Opinion ID: 561899
Heading Depth: 2
Heading Rank: 1

Heading: Acquisition Savings Versus Collateral Savings

Text: 12 The Board correctly determined, as a matter of law, that the cost savings due to the lower acquisition cost of alkaline batteries were collateral savings under ICSD's contract. 13 The Value Engineering Incentive clause of ICSD's contract provided for a 50% savings share award for savings realized under (1) the instant contract, (2) concurrent contracts, or (3) future contracts. Instant contract savings were defined as the unit cost reduction times the number of units affected in the instant contract. Concurrent contract savings are those realized when the VECP accepted under this contract is used on concurrent contracts of the purchasing office for essentially the same item. (Emphasis added.) The future contracts provision, on which ICSD bases its 50% award claim, states: 14 If the VECP accepted under this contract is used on future purchases of essentially the same item by the purchasing office, or its successor, the Contractor shall share in the savings.... 15 (Emphasis added.) When read as a whole, it is clear that the incentive clause provides for a 50% cost savings share when the VECP reduces the cost of the item or essentially the same item as that to be acquired under the contract. Because batteries were not acquired by the government under ICSD's contract, battery cost savings are not subject to the 50% share award. 16 In contrast to the 50% contract savings award provisions, the collateral savings provision of the incentive clause awards a 20% share of collateral savings. That award applies: 17 [i]f an accepted VECP results in a measurable net reduction in the cognizant Military Department's overall documentable projected costs of maintenance, operation, logistic support or Government-furnished property .... 18 As the Board correctly held, the savings realized by the government as a result of the lower cost of alkaline batteries fell into the collateral savings category as either reduced cost of operation of the night vision sights acquired under the contract or reduced cost of government-furnished property. 19 ICSD first argues that mercury batteries were defined to be a major component of the night vision sight system, and its contract required ICSD to value engineer the entire system, including the battery. Regardless of the scope of ICSD's value engineering obligations, the contract explicitly defined which cost savings were subject to a 50% share award and which were subject to a 20% award. 20 ICSD also reads the Future Contracts provision to mean that ICSD would receive a 50% savings share award on acquisitions of the item subject to the VECP. Under ICSD's argument, any savings realized by the government on acquisitions of the VECP item are subject to a 50% share award, while all other savings are collateral and subject to a 20% award. ICSD's construction is unreasonable. Nowhere does the incentive clause extend the 50% share award to all acquisitions of the VECP item. Rather, as discussed above, the 50% share applies when the VECP item is the subject of the instant contract and, in that case, when essentially the same item is the subject of concurrent and future contracts. 21 Finally, ICSD argues that the policy of the incentive clause would be thwarted in this case if ICSD does not get its fair share of the savings. That argument is unpersuasive. The incentive clause provides for a fair share of 50% if the savings are contract savings and 20% if the savings are collateral. The 50% award provides a greater incentive to contractors who submit VECPs which reduce the cost of contract items and which would possibly reduce the price of those contracts. On the other hand, contractors such as ICSD require less of an incentive to make cost savings proposals where the reduced cost does not relate to items furnished under the contract. 22 Neither Philco-Ford Corp., ASBCA No. 16197, 73-1 BCA p 9917, nor Mishara Constr. Co., Inc., ASBCA No. 17957, 75-1 BCA p 11,206, compels a contrary result. In Philco-Ford, the Board suggested that savings resulting from the VECP's ripple effect may be subject to a 50% award. However, the Board did not determine whether in fact the savings were instant contract savings, future contract savings, or collateral savings, and it left open the possibility that a lesser award could be made. In Mishara, the peculiar circumstances referred to by the Board in making a 50% award appear to relate to the manner in which the VECP was implemented, not to the question of whether the savings were contract or collateral savings.