THE NPMA JOURNAL OF PROPERTY AND ASSET MANAGEMENT ...

JOURNAL OF PROPERTY AND ASSET

MANAGEMENTUse of Statistical Samples in Physical Inventories

Michael Showers, CPPA

It Is Not Chattel: a Look at Personal/Tangible Property Issues in Research Administration

Kathleen Lorenzi, Vincent “Bo” Bogdanski and Dr. Douglas N. Goetz, CPPM, CF

How Much Are Your Capital Assets Really Costing You?William M. Love, CPPS

What It Takes To Become A Respected Property ManagerAnd Subject Matter Expert

Robert J McFarland, CPPM/CF

Total Asset Management: From Acquire to RetireSteven F. Holland, CPPM CF

JUNE 2013Vol. 3No. 1

A Publication of the National Property Management Association, Inc.

i

THE NPMA JOURNAL OF PROPERTY AND ASSET MANAGEMENT

Volume 3, Number 1, June 2013

CONTENTS

INDEX ............................................................................................. i National Property Management Association’s Executive Board ................................................................................................... iii National Directors ..................................................................................................v National Property Management Association’s National Office .................................................................................................... vii Property Professional Editorial Team .............................................................. vii Editor’s Column ................................................................................................... ix

ARTICLES: Use of Statistical Samples in Physical Inventories ..........................................................1 Michael Showers, CPPA It Is Not Chattel: a Look at Personal/Tangible Property Issues in

Research Administration.....................................................................................11 Kathleen Lorenzi, Vincent “Bo” Bogdanski and Dr. Douglas N. Goetz, CPPM, CF How Much Are Your Capital Assets Really Costing You? ..........................................29 William M. Love, CPPS What It Takes To Become A Respected Property Manager And Subject Matter Expert ..................................................................................53 Robert J McFarland, CPPM/CF Total Asset Management: From Acquire to Retire ......................................................69 Steven F. Holland, CPPM CF

iii

National Executive Board

National President Marcia Whitson CPPM CF

Oak Ridge National Laboratory 865-947-3047

[email protected] Executive Vice President Wesley Carter CPPM CF NPMA Executive Vice President 803-422-7305 [email protected] Immediate Past President Carl Iannacone CPPS Jefferson Lab 757-269-5430 [email protected] Vice President of Administration Ivonne Bachar CPPM CF Stanford University 650-723-9095 [email protected] Vice President of Certification Rosanne Green CPPM CF Consultant 321-751-9014 [email protected] Vice President of Communications & Marketing Brian Thompson CPPM CF Sunflower Systems 805-630-4000 [email protected]

Vice President of Finance Brandon Kriner CPPM CF Harris Corporation 202-255-1085 [email protected] Vice President of Membership Jessica Dzara CPPA Sunflower Systems 703-400-3170 [email protected] Vice President of Parliamentary Procedures James Young CPPM CF Retired 504-455-2997 [email protected] Acting Vice President of Professional Development Cathy Seltzer CPPM CF TASC 703-633-8300 x 4377 [email protected] Vice President - Central Region Gary Quinn CPPM UT Southwestern Medical Center 214-648-6060 [email protected]

v

National Directors Awards - Logistics & Administration Loril Stephens CPPM CF ATK 801-251-2871 [email protected] Awards - Program & Communications Kimberly Saeger CPPS Raytheon Missile Systems 520-850-2438 [email protected] Director of Chapter Support-Leadership Training Kim Kaehler CPPS Ascot Associates LLC 925-234-4228 [email protected] Director of Job Awareness Marlene Lynn CPPM CF BAE Systems 973-633-6472 [email protected] Director of Membership - Administration Robert Giacomi Jr. CPPM CF Lockheed Martin 831-703-4465 [email protected] Director of Online Courses Kim Doner CPPM SRA International 202-536-5972 [email protected] Director of Special Interest Groups Cheri Cross CPPM CF Oak Ridge National Laboratory 865-574-6046 [email protected] Certification Governing Board Co-Chair James Begis CPPM CF Retired 240-620-6099 [email protected]

Certification Governing Board Frank Gonzalez CPPM Texas State University-San Marcos 512-392-4033 [email protected] Council of Fellows Chair James Begis CPPM CF Retired 240-620-6099 [email protected] Director of Certification Cinda Brockman CPPM CF A2B Tracking 858-361-4270 [email protected] Director of Chapter Support - Education Katherine Baker CPPA Bonneville Power Administration 503-969-6357 [email protected] Director of Legislative Affairs Rick Dillard CPPM University of Texas MD Anderson Cancer Center 713-745-9433 [email protected] Director of Chapter Support - Leadership Development Sarah Trinh CPPM Defense Contract Management Agency 920-216-9948 [email protected] Director of Seminars Steven Holland CPPM CF [email protected]

vii

NPMA NATIONAL OFFICE

28100 US Highway 19 North, Suite 400 Clearwater, FL 33761

Telephone: 727-736-3788 Fax: 727-736-6707

E-Mail: [email protected]

NPMA National Office Staff Events and Education Manager Maria Maggio, CMP [email protected] 727-736-3788 Education Coordinator Lesley Townsend [email protected] 727-736-3788 Membership & Certification Manager Penny Parker [email protected] 727-736-3788 PR Communications Manager Felicia Johnson [email protected] 813-475-6998, ext. 305

Property Professional Editorial Team National Editor: Billie Perchla, CPPM, CF E-mail [email protected] Managing Editor: Betsy Tucker, CPPS Email: [email protected] Western Region Editor: Brenda dePaz, CPPA E-mail: [email protected] Central Region Editor: Barbara Bays, CPPM E-mail: [email protected] Eastern Region Editor: National Editor Emeritus: Dr. Douglas N. Goetz, CPPM, CF E-mail: [email protected] Production Editor: Felicia Johnson, APR E-mail: [email protected] Graphic Design: Wendy Hummel E-mail: [email protected]

ix

Editor’s Column Ladies and Gentlemen: Putting together a journal of technical articles is always difficult, even moreso in the current environment of budget cutbacks, governmental furloughs, and high unemployment. With that said, one would think that there would be a real lack of participation as folks focus on survival in their jobs. Such is NOT the case here! In the journal you will find an outpouring of support of our profession by the authors contributing to this edition. They boldly stepped forward and contributed – sharing their knowledge, skills and abilities making this a great third edition of the journal. The authors contributing to this issue of the Journal: Mr. Michael Showers, CPPA

Kathleen Lorenzi, Vincent “Bo” Bogdanski and Dr. Douglas N. Goetz, CPPM, CF William M. Love, CPPS Robert J McFarland, CPPM, CF and Steven F. Holland, CPPM, CF

