FEDERAL CONTRACT LAW
Remember, this change proposal shares the savings
Joseph J. Petrillo
Performance-based contracts, incentives and other types of so-called win-win arrangements between buyer and seller are becoming increasingly popular in federal contracting. When you get past the hoopla, however, you'll discover these innovations aren't really new.
For about 40 years, contractors have been invited to propose changes to the specifications and to share in the resulting savings. This value engineering technique is common in contracts but also commonly forgotten.
That's a shame. The outlines of a value engineering program describe a mutually beneficial deal. The contractor proposes a different way to do the work, with the objective of saving the government money. The clause calls this a value engineering change proposal, or VECP. If the government accepts the idea, the contractor is paid a percentage of the savings.
The need for an incentive is obvious. Otherwise, why would the contractor take the time and effort to propose something that would reduce the contract price?
The government has complete discretion about whether to accept a VECP. What the government can't do, however, is reject the VECP and then use the idea anyway. This is called constructive acceptance, and it entitles the contractor to a share in savings.
The contractor's share depends on the type of contract. In most fixed-price contracts, the percentage is 50 percent of the savings. The savings eligible for sharing include those on the contract under which the VECP is accepted, other concurrent contracts and future contracts for a three- year period. The contractor can also receive 20 percent of the savings on collateral items, such as government operations and maintenance costs, up to a ceiling of $100,000.
The essential requirement is having a contract with a VECP clause in it. Without that, a would-be contractor's suggestions are likely to be merely gratuitous.Flex appeal
A recent decision by the Armed Services Board of Contract Appeals illustrates how flexible this program can be. In a case involving Sentara Health System [51540, Sept. 29, 2000], the contractor operated a network of primary care clinics. The government needed to report information on patient visits to a central computer database. It asked the contractor to propose a price for implementing its, the government's, home-grown system. This depended on doctors filling out bubble sheets, which were then scanned and proofread.
That proved to be an expensive undertaking, mainly because physician time is very valuable. There were also problems with scanning the forms, probably stemming from the poor penmanship for which physicians are famous.
Instead, the contractor proposed to furnish the data from its proprietary database, in ASCII flat-file format. It framed its proposal as a formal VECP.
When the government ultimately balked at the high price of implementing its own system, it turned to the contractor's VECP, which it added to the contract by modification. But the agency refused to pay the contractor its share of the savings because the data reporting requirement had not been formally part of the contract.
The board rejected this narrow reading of the clause. Relying on a 1971 case about adding air conditioning to a new building at Cape Canaveral, Fla., the board held that the VECP was valid. When the government directed the contractor to prepare to report the patient visit data, the contractor was under the implied contractual obligation to provide the data. Its VECP related to this obligation, so the company was entitled to share in the resulting savings.
The board's decision avoids an unfortunate anomaly. If the government had prevailed, then the program would yield less benefit to both parties. The contractor would first have to implement the government's inefficient and costly method of performance'before submitting its VECP.
The solution the board decided on means that contractors don't have to waste the government's money to get the benefits of VECPs.
Unfortunately, few VECPs are proposed and accepted. The architects of procurement reform should study why this is so when constructing their new incentive programs. Joseph J. Petrillo is an attorney with the Washington law firm of Petrillo & Powell.
E-mail him at email@example.com