A common question is the difference between value engineering and qualified research for the R&D tax credit. The short answer is that value engineering that applies known alternatives to reduce costs generally is not qualified research. Value engineering that involves a technical uncertainty and a process of experimentation may warrant review. This page explains the framework in general terms. It is educational and is not individualized advice. For the foundational framework, see our page on qualified research.
Value Engineering in General Terms
Value engineering is a systematic approach to reducing costs while maintaining or improving function and performance. In construction and manufacturing, value engineering commonly involves evaluating alternative materials, designs, or methods to reduce costs. Whether value engineering constitutes qualified research depends on whether it involves a technical uncertainty and a process of experimentation.
When Value Engineering May Warrant Review
Value engineering may warrant review when it involves a technical uncertainty and a process of experimentation:
- Material alternatives — evaluating alternative materials to resolve uncertainty about whether a cheaper material can achieve the required performance.
- Design alternatives — testing alternative designs to resolve uncertainty about whether a cheaper design can achieve the required performance.
- Method alternatives — evaluating alternative methods to resolve uncertainty about whether a cheaper method can achieve the required performance.
Where the value engineering involves evaluating alternatives to resolve a technical uncertainty, the work may warrant review as qualified research.
Cost Reduction Alone Is Not Enough
It is important to understand that cost reduction alone does not establish qualified research. A value-engineering project that reduces costs by applying known alternatives — for example, switching to a known cheaper material that is known to perform equivalently — is generally routine cost reduction, not research. The permitted purpose element requires that the work be directed at developing or improving a business component through a process of experimentation, not merely at reducing costs.
Hypothetical Example
Consider a company that wants to reduce the cost of a product by substituting a cheaper material and is uncertain whether the alternative material can achieve the required performance. The company evaluates alternative materials, tests each for performance, and systematically evaluates the results to resolve the uncertainty. This value-engineering project may warrant review as qualified research.
By contrast, if the same company switches to a known cheaper material that is known to perform equivalently, that is routine value engineering, not research.
These examples are illustrative only and do not state whether any particular activity qualifies.
Documentation That May Help
Records that can help support value-engineering claims include records identifying the technical uncertainty and alternative materials or approaches, test results, and records of how results informed the selection. For more, see our page on R&D tax credit documentation.
Key Takeaway
Value engineering that applies known alternatives to reduce costs generally is not qualified research. Value engineering that involves a technical uncertainty and a process of experimentation may warrant review. Because the distinction is fact-specific, professional review is appropriate before claiming the credit.