All have contributed well thought out and enlightening articles – with a variety of different approaches. This is the second article by Michael Showers to appear in the journal. Mike has a talent to take a heady topic, i.e., statistics, and provide an interesting and informative article regarding the “Use of Statistical Samples in Physical Inventories” – a topic that just about every property professional deals with in their respective jobs. The second article in the journal, “It Is Not Chattel: a Look at Personal/Tangible Property Issues in Research Administration,” is by a trio of writers -- Kathleen Lorenzi, Vincent “Bo” Bogdanski and even I get to say a few words. These authors provide an in-depth analysis of the critical property issues in the world of grants, cooperative agreements and contracts. This article provides a very useful analysis for all of our University and non-profit members. In a veritable “tour de force” of data analysis William M. Love provides concrete, empirical data for those of us that want, and need, data to support our decisions. We have seen other authors within the NPMA provide us this information – in this article, “How Much Are Your Capital Assets Really Costing You?” we continue that journey of deep thoughtful data analysis. Robert J McFarland, one of our most respected senior statesmen, whom I have known for close to thirty years, shares with us his decades of experience in our career field in the article, “What It Takes to Become a Respected Property Manager and Subject Matter Expert.” Not one to just wax philosophic, Bob provides detailed competencies, and even various courses of action to

x

achieve the level of knowledge, skills and abilities required to reach the highest levels of performance. For all newcomers to our profession, Bob set forth a path – a value added path useful in increasing your achievements and accomplishments as a Property professional! The last article in the journal, “Total Asset Management: From Acquire to Retire” is by Steven F. Holland. An article providing regulatory, statutory and empirical data to make his case Steve present a through composed analysis of the asset management process – with discussion of numerous critical steps along the life cycle path. My congratulations to the authors and to the NPMA as the journal continues to grow in depth and breadth over the past three years. BRAVO to all! Ladies and Gentlemen, you have in front of you the third edition of the Journal of Property and Asset Management. I encourage you to feast upon its treasures!

Dr. Douglas N. Goetz, CPPM, CF Editor, The Journal of Property and Asset Management

Use of Statistical Samples in Physical Inventories

By Michael Showers, CPPA

NOVA Chapter

Abstract

Use of Statistical Samples in the Conduct of Physical Inventories Property assets typically comprise a significant part of most organization’s or enterprise’s

value. Government agencies owe the taxpayer and corporations owe their shareholders assurance that these assets are managed correctly, that they exist, and that all assets are recorded appropriately. Property records provide insight into the acquisition, use, maintenance and disposal of those assets. As such, they serve as a significant measure of the value of an entity. The principle method for assuring the efficacy of property records is through the physical inventory process. Traditionally, entities perform this labor intensive process on a regular basis, requiring a visual confirmation of the existence of assets on record. Properly performed physical inventories also review assets on hand, and compare them with assets on record, to assure records are complete for all items. However, physical inventory processes that review the entire population are extremely costly. As a result a variety of alternative methods have been used to verify record accuracy. This paper explores the use of statistical sampling as a method for the conduct of physical inventories.

Introduction

Corporate and Government entities retain trillions of dollars of assets, which are used in the production of products and services. Proper control of these assets assures that the equipment and supplies that an entity requires are available when they are needed. It assures that they are in sufficient quantities to manufacture products, and that only minimum quantities needed for production or sale are kept on hand. In addition, appropriate control of these assets minimizes loss through shrinkage and spoilage. Meyer (1990) studied the costs associated with inventory discrepancies at the Leviton Company. He found that inventory inaccuracy results in lost productivity, in lost sales due to an inability to completely fill customer orders, and in lost product. Laws enacted as a consequence of financial reporting frauds during the late 1990’s and early 2000’s require that corporate officials certify the accuracy of financial records, including the values of inventories (Byington & Christensen, 2003).

The accuracy of inventory management information systems and perpetual item records must be confirmed on a regular basis. The physical inventory audit process serves this purpose. Physical inventory audits confirm the existence of items on the perpetual inventory records through visual inspection and counting. Physical inventory audits also confirm that all items in the custody of the entity are recorded within perpetual inventory systems. DeHoratius and Raman (2008) discuss the reasons, ramifications, of inaccurate inventory records within a major corporation in the retail environment. They offer a number of reasons for inaccuracy and

1

establish a model that relates inaccuracy to a number of variables, including; sales, cost, volume, location, product density, variety, and days between inventory audits. They propose a number of hypotheses related to the subject. One, which is particularly related to this paper, posits that inaccuracy decreases as time between inventory audits decreases. The study found this to be true, and significant. They found a 12% higher rate of inaccuracy in stores with annual inventory counts as opposed to those with semi-annual counts.

However, it is argued that the cost for performance of physical sighting and verification of counts is labor intensive and therefore, remains high, particularly when the entire population of the inventory is to be counted. Technological solutions such as radio frequency identification may help reduce the cost of performing physical inventories by reducing the amount of physical labor involved. However the cost associated with implementing such systems is still prohibitive. Investigation of alternative methods could provide significant savings to entities engaged in the process, provided the data derived from the alternate methods can be considered to be reasonably reliable.

This paper questions whether statistical sampling techniques can be used to provide reasonably accurate assessments of inventory records. As such, it attempts to address the usefulness of statistical sampling inventory record verification and discuss statistical sampling, in comparison with and in conjunction with some of the acknowledged methods, in an effort to determine the level of confidence that can be achieved using them.

Method

The use of statistical sampling for inventory audit (conduct of physical inventory counts) will be investigated using a literature review. While there is significant literature associated with the management of inventories, particularly those related to maintenance of stock levels within a supply chain and order triggering, literature related to establishing statistical sampling as a method for the conduct of physical inventories as a substitute for full population inventories or other methods, such as cycle count, is limited. Most of the available literature involves the testing of perpetual inventory records as part of financial audits. There is some literature related statistical sampling in lieu of full population inventories based on surveys of large company best practices. There is also recommendation for the use of statistical samples in Government agency procedural guidance.

Results

Studies of the Use of Statistical Samples in Physical Inventory Audits Cyert, Hinckley, and Monteverde (1960) studied the use of statistical sampling in a

physical inventory audit of US Air Force vehicles. The study used a stratified sample with a combined ratio estimate. A general cluster sample was taken. Stratification was made, first by major command, then by Air Force base or contractor storage site. Sites were selected to be representative of the entire population. Complete, full population, physical inventories were conducted at the selected sites. Based on the findings of the complete inventories, an estimate of the physical inventory adjustments was made for each stratum. Finally, all estimates were compiled into the total Air Force estimate and the overall variance was determined using the combined ratio estimate. The authors concluded that the application of this method resulted in a precision of 1.5% at athe 95% confidence level. They further recommended consideration of the

2

use of statistical samples in lieu of full population physical inventories in the future to save time, effort and expense.

