer may increase the contractor's sharing rate to as high as 50 percent for each VECP.

(See 48.102(g) (1) through (7).)

* * * * *

7. Revise designated section 48.104-3 to read as follows:

Sec. 48.104-3 Sharing collateral savings.

(a) The Government shares collateral savings with the contractor,

unless the head of the contracting activity has determined that the

cost of calculating and tracking collateral savings will exceed the

benefits to be derived (see 48.201(e)).

(b) The contractor's share of collateral savings may range from 20

to 100 percent of the estimated savings to be realized during a typical

year of use but must not exceed the greater of--

(1) The contract's firm-fixed-price, target price, target cost, or

estimated cost, at the time the VECP is accepted; or

(2) $100,000.

(c) The contracting officer must determine the sharing rate for

each VECP.

(d) In determining collateral savings, the contracting officer must

consider any degradation of performance, service life, or capability.

8. In section 48.201, add paragraphs (g) and (h) to read as

follows:

Sec. 48.201 Clauses for supply or service contracts.

* * * * *

(g) Engineering-development solicitations and contracts. For

engineering-development solicitations and contracts, and solicitations

and contracts containing low-rate-initial-production or early

production units, the contracting officer must modify the clause at

52.248-1, Value Engineering, by--

(1) Revising paragraph (i)(3)(i) of the clause by substituting ``a

number equal to the quantity required to be delivered over a period of

between 36 and 60 consecutive months (set at the discretion of the

Contracting Officer for each VECP) that spans the highest planned

production, based on planning and programming or production

documentation at the time the VECP is accepted;'' for ``the number of

future contract units scheduled for delivery during the sharing

period;'' and

(2) Revising the first sentence under paragraph (3) of the

definition of ``acquisition savings'' by substituting ``a number equal

to the quantity to be delivered over a period of between 36 and 60

consecutive months (set at the discretion of the Contracting Officer

for each VECP) that spans the highest planned production, based on

planning and programming or production documentation at the time the

VECP is accepted.'' for ``the number of future contract units in the

sharing base.''

(h) Extended production period solicitations and contracts. In

solicitations and contracts for items requiring an extended period for

production (e.g., ship construction, major system acquisition), if

agency procedures prescribe sharing of future contract savings on all

units to be delivered under contracts awarded during the sharing period

(see 48.104-1(c)), the contracting officer must modify the clause at

52.248-1, Value Engineering, by revising paragraph (i)(3)(i) of the

clause and the first sentence under paragraph (3) of the definition of

``acquisition savings'' by substituting ``under contracts awarded

during the sharing period'' for ``during the sharing period.''

PART 52--SOLICITATION PROVISIONS AND CONTRACT CLAUSES

9. In section 52.248-1, revise the introductory text, the date of

the clause, in paragraph (b) paragraph (3) of the definition

``Acquisition savings'', and the definition ``Sharing period'', revise

the table in (f); amend paragraph (i)(5) introductory text by removing

``48.104-3'' and adding ``48.104-4'', and revise

[[Page 51849]]

the first sentence in paragraph (j). The revised text reads as follows:

52.248-1 Value Engineering.

As prescribed in 48.201, insert the following clause:

Value Engineering (Nov 1999)

* * * * *

(b) Definitions.

Acquisition savings, * * *

(3) Future contract savings, which are the product of the future

unit cost reduction multiplied by the number of future contract

units in the sharing base. On an instant contract, future contract

savings include savings on increases in quantities after VECP

acceptance that are due to contract modifications, exercise of

options, additional orders, and funding of subsequent year

requirements on a multiyear contract.

* * * * *

Sharing period, as used in this clause, means the period

beginning with acceptance of the first unit incorporating the VECP

and ending at a calendar date or event determined by the contracting

officer for each VECP.

* * * * *

(f) * * *

Contractor's Share of Net Acquisition Savings

[Figures in Percent]

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Sharing arrangement

-------------------------------------------------------------------

Incentive (voluntary) Program requirement (mandatory)

Contract type -------------------------------------------------------------------

Con-current and Con-current and

Instant future contract Instant future contract

contract rate rate contract rate rate

----------------------------------------------------------------------------------------------------------------

Fixed-price (includes fixed-price-award-fee; \1\ 50 \1\ 50 25 25

excludes other fixed-price incentive

contracts).................................

Incentive (fixed-price or cost) (other than (\2\) \1\ 50 (\2\) 25

award fee).................................

Cost-reimbursement (includes cost-plus-award- \3\ 25 \3\ 25 15 15

fee; excludes other cost-type incentive

contracts).................................

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\1\ The Contracting Officer may increase the Contractor's sharing rate to as high as 75 percent for each VECP.

\2\ Same sharing arrangement as the contract's profit or fee adjustment formula.

\3\ The Contracting Officer may increase the Contractor's sharing rate to as high as 50 percent for each VECP.

* * * * *

(j) Collateral savings. If a VECP is accepted, the instant

contract amount must be increased, as specified in paragraph (h)(5)

of this clause, by a rate from 20 to 100 percent, as determined by

the Contracting Officer, of any projected collateral savings

determined to be realized in a typical year of use after subtracting

any Government costs not previously offset. * * *

* * * * *

[FR Doc. 99-24423 Filed 9-23-99; 8:45 am]

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