FAR 48.102—Policies.
Plain-English Summary
FAR 48.102 sets the government-wide policy framework for value engineering (VE) and value engineering change proposals (VECPs). It explains the agencies’ duty to maintain cost-effective VE procedures, give contractors a meaningful financial incentive, and include VE clauses in appropriate supply, service, architect-engineer, and construction contracts unless an exemption applies. It also addresses how agencies must process VECPs, how savings are shared, when subcontract VE clauses should be considered, and special rules for major system programs in civilian agencies and the Department of Defense. The section further clarifies that VE incentive payments are not profit or fee, that profit or fee generally should not be reduced because a VECP is accepted, and that profit/fee is excluded from savings calculations. In addition, it requires contracting officers to set sharing periods and sharing rates using prescribed factors and to document the rationale in the contract file. Finally, it imposes a mandatory VE program for architect-engineer services, but prohibits sharing of VE savings in those contracts, and requires agency procedures for funding and paying contractor shares of collateral and future contract savings. In practice, this section is the policy backbone for deciding when VE applies, how it is administered, and how contractors are rewarded for generating government savings.
Key Rules
Agencies must run VE programs
Agencies are required to establish and maintain cost-effective value engineering procedures and processes. The policy is intended to create a real incentive for contractors to propose changes that reduce cost without harming required performance.
VE clauses go in appropriate contracts
Contracting activities must include value engineering provisions in appropriate supply, service, architect-engineer, and construction contracts as required by FAR 48.201 and 48.202, unless the agency head grants a case-by-case or class exemption.
VECPs must be handled fairly
Agencies must establish processing guidelines, evaluate VECPs objectively and expeditiously, and provide contractors a fair share of the savings from accepted proposals. This means the government cannot delay or handle proposals in a way that undermines the incentive structure.
Subcontract VE clauses should be considered
Agencies must consider requiring value engineering clauses in appropriate subcontracts. This is a policy direction, not an automatic universal requirement, but it signals that VE should flow down where it makes sense.
Special rules for major systems
Civilian agencies generally must use the VE program requirement clause in initial production contracts for major system programs and for major system R&D contracts, unless the contracting officer documents that it is not appropriate. DoD must include the clause in initial production solicitations and contracts for major system acquisition programs, subject to specific exceptions for prior effective VE programs and competed awards.
VE payments are not profit or fee
Value engineering incentive payments do not count as profit or fee under the statutory limitations cited in the rule. This protects the incentive payment from being treated as part of the contractor’s allowable profit/fee ceiling.
Profit or fee is usually not reduced
As a general rule, the contracting officer should not reduce the contract’s profit or fee because a VECP is accepted. Profit or fee must also be excluded when calculating instant or future contract savings.
Sharing terms are set case by case
The contracting officer determines the sharing period and sharing rate using the guidance in FAR 48.104-1 and 48.104-2. The officer must consider factors such as the extent and complexity of the change, development risk and cost, performance or reliability impact, remaining production period, and number of units affected, and must document the rationale in the file.
A-E contracts have mandatory VE, no sharing
Architect-engineer service contracts must include a mandatory VE program to reduce total ownership cost, but there is no sharing of VE savings in those contracts. That makes A-E VE a required management tool rather than a contractor-sharing incentive program.
Agencies must fund and pay savings shares
Agencies must establish procedures to fund and pay the contractor’s share of collateral savings and future contract savings. This ensures that accepted VECPs are actually compensated in a timely and administratively workable way.
Responsibilities
Agency
Establish and maintain cost-effective VE procedures; provide substantial financial incentives; issue guidelines for VECP processing; ensure objective and expeditious review; provide fair sharing of savings; consider VE clauses in subcontracts; establish funding and payment procedures for contractor shares; and implement special program requirements for major systems and architect-engineer services.
Agency Head
Grant exemptions from VE clause use on a case-by-case basis or for specific classes of contracts when appropriate.