Vance (1960) provides several case studies to illustrate the use of statistical sampling in the audit profession. Among these are the use of statistical sampling in an Esso Research and Engineering case where physical inventories of two storage warehouses with 4700 line items cost over $300,000. Through the use of sampling techniques, Esso was able to achieve a 95% confidence level of a precision of +$1300 in one warehouse and + $600 in the other. In addition to achieving the desired level of accuracy, the work hours consumed in the performance of the inventory were reduced to 300 straight time hours, eliminating 320 hours of overtime. The paper provides a detailed description of the Minneapolis-Honeywell Corporation’s use of statistical sampling techniques in the physical inventory process. Minneapolis-Honeywell was able to achieve a high level of confidence in the estimate by counting all high dollar value lots, defined as exceeding $500 value and a 10% sample of low dollar value items. To confirm the validity of the sample additional samples of five percent each were identified and tested. The sample inventory, as conducted provided a 99.73% confidence that the value was within 4% of the actual. The change in procedure allowed for completion of the inventory in sixteen continuous hours as opposed to five workdays, saving on cost; provided greater accuracy, with predetermined error limits; and added flexibility in inventory scheduling. Vance concluded that statistical sampling could supplant 100% (full-population) physical inventories were the elements of statistics correctly implemented, understood, and accepted by the audit community.

Kiger and Wise (1996) discuss the methods used to perform a physical inventory audit at the academic University of Tennessee library, in their article Auditing an Academic Library Book Collection. The article discusses their use of attribute sampling, a form of stratified sampling where the attributes of a portion of the collection are used to stratify the inventory population. The article discusses the use of a program to produce a random sample of the items in the library’s collection. This article provides a practical example of the use of statistical sampling in the process of conducting a physical inventory. This study is of particular interest in that it is used in a non-typical inventory environment, and it is not part of a formal audit program. They found that attribute sampling, a form of stratified sampling, could be effectively used to verify the inventory of library holdings.

Davidson and Monteverde (1959) applied statistical sampling to estimate the value of inventory and its application to tax accounting in a Last in First Out (LIFO) inventory. The company sought a precision of 1% with 95% reliability, in accordance with accepted practices of similar firms for taxation purposes. The authors were able to determine the statistical and accounting methods to be employed to value the inventory. They utilized a random sample in support of simple ratio estimates, based on the cost index, to determine value of different pools or clusters of property.

In an early study of supply operations at a federal government facility, Rinehart (1960) used statistical sampling techniques to study discrepancies in inventory balances and the accuracy of physical inventory procedures. The study followed the results of three annual inventories, in which the facilities were closed for operations and a full population inventory was conducted. After the third year, a project was conducted to determine whether using sample inventories in lieu of full population physical inventories would be acceptable. The project found that approximately one-third of the 6000 items were discrepant. Using a sub-sample of the reported discrepancies to study the probable causes of discrepancy, Rinehart found that the principle sources of inventory discrepancies were adjustments made to the inventory records in

3

response to findings of the prior year’s full population inventory. The study recommended improvement in full population inventory procedures, use of a sample of the inventory to confirm its accuracy, and changes to the method of processing inventory adjustments for discrepancies discovered during periods between inventories.

In the article Maintaining Inventory System Accuracy, Ernst, Guerrero and Roshwalb (1992) provide a justification for inventory control and a methodology for establishing the inventory system’s accuracy over time using simple random sampling. The method proposes a strategy that allows for high precision with low sample sizes, seeks minimization of variance, and considers accuracy at the line item (SKU) level rather than at the more general full population level. While equating the maintenance of accurate inventory records with other quality control processes, the article proposes the use of this process in lieu of costly full physical inventories.

In their examination of audits of accounts receivable and inventories, Characteristics of Errors in Accounts Receivable and Inventory Audits, Johnson, Leitch and Neter (1981) discuss the use of sampling and the development of sampling plans by a major accounting firm, in audits of large businesses. The study considers the types of businesses, the audit errors, their “tainting” or the difference between book and actual values, and the frequency of errors. Further, the study compares the results of audit errors with the typical assumptions of auditors. This study provides an early statistical analysis of inventory variance in 26 audits by a major accounting firm. The samples used to test inventory records were stratified random samples. They identified both over and understatement errors within inventory records and also found that the distributions of errors were not normal, tended to be leptokurtic and skewed positively. The authors called for additional replication studies to expand on their findings, particularly to consider the effect of transaction volume, processes, the use of other audit procedures in the detection of errors, and how adjustments to allow for errors found in the audit process effect errors.

While not specifically related to physical inventory record audits, Loebbecke and Neter (1975) provide guidance to auditors on sampling methods and processes based on an evaluation of a number of studies. Their paper explores different audit requirements and proposes sampling methods that could be employed to meet those objectives. They discuss their own studies and those of other authors in order to provide evidence of the efficacy of sampling techniques. They conclude that a plan and strategy for the audit and sampling approach is critical to success and to the validity of the sample procedures. They recommend that the auditor correctly define the audit goals, properly identify variables, properly identify the frame or population, recognize and account for any bias, consider alternate audit procedures in case the selected procedures cannot be used, and determine whether multiple audit goals are to be met with concurrent audits.

The General Accounting Office (2001), in their “Executive Guide: Best Practices in Achieving Consistent Accurate Physical Counts of Inventory and Related Property,” recommends the use of sample inventories as one of the “best practices” exercised by industry leading companies. This study reviewed the physical inventory practices of seven large companies. The study found that a variety of physical inventory processes were used. The selection of practices was principally dependent on the results of prior physical inventory reviews. In one location, after several successful cycle counts, sample inventories had been recognized as valid and cost effective method and used in lieu of both cycle counts and full population inventories. Due to the limited use of statistical sampling, this method did not receive further discussion within the guide.

4

Application of Statistical Sampling Techniques in Inventory Audits However, the Government Accountability Office (GAO), renamed from the General

Accounting Office, regularly utilizes statistical sampling to verify inventory records within agencies of the Federal Government. In their audit of the Indian Health Service, the GAO used simple random sampling techniques to evaluate the accuracy of Indian Health Service personal property management records. Within the study, they evaluated the entire population of property items for one Headquarters activity and evaluated six field activities using simple random sample tests. They obtained a 95% confidence level that the full population was represented within the sample. The estimated values for numbers, percentages, and values of lost items fell within the confidence levels in all cases. Similar results were achieved for errors in user assignments, locations and disposition records (Government Accountability Office, 2009).

In a similar report on property management operations within the Veteran’s Affairs Department, GAO used weighted and stratified random statistical samples to evaluate the effectiveness of records at four Veterans Affairs Department personal property management activities. The audit studied both physical inventory records and records of transactions. In this case they utilized a stratified random sample, based on organizations. The samples were weighted to adjust the samples chosen to the populations for the locations. GAO again determined that this method provided a 95% confidence level that the errors found were representative of the entire population (Williams, 2007).

Consideration of Alternate Sampling Techniques

Ponemon and Wendell (1995) provide a comparison of the differences between the nonprobability, judgmental sampling versus statistically derived random sampling in the development of upper bounds for overstatement errors. The authors hypothesize that the two are equivalent. They studied junior and senior auditors, and compared their judgmental selections of inventory items with computer derived simulations of random samples. The results were compared at several different confidence levels. The authors conclude that auditors and audit firms should exercise care in the use of judgmental samples. In addition, auditors with limited experience tend to have even more instances of material misstatements when judgmental samples are used over statistically derived samples.

