FAR 48.104-3—Sharing collateral savings.
Plain-English Summary
FAR 48.104-3 explains how the Government and contractor share collateral savings when a value engineering change proposal (VECP) produces savings beyond the immediate contract line item or direct cost reduction. It covers when collateral savings are shared, the exception for situations where tracking those savings would cost more than the benefit, the allowable contractor share range, the cap on the contractor’s share, the contracting officer’s duty to set the sharing rate for each VECP, and the need to account for any loss in performance, service life, or capability when calculating savings. In practice, this section matters because collateral savings can be significant over the life of a system or service, but they are harder to measure than direct savings, so the rule balances incentive with administrative burden. It gives contractors a potential reward for proposing changes that reduce downstream costs, while protecting the Government from overpaying for savings that are uncertain, overstated, or offset by reduced performance. For contracting officers, it requires a case-by-case judgment about whether to track collateral savings and what percentage of those savings the contractor should receive. For contractors, it creates an incentive to document the broader benefits of a VECP and to understand that the share is negotiable within regulatory limits, not automatic.
Key Rules
Government shares collateral savings
The Government generally must share collateral savings with the contractor when a VECP is accepted. The only exception is when the head of the contracting activity determines that the cost of calculating and tracking those savings would exceed the expected benefit.
Contractor share has a broad range
The contractor’s share may be anywhere from 20 percent to 100 percent of the estimated collateral savings realized during a typical year of use. This gives the contracting officer flexibility to tailor the incentive to the value and risk of the proposal.
Share is capped by contract value or $100,000
The contractor’s share of collateral savings cannot exceed the greater of the contract’s firm-fixed-price, target price, target cost, or estimated cost at the time the VECP is accepted, or $100,000. This prevents the contractor’s share from becoming excessive relative to the contract or the regulatory cap.
CO sets the sharing rate
The contracting officer must determine the sharing rate for each VECP. The rate is not automatic and must be established case by case based on the proposal and the expected savings.
Performance degradation must be considered
When calculating collateral savings, the contracting officer must account for any reduction in performance, service life, or capability. Savings are not limited to gross cost reductions; they must reflect any offsetting loss in value to the Government.
Responsibilities
Head of the Contracting Activity
Determine whether the cost of calculating and tracking collateral savings would exceed the benefits. If so, the Government is not required to share collateral savings for that VECP.
Contracting Officer
Decide the sharing rate for each VECP, ensure the rate falls within the 20 to 100 percent range, apply the regulatory cap, and evaluate collateral savings by considering any degradation in performance, service life, or capability.
Contractor
Submit VECPs that identify collateral savings and support the estimated savings with credible data. The contractor should also understand that the share is subject to the contracting officer’s determination and regulatory limits.
Agency/Government
Share collateral savings with the contractor when required, unless the HCA exception applies, and ensure savings calculations are reasonable, documented, and adjusted for any loss in value from reduced performance or capability.
Practical Implications
Collateral savings can be a meaningful incentive, especially for proposals that reduce operating, maintenance, logistics, or lifecycle costs rather than just immediate contract costs.
The biggest practical challenge is measurement: if savings are hard to calculate or track, the HCA may decide the administrative burden outweighs the benefit, eliminating the sharing obligation.
Contractors should document how the VECP affects downstream costs and be prepared to defend the estimate of savings during a typical year of use.
Contracting officers should avoid overstating savings by ignoring reduced performance, shorter service life, or diminished capability that may offset the apparent cost reduction.
Because the sharing rate is set case by case, contractors should not assume a standard percentage; negotiation and supporting analysis matter.
Official Regulatory Text
(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.