Contracting Officer
Include VE provisions in appropriate contracts unless exempt; determine whether a VE program requirement clause is appropriate for major system contracts; document any decision not to use the clause; set sharing periods and sharing rates using the prescribed factors; and place supporting rationale in the contract file.
Contractor
Develop and submit VECPs; participate in the VE process; and, when proposals are accepted, receive and account for the agreed share of savings under the contract terms.
Department of Defense
Apply the VE program requirement clause in initial production solicitations and contracts for major system acquisition programs, subject to the stated exceptions for effective prior VE programs and competed awards.
Architect-Engineer Contractor
Operate under a mandatory VE program aimed at reducing total ownership cost, while recognizing that no sharing of VE savings is permitted in A-E service contracts.
Practical Implications
Contracting officers need to decide early whether a contract is an appropriate candidate for VE clauses, because the clause choice affects pricing, administration, and contractor incentives.
The file documentation matters: if the contracting officer decides not to use the VE program requirement clause in a major system contract, the rationale must be clearly recorded.
Agencies should not treat VECPs as a nuisance process; the rule expects objective and prompt review, and delays can undermine the statutory incentive structure.
Profit/fee and VE savings must be kept conceptually separate. A common mistake is trying to offset VE savings by reducing fee, which this section generally discourages.
For architect-engineer contracts, the mandatory VE program does not mean savings sharing; practitioners should not assume the standard VECP incentive model applies there.
When setting sharing rates and periods, the contracting officer should tie the decision to the actual risk, complexity, and production profile of the change rather than using a one-size-fits-all approach.
Agencies need workable payment procedures before accepting VECPs, or contractor confidence in the program can suffer if savings shares are delayed or difficult to pay.
Official Regulatory Text
(a) As required by 41 U.S.C. 1711 , agencies shall establish and maintain cost-effective value engineering procedures and processes. Agencies shall provide contractors a substantial financial incentive to develop and submit VECP’s. Contracting activities will include value engineering provisions in appropriate supply, service, architect-engineer and construction contracts as prescribed by 48.201 and 48.202 except where exemptions are granted on a case-by-case basis, or for specific classes of contracts, by the agency head. (b) Agencies shall- (1) Establish guidelines for processing VECP’s, (2) Process VECP’s objectively and expeditiously, and (3) Provide contractors a fair share of the savings on accepted VECP’s. (c) Agencies shall consider requiring incorporation of value engineering clauses in appropriate subcontracts. (d) (1) Agencies other than the Department of Defense shall use the value engineering program requirement clause ( 52.248-1 , Alternates I or II) in initial production contracts for major system programs (see definition of major system in 34.001 ) and for contracts for major systems research and development except where the contracting officer determines and documents the file to reflect that such use is not appropriate. (2) In Department of Defense contracts, the VE program requirement clause ( 52.248-1 , Alternates I or II), shall be placed in initial production solicitations and contracts (first and second production buys) for major system acquisition programs as defined in DoD Directive 5000.1, except as specified in subdivisions (d)(2)(i) and (ii) of this section. A program requirement clause may be included in initial production contracts for less than major systems acquisition programs if there is a potential for savings. The contracting officer is not required to include a program requirement clause in initial production contracts- (i) Where, in the judgment of the contracting officer, the prime contractor has demonstrated an effective VE program during either earlier program phases, or during other recent comparable production contracts. (ii) Which are awarded on the basis of competition. (e) Value engineering incentive payments do not constitute profit or fee within the limitations imposed by 10 U.S.C. 3322(b) and 41 U.S.C.3905 (see 15.404-4 (c)(4)(i)). (f) Generally, profit or fee on the instant contract should not be adjusted downward as a result of acceptance of a VECP. Profit or fee shall be excluded when calculating instant or future contract savings. (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. (i) Agencies shall establish procedures for funding and payment of the contractor’s share of collateral savings and future contract savings.