Hall, Herron, Pierce and Witt (2001) discuss the possible errors of overrepresentation of populations within samples associated with haphazard sampling, another method of evaluation used by auditors. They also consider the value of doubling sample size in order to reduce overrepresentation. They use Chi-square tests of differences in proportions to determine the significance of differences in proportions and the significance of difference in representation. As opposed to simple random sampling, haphazard sampling does not attempt to assure inclusion of all elements of the population. Rather, under haphazard sampling, the auditor attempts to assure that the selection of the sample is not influenced by any of the characteristics of the sample. The authors found that the physical size and location of the test articles biased the selection within the haphazard sample. They also find that doubling of the sample size would reduce the selection bias, but not eliminate it.

Gumrukcu, Rossetti, & Buyurgan (2008) discuss the use of cycle counting to establish the value and accuracy of inventory throughout different levels of the supply chain. They utilize simulation, error and cycle count modeling in order to identify both the costs associated with a lack of inventory accuracy and the costs associated with conduct of cycle inventory counts. As

5

part of their experiments they compare costs and accuracy levels of items with high demand and low value as well as those with low demand, high value.

Discussion

Hitzig (2004) provides a discussion of the application of statistical sampling to audit activities. He suggests that statistical sampling is effective in ascertaining the materiality of misstatements in financial reporting. He provides several examples of the application of statistical sampling for this purpose. He identifies risks associated with the use of statistical sampling as the possible incorrect acceptance or rejection of different hypotheses related to the misstatement of accounts. Ultimately, he proffers that statistical sampling should be accepted, in lieu of judgment, by both auditors and audit organizations as a proper method for determining the efficacy of accounting records.

The Department of Defense (1991), in the “DoD Manual for the Performance of Contract Property Administration,” provides guidance on the appropriate sample size for achieving appropriate confidence levels when performing reviews of contractor property management systems, practices and records. Though this manual served as a guide for individuals who were conducting physical inventory audits of contractor-held government property and the statistical sampling techniques described within have been considered to be valid for that purpose, the use of the same techniques by the contractors themselves was not considered. The National Aeronautics and Space Administration (2006) provides for the use of statistical sampling to determine the accuracy of perpetual inventory records, and the need for a full population physical inventory in their Materials Inventory Management Manual. This allows the use of statistical sampling, to reduce overall inventory cost by reducing the number of full population inventories. In the commercial world, ASTM International (2007) discusses the use of sampling in physical inventory practices in their “Standard Practice for Physical Inventory of Durable, Moveable Property.

It would seem that the proper use of statistical sampling, as a substitute for full population physical inventories could result in cost savings while providing a reasonable assurance of the existence of the items on record and the completeness of the records. However, despite literature on the subject that provides justification for its use and demonstrates the efficacy of the procedures, the techniques are rarely used. While the literature consistently speaks of cost savings that could be achieved through the use of statistical samples in the verification of inventory records, literature on inventory cost and potential savings was sparse at best. Further study of physical inventory costs and comparisons with the costs of conducting inventory using statistical sampling techniques could provide the impetus for greater use of those techniques. In addition, the efficacy of inventories conducted through the use of statistical samples is directly related to the knowledge and abilities of those who execute the process. Studies of the training and education levels of physical inventory personnel should be conducted to ascertain their readiness to perform statistical analysis.

6

References ASTM International. (2007). Standard practice for physical inventory of durable, moveable

property (E 2132-01). West Conshohocken, PA Byington, J.R., & Christensen, J.A. (2003). How to prevent inventory fraud. Journal of

Corporate Accounting and Finance (Wiley), 14(4), 33-39. Retrieved April 24, 2010, from EBSCO Business Source Complete database.

Cyert, R.M., Hinckley, G.M., & Monteverde, R.J. (1960). Statistical sampling in the audit of the Air Force motor vehicle inventory. Accounting Review, 35(4), 667-673. Retrieved April 3, 2010, from http://web.ebscohost.com.ezproxy.umuc.edu/ehost/pdfviewer/pdfviewer?vid=4&hid=13&sid=56e98d5a-3d17-4f10-98d6-b5c8cb63b97c%40sessionmgr4.

Davidson, H.J., & Monteverde, R.J. (1959). Lifo and statistical sampling. Management science, 5(3), 279-292. Retrieved 04/24/2010, from http://web.ebscohost.com.ezproxy.umuc.edu/ehost/pdfviewer/pdfviewer?vid=4&hid=10&sid=e307d9b9-7dac-4dbd-9ad9-e693264429c7%40sessionmgr12.

DeHoratius, N., & Raman, A. (2008). Inventory record inaccuracy: An empirical analysis. Management Science, 54(4), 627-641. Retrieved April 24, 2010, from http://web.ebscohost.com.ezproxy.umuc.edu/ehost/pdfviewer/pdfviewer?vid=2&hid=11&sid=8a12ddba-0eaa-478a-bb97-c264480ce4c5%40sessionmgr4.

Department of Defense. (1991). DoD manual for the performance of contract property administration. Washington: United States Government. Retrieved April 3, 2010, from http://biotech.law.lsu.edu/blaw/dodd/corres/pdf/41612m_1291/p41612m.pdf.

Ernst, R., Guerrero, J., & Roshwalb, A. (1992). Maintaining inventory system accuracy.

International Journal of Purchasing and Materials Management, 28(3), 33. Retrieved from http://proquest.umi.com.ezproxy.umuc.edu/pqdweb?did=590002&Fmt=7&clientId=8724&RQT=309&VName=PQD .

General Accounting Office. (2001). Executive guide: Best practices in achieving consistent, accurate physical counts of inventory and related property (GAO-01-763G). Retrieved April 3, 2010, Web site:http://www.gao.gov/new.items/d01763g.pdf.

Government Accountability Office. (2009). Indian Health Service: Millions of dollars in property and equipment continue to be lost or stolen. GAO Reports (GAO-09-450). Retrieved from http://ezproxy.umuc.edu/login?url=http://search.ebscohost.com.ezproxy.umuc.edu/login.aspx?direct=true&db=bth&AN=41128357&loginpage=Login.asp&site=ehost-live&scope=site

Gumrukcu, S., Rossetti, M.D., & Buyurgan, N. (2008). Quantifying the costs of cycle counting in a two-echelon supply chain with multiple items. International Journal of Production Economics, 116(2), 263-274. Retrieved April 24, 2010, from http://www.sciencedirect.com.ezproxy.umuc.edu/science?_ob=MImg&_imagekey=B6VF8-4TK478Y-2-9&_cdi=6004&_user=961261&_pii=S092552730800306X&_orig=search&_coverDate=12%2F31%2F2008&_sk=998839997&view=c&wchp=dGLbVzb-zSkzk&md5=87b6edc09b1b83816f8741aeced0afbe&ie=/sdarticle.pdf

7

Hall, T. W., Herron, T. L., Pierce, B. J., & Witt, T. J. (2001). The effectiveness of increasing sample size to mitigate the influence of population characteristics in haphazard sampling. Auditing, 20(1), 169. Retrieved from http://ezproxy.umuc.edu/login?url=http://search.ebscohost.com.ezproxy.umuc.edu/login.aspx?direct=true&db=bth&AN=4585351&loginpage=login.asp&site=ehost-live&scope=site.

Hitzig, N. (2004). Statistical sampling revisited. CPA Journal, 74(5), 30-35. Retrieved April 24, 2010, from http://web.ebscohost.com.ezproxy.umuc.edu/ehost/pdfviewer/pdfviewer?vid=4&hid=12&sid=1dca58de-a05c-48c5-80f4-a107c41b91ef%40sessionmgr10.

Johnson, J. R., Leitch, R. A., & Neter, J. (1981). Characteristics of errors in accounts receivable and inventory audits. Accounting Review, 56(2), 270. Retrieved from http://ezproxy.umuc.edu/login?url=http://search.ebscohost.com.ezproxy.umuc.edu/login.aspx?direct=true&db=bth&AN=4482618&loginpage=Login.asp&site=ehost-live&scope=site

Kiger, J. E., & Wise, K. (1996). Auditing an academic library book collection. The Journal of Academic Librarianship, 22(4), 267-272. doi:DOI: 10.1016/S0099-1333(96)90116-0. Retrieved from http://www.sciencedirect.com.ezproxy.umuc.edu/science?_ob=MImg&_imagekey=B6W50-45TYMDN-11-1&_cdi=6556&_user=961261&_pii=S0099133396901160&_orig=search&_coverDate=07%2F31%2F1996&_sk=999779995&view=c&wchp=dGLbVtb-zSkzk&md5=00fcc5ed3a00a3402cf705afffdaa111&ie=/sdarticle.pdf

LOEBBECKE, J. K., & NETER, J. (1975). Considerations in choosing statistical sampling procedures in auditing. Journal of Accounting Research, 13(3), 38-52. Retrieved from http://ezproxy.umuc.edu/login?url=http://search.ebscohost.com.ezproxy.umuc.edu/login.aspx?direct=true&db=bth&AN=6415813&loginpage=login.asp&site=ehost-live&scope=site

Meyer, H. (1990). Inventory accuracy - is it worth it? Production and Inventory Management Journal, 31(2), 15-17. Retrieved April 25, 2010, from http://proquest.umi.com.ezproxy.umuc.edu/pqdlink?index=14&did=726506&SrchMode=3&sid=1&Fmt=6&VInst=PROD&VType=PQD&RQT=309&VName=PQD&TS=1272208342&clientId=8724&aid=2 database.

National Aeronautics and Space Administration (2006). NASA Procedural Requirements: NASA Materials Inventory Management Manual (NPR 4100.1D) Chapter 5. Washington. Retrieved April 3, 2010, from http://nodis3.gsfc.nasa.gov/displayDir.cfm?Internal_ID=N_PR_4100_001D_&page_name=Chapter5

Ponemon, L. A., & Wendell, J. P. (1995). Judgmental versus random sampling in auditing: An experimental investigation. Auditing, 14(2), 17-34. Retrieved from http://ezproxy.umuc.edu/login?url=http://search.ebscohost.com.ezproxy.umuc.edu/login.aspx?direct=true&db=bth&AN=9510180605&loginpage=login.asp&site=ehost-live&scope=site.

Rinehart, R.F. (1960). Effects and causes of discrepancies in supply operations. Operations Research, 8(4), 543-564. Retrieved from http://www.jstor.org.ezproxy.umuc.edu/stable/167296.

8

Vance, L. L. (1960). A review of developments in statistical sampling for accountants. Accounting Review, 35(1), 19. Retrieved from http://ezproxy.umuc.edu/login?url=http://search.ebscohost.com.ezproxy.umuc.edu/login.aspx?direct=true&db=bth&AN=7061008&loginpage=login.asp&site=ehost-live&scope=site

Williams, M. (2007). Veterans affairs: Inadequate controls over IT equipment at selected VA locations pose continuing risk of theft, loss, and misappropriation. GAO Reports (GAO-07-505). Retrieved from http://ezproxy.umuc.edu/login?url=http://search.ebscohost.com.ezproxy.umuc.edu/login.aspx?direct=true&db=bth&AN=26015645&loginpage=Login.asp&site=ehost-live&scope=site

BIO Michael (Mike) Showers, CPPA, is a property manager with over 40 years of experience ranging from counting and ordering inventory for a retail store, to management of agency-wide property management and logistics activities. Mike was awarded a Master of Science in Management degree, with a specialization in Procurement and Contract Management, from the University of Maryland, University College, in 2010. He is married, with three adult children and lives in the Washington, DC suburbs. He currently serves as the Manager of the Contract Property Program at NASA Headquarters, in Washington, DC.

9

It Is Not Chattel: a Look at Personal/Tangible Property Issues in Research Administration

By

Kathleen Lorenzi, Vincent “Bo” Bogdanski and Dr. Douglas N. Goetz, CPPM, CF

What’s the problem? Everyone knows that under a grant the recipient owns any property purchased; under a contract, the government owns the property provided or purchased, right? Next clause. Hold on partner - NOT SO FAST! Purchase, ownership, management, and disposition of property under a government project can be confusing, involved and, if done wrong, expensive. So, what does that mean for the research administrator and the university? Well first, it is essential to make sure the correct property clauses and requirements are in place for the nature of the award. Second, and, even more importantly, the research administrator must use the accurate interpretation of the property requirements at the beginning of any project to minimize confusion throughout the project and at closeout. Third, the research administrator must be familiar with the content and have an understanding of the appropriate property clauses and requirements in each type of award, whether a contract, grant, cooperative agreement or other type of award. Last, but not least, the research administrator must work with her team to make conscious choices about property based on her knowledge of the property clause in the award and have the negotiated property terms with the agency documented thoroughly. Thorough, up-front planning and documentation between the principal investigator, central administration, departmental administration and property administration will make life much easier throughout the project and especially at the conclusion. Throughout this Article the term “property” refers to physical or tangible property only (equipment, special test equipment, special tooling, materials, supplies, and expendable property). We will discuss federal property and non-federal property, e.g., private, for comparison purposes. Also, we are assuming that property administration at your university takes place in an office completely outside those traditional research administration specialties; departmental, pre-award, post-award, compliance, etc. This is the model used by most universities and the reason close coordination between all the administrative parties is so important. Why is property important? Aside from personnel, it is the largest expenditure category in research administration and, the potential for the disappearance, abuse or misuse of property in an open, university setting is perceived to be high risk by sponsors. A single property item can be anywhere from a penny to millions of dollar. It is remarkable the number of smaller items that cumulate in a laboratory or research area from beakers to cameras to laptops to electron microscopes. Most sponsors expect accountability for all the items purchased or provided under an award as the sponsor is told, and therefore, believes, that the research cannot be performed without it. Principal Investigators and their team sometime forget that the property is owned by

11

the university or the sponsor and is not titled to them, their lab or their department. Rather, they are the stewards of the property and they are accountable for that property. GRANTS AND COOPERATIVE AGREEMENTS UNDER FINANCIAL ASSISTANCE AGREEMENTS OK, so in this wide world of property, where does one start? How about with the document that research administrators are most familiar; 2 CFR 215, Uniform Administrative Requirements for Grants and Agreements with Institutions of Higher Education, Hospitals and Other Nonprofit Organizations (lovingly referred to by all as A-110). Part 215.30 of A-110 contain the Property Standards the Federal Government expects the university to implement in their own property management system and then, actually follow (yeah, really!) these requirements. Please note that your property management system may be reviewed by your Administrative Contracting Officer (ACO) to determine if you have a property management system adequate for managing property purchased with federal funds or provided to you by the agency. Take note, all agencies are expected to observe these standards and shall not impose additional requirements unless required by federal statute.” (215.30). It should also be noted that A-110 applies only to financial assistance agreements as defined in the Grants and Cooperative Agreement Act of 1975; it does not apply to awards with private organizations or to procurement contracts under the Federal Acquisition Regulations (FAR). As with any agreement, it is important to understand the definitions applied to the project. A-110 has specific definitions for Equipment, Excess Property, Exempt Property, Personal Property, Property, etc., and they may not be the same as other documents referenced in this Article, such as the FAR, or, grants and agreements with private entities. Such as, in A-110, “Property means… real property, equipment, intangible property and debt instruments,” and “Supplies means all personal property excluding equipment, intangible property, debt instruments,… and inventions of a contractor conceived or first actually reduced to practice in the performance of work under a funding agreement….” “Personal property means property of any kind except real property; may be tangible, have physical existence or intangible….” To add to the above and avoid confusion, we will not include discussions on intangible property, e.g., intellectual property, real property, e.g. land/buildings, or debt instruments, but will focus on equipment, personal property and supplies. To plan appropriately, recognize that Section 215.31 requires insurance coverage on property purchased under A-110 to be equivalent to insurance the university purchases on its own property. If special insurance is required due to location, cost or use of the equipment, or requirements of the agency, additional insurance costs above your normal university insurance may need to be addressed in your proposal (Reference Section J.25, Insurance and Indemnification, of 2 CFR 220, Cost Principals for Universities (lovingly known as A-21)). A small note – insurance for Government property under a contract is handled differently – we’ll talk about that later. In A-110, 215.33, the government may choose to provide federally owned property, or Government furnished property (GFP) in the general vernacular, to the university to use on a

12

specific research project. This rarely happens under grants or cooperative agreements so the topic is discussed further in relation to contracts. However, a research administrator needs to be able to manage the situation as all GFP must be controlled from time of receipt to completion of final disposition. Universities have a common problem that sometimes results from close relationships between the government technical representative and a principal investigator or university employees who work at or near a government facility. The government employee provides an “excess” piece of Government property without going through the GFP procedures. Eventually, the Government Property Administrator (GPA) finds out about this “gift” and they are not happy. If this occurs corrected procedures are required to be installed in both locations after the fact and that requires additional work and more hassles than if originally done correctly. If the university does not have procedures in place for handling property, unexpected costs may be incurred. As stated earlier, all GFP must be controlled. Title of Property acquired by the university under a grant or cooperative agreement will normally pass to the university thereby relieving universities of many challenges associated with keeping track of Government property. However, do not be lulled into complacency by this idea. When working with the Federal Government, there are always strings of some sort that are attached – the research administrator needs to know what to look for so she can share with the principal investigator and department. For example, some federal agencies reserve the right to take title back within 120 days of the conclusion of the grant or cooperative agreement. In actuality, title to the property may only be on a conditional basis. Section 215.34 allows title to go to a university for Equipment and supplies but establishes certain conditions controlling the use and disposition of this property. These conditions for equipment purchased with federal funds include:

A university cannot use equipment to provide services to a non-federal, outside organization for a fee while it is being used on federally funded projects. If the equipment is not currently being utilized for a project and used to provide outside services, a university cannot undercut the fees of a private sector provider of the same or similar services.

A university must use the Equipment on the project under which it was required as long as needed for the project. This condition applies whether or not the project continues to be funded by the government. The Equipment cannot be encumbered without approval of the government, i.e., taking a loan using the equipment as collateral.

Once a project is over, a university must use the Equipment in connection with its other federally sponsored projects.

Equipment can be used for other federally funded project when it is not needed for the project under which it was purchased. Preference is given to other projects funded by the same agency.

When the Equipment requires replacement, a university may use the old equipment as a trade-in or, sell and use the proceeds to offset the costs of replacement equipment – with agency approval, of course…

A university property management system must keep track of all Equipment and include a long list of descriptive information as listed in 215.34(f)(1); A physical

13

inventory must be conducted every 2 years; a control system with safeguards to prevent loss, damage or theft must be established; a university is responsible for the maintenance and upkeep of the Equipment; and should a university want to sell the Equipment, proper sales procedures are required to provide for competition.

If any property is lost, stolen or damaged, an investigation must ensue as to the conditions and events around the incident and be fully documented. If the property is GFP the incident must be reported to the agency grant officer promptly.

When a university no longer needs the Equipment, it may be used for other activities in accordance with, you got it, more standards:

o If Equipment fair market value is $5,000 or more, a university may retain and use the equipment for other uses provided the original awarding agency is compensated based on current market value. If Equipment is no longer required by a university, request disposition instructions from the awarding agency. Instructions must be provided by the agency within 120 calendar days.

o If instructed by the awarding agency or disposition is not received in 120 days, the university may sell the Equipment but must reimburse the awarding agency by a prescribed formula.

o If the university is instructed to ship the Equipment elsewhere or dispose of the Equipment, the university shall be reimbursed by the agency based on a formula taking into consideration the university’s shared investment in the Equipment (if any).

Supplies and other expendable property are discussed in Section 215.35. Title to supplies and expendable materials will vest in the university upon acquisition. Any unused supplies can be used for other federally sponsored projects. If no other federal project can use them, the supplies may be used for non-federal sponsored activities or be sold. The university is required to compensate the government for the use or sale of supplies not used on a federal project. Again, any supplies used to provide outside services, a university cannot undercut the fees of a private sector provider of the same or similar services.

One very important consideration of working with the Federal Government is to recognize the “property trust” relationship related to property as stated Section 215.37:

“Real property, equipment and intangible property and debt instruments that are acquired or improved with federal funds shall be held in trust by the university as trustee for the beneficiaries of the project and program under which the property was acquired or improved. Agencies may require recipients to record liens or other )appropriate notices of record to indicate that personal or real property has been acquired or improved with federal funds and that use and disposition conditions apply to the property.”

A “trust,” as defined in Black’s Law Dictionaryi, is “1) the right, enforceable solely in equity to the beneficial enjoyment of property to which another person holds the legal title; a property interest held by one person (the trustee) at the request of another (the settlor) for the benefit of a third party (beneficiary). For a trust to be valid, it must involve specific property, reflect the settler’s intent and be created for lawful purposes. 2) A fiduciary relationship regarding property and subjecting the person with title to the property to equitable duties to deal with it for another’s benefit; the confidence placed in the trustee, together with the trustee’s obligations toward the

14

property and the beneficiary. A trust arises as of a result of the manifestation of an intention to create it.” (page 1513) If you consider the university as a trustee, the government as the settlor and the principal investigator/award as the beneficiary, the idea of the trust begins to make sense. In other words, the government has the right to take back title to property it is funding under an award if the Government Property Administrators (GPA) determine that the university is not using it appropriately, is mishandling or misusing the property, or, is not safeguarding the property adequately (didn’t know that, did you?). To date, it is not obvious that the federal agencies strictly enforce all of the requirements stated above; they have so many issues on their plates these days. However, be prepared for that to change if your university does not make a reasonable effort to establish an adequate property management system that complies with the above stated conditions. A research administrator must know something about agency differences in interpreting this trust relationship. For example, agencies have the authority to vest title in tangible personal property for research under 31 USC 63.6306 (Title 31, Money and Finance, Subtitle V, General Assistance Administration). However, in accordance with Title 15 USC, Commerce and Trade, Section 3710, Utilization of Federal Technology, (i) Research Equipment, “the Director of a laboratory, or the head of a federal agency or department, may loan, lease or give research equipment that is excess to the needs of the laboratory, agency, or department to an educational institution or nonprofit organization for the conduct of technical and scientific education and research activities. Title of ownership shall transfer with a gift under this section.” In other words, know what to ask of the agency should your university ask for permanent disposition of equipment. A good example relating to the trust relationship is the NSF “Grant General Conditions.” The rule is found in Article 6, paragraph a. Title to Equipment – Non-profit Organizations, state, “Unless otherwise specified in the grant, title to equipment purchased or fabricated with NSF grant funds shall vest in the grantee upon acquisition. Such equipment is considered exempt property and shall be acquired and used in accordance with paragraph c below.” So, what is Exempt Property? A-110 defines Exempt Property as “tangible nonexpendable personal property acquired in whole or in part with federal funds, where the federal awarding agency has statutory authority to vest title in the recipient without further obligation to the Federal Government.” Now, we look for the strings attached to this disposition of property at paragraph c. Conditions for Acquisition and Use of Equipment; sound familiar?

1. Grantee Assurance. The grantee will assure that each purchase of equipment is: (a) Necessary for the research or activity supported by the grant; (b) Not otherwise reasonably available and accessible; (c) Of the type normally charged as a direct cost to sponsored agreements; and (d) Acquired in accordance with organizational practice.

15

2. General Purpose Equipment. Expenditures for general-purpose equipment (see AAG Chapter V.B.2d) are unallowable unless the equipment is primarily or exclusively used in the actual conduct of the research. 3. Equipment Usage. The equipment will remain in use for the specific project for which it was obtained in accordance with 2 CFR § 215.34(c), unless the provision in 2 CFR § 215.34(e) applies. 4. Equipment Sharing. The equipment must be shared on other projects or programs in accordance with 2 CFR § 215.34(d). 5. Property Management Standards. The grantee shall maintain a property management system that, at a minimum, meets the requirements of 2 CFR § 215.34(f). Because of increasing threats to information technology systems, the grantee is reminded that, under 2 CFR §§ 215.34.(f). (4) and (5), "[a] control system shall be in effect to insure adequate safeguards to prevent loss, damage, or theft of the equipment" and "adequate maintenance procedures shall be implemented to keep the equipment in good condition." This requirement imposes on the grantee a duty to adequately maintain and to insure adequate safeguards against the loss, damage, or theft of information technology equipment and systems purchased with NSF funds. 6. Inventory Requirements.

(a) In accordance with the requirements of 2 CFR § 215.33(a)(1), for all equipment exceeding $5,000, the grantee must submit an annual inventory listing of government owned property to the NSF Property Administrator, Division of Administrative Services (DAS). The listing should include all government-owned equipment purchased under the award or acquired by screening excess through the General Services Administration (GSA); and include the type of equipment, serial number, acquisition price, acquisition date and condition of the equipment. The inventory listing and a copy of the organization’s audited financial statement should be submitted electronically to [email protected] and must be received by DAS no later than September 1 each year. (b) A physical inventory of Government-owned equipment shall be conducted every two years pursuant to 2 CFR § 215.34(f). Upon expiration of the award, the grantee shall report the property to the DAS Property Administrator for further agency utilization.

7. Competition. The grantee shall not use equipment acquired with Federal funds to provide services to non-Federal outside organizations for a fee that is less than private companies charge for equivalent services, unless specifically authorized by statute in accordance with 2 CFR § 215.34(b). 8. Right to Transfer Title.

(a) NSF may identify items of equipment having an acquisition cost of $5,000 or more where NSF reserves the right to transfer the title to the Federal Government

16

or a third party named by the Federal Government at any time during the grant period. (b) In cases where NSF elects to transfer the title, disposition instructions will be issued no later than 120 calendar days after the expiration date of the NSF-supported project for which it was acquired.

An issue common to all universities occurs when a principal investigator moves from one university to another. Many principal investigators believe property is tied to the grant or cooperative agreement. This simply, is not the rule. Title to the property is with the university or a university’s foundation depending upon the structure of the university and the university decides if it is appropriate for property to be transferred with the departure of a principal investigator. Often, program managers “insist” that the property accompany the principal investigator but, in reality, the decision remains with the university. One factor important to the decision process is that good relations with any federal agency are almost always paramount. However, determination of an adequate property management system at the new university is also important. The best way to avoid these issues is to develop good policies and procedures that are used consistently in the decision making process. PRIVATE FOUNDATONS, NONPROFITS AND INDUSTRY SPONSORS Non-federal sponsors sometimes want to take title to equipment purchased with their sponsor funds. Often the solicitation or award does not discuss, much less determine, title to property, sponsor provided property, liability issues, normal wear and tear, maintenance, disposal and shipping costs at the conclusion of the award. We suggest all these issues be addressed in negotiations and before acceptance of the award. A major consideration is the cost of property to the university verses cost of property to the sponsor. Most universities receive significant discounts for materials and equipment that a private sponsor cannot obtain and, they are tax exempt. It is better to make it clear in your proposal or in your sponsored research agreement that ownership/title to all property will reside in the university to avoid being implicated in possible IRS issues or be in the predicament of a public entity providing special treatment to a private entity . In addition, do not plan on the sponsor to specify the requirements for handling sponsored owned property as a government agency might. The internal property management requirements of the Federal Government are quite different than the requirements imposed upon universities by non-profits and other sponsors. If the property is to be provided by the sponsor, and, if this equipment is needed for other projects at your university, a contingency plan should be considered to buy that equipment. As mentioned above, if your university accepts use of property owned by the sponsor, that property should be controlled using a property management system similar to the GP management system described above. PROPERTY ASSOCIATED WITH GOVERNMENT CONTRACTS Moving from financial assistance agreements to procurement, if your university receives Federal Government contracts, FAR 52.245-1, Government Property, should be a clause you find in all cost type, time and material, as well as fixed price contracts where GFP is provided. The primary sections of this clause we want to discuss are as follows (the other sections, i.e., systems, handling, liability, and equitable adjustments, will be discussed in general around these sections):

17

Section (a) provides the all-important definitions (read each definition carefully; hint - they are different from A-110);

Section (b) requires a “system of internal controls to manage (control, use preserve, protect, repair and maintain) Government property” – also known as a property management system;

Section (c) discusses the use of Government Property under a contract; Section (d) discusses the warranties and guarantees made by the Government for

Government-furnished property (GFP) as well as the Government’s authorities to change the GFP, i.e., increase, decrease or substitute.

Section (e) states that the government retains title to all Government property either furnished, acquired or fabricated under the contract.

The Property clause states, “the contractor shall use the Government property, either furnished or acquired under this contract, only for the performing this contract.” Comparing the requirements of the FAR to A-110, though similar in many respects, the FAR is much more strict and less flexible. Therefore, if your university participates in financial assistance agreements and contracts, your property management system is required to relate to the FAR requirements and may require evaluation by the ACO or Government Property Administrator (GPA) to determine if it is adequate. Property Management System The FAR, under paragraph (b) of the Government Property Clause, requires the contractor to “have a system of internal controls to manage (control, use, preserve, protect, repair and maintain) government property in its possession.” A few years ago, the Federal Government changed its approach to internal controls by moving from a dictated set of controls to a more commercial, contractor determined managerial approach. “The contractor may employ customary commercial practices, voluntary consensus standards, or industry leading practices and standards that provide effective and efficient government property management that are necessary and appropriate for the performance of this contract.” The government outlines the extent of the responsibilities but leaves the specifics of “how” to the contractor. The contractor, in this case the university, is deemed to be the “steward” of that Government property. This requirement is also a required flow-down to subcontractors; “This requirement applies to all government property under the contractor’s accountability, stewardship, possession or control, including its vendors or subcontractors.” In working with your industry partners, you may find that many entities, universities and commercial contractors alike, used Voluntary Consensus Standards (VCS) created through VCS Bodies such as ASTM International or the “International Standards Organization” (ISO). No matter what standard you apply within your Property Management System, the government reserves the right to audit and determine whether or not your property management system is “adequate.” Government Property (GP) / Government Furnished Property (GFP) Paragraphs (c) and (d) of the Government property clause discuss the “Use of Government Property” and “Government Furnished Property.” For use of any Government property provided under a Government contract, the university is to use that GP ONLY for the contract under which it was provided – or, for any other use, only as authorized by the Contracting Officer. For paragraph (d) dealing with Government furnished property (GFP) -- this paragraph describes the

18

warranties made regarding that GFP as well as the authorities to “change” that property. Specifically the Government has the unilateral right to increase or decrease that GFP or substitute other GFP. But, the Government also assumes some responsibilities in regard to the quantity and condition of that GFP. First, the Government provides that the GFP will be suitable for its intended use and delivered in a timely fashion, enabling your principal investigators to perform their research and meet research deadlines. If the Government fails to meet these obligations the university may be entitled to an equitable adjustment. Of course there are always exceptions – and in some cases the Government may provide that GFP in as “AS-IS” condition, at which point the university would not be entitled to an equitable adjustment for any repair work done to bring the equipment up to a working standard. Oh, and on top of that, any repair parts used to make the equipment suitable for use under an “AS-IS” situation – those now becomes Government property. Second, the Government has the unilateral right to increase, decrease or even substitute other GFP for the GFP listed in the contract. It appears that the Government has a lot of clout when dealing with GFP. Liability for Loss of Government Property FAR 45.104 states “Generally contractors are generally not held liable for the loss of Government Property under the following types of contracts:

1) Cost-reimbursement contracts. 2) Time-and-material contracts. 3) Labor-hour contracts. 4) Fixed-price contracts awarded on the basis of submission of certified cost or pricing

data.” [NOTE: the Department of Defense has modified this to include Negotiated Fixed-price contracts where there is no requirement for a certificate of current cost and pricing data.]

As long as your PMS is deemed adequate, the Government assumes most liability for the loss of Government property unless there is other specific wording in the contract to the contrary or the recipient accepts FAR 52.245-1, Government Property with Alternate I. Under Alternate I, the liability for loss is placed upon the contractor. Also, there is potential liability when there is GFP provided by a federally operated laboratory or GOCO facility. Often these organizations “modify” the GFP language to limit their liability and move that liability to the recipient of the contract. Pay special emphasis to GFP wording that is not quoted word-for-word from the FAR. Disposition and Disposal of Government Property At the conclusion of the project, your university must comply with the disposition instructions for Government Property. These disposal requirements are set forth under FAR 52.245-1 paragraph (j) for the university and FAR Subpart 45.6, as well as other statutory requirements for the Government. There are a number of possible options that the Government may use:

1) The accountability of the Government property may be transferred, with authorization provided by Contract Modification, to another contract or grant/cooperative agreement at your university which is performing similar work and has need for the use of the equipment.

2) The Government may direct your university to ship the equipment to another location, with the shipping normally at the Government’s expense.

19

3) The Government may abandon Government property in place, if there is no longer a need for the equipment or the economics of the situation do not warrant shipping to another location,

4) The Government may ask the university to dispose of the Government property through sale.

4) Universities have an additional advantage in that the Government can “donate” excess Government property under specific circumstances such as the donation of Educationally Useful Federal Equipment under Executive Order 12999.

Title under Fixed Price Contracts If you have a fixed price contract awarded competitively, FAR 52.245-1(e) provides the guidance regarding title. It states, “the contractor retains title to ALL (Emphasis added) property acquired by the Contractor for use on the contract….” Now of course with the Government there are always exceptions. These title exceptions (Where the Government claims title) include:

1) if GFP is provided, 2) if there are financing provisions, 3) if there are special circumstances, or 4) if property is the deliverable.

If property is a deliverable, it would be a wise, prudent university that would try to negotiate, Freight on Board (FOB) ORIGIN, for the deliverable so that the Government takes title before shipment and, more importantly, the Government assumes liability for property in transit. This saves you the shipping hassles associated with costs, transportation and liability. Note, if the university is required to pay for shipping, make sure the costs are estimated in the budget or the terms of the contract are “pre-pay and add.” It is noted that most university principal investigators and proposal analysts do not think to include shipping and other costs in their proposed budgets. In addition, these costs are not normally included in a university facilities and administrative (”F&A”) rate. Most fixed price contracts are not subject to the Government property clause as all property acquired vests with the university and there may be no GFP provided under the contract. If GFP is provided under the fixed price contract – then the contract needs a Government property clause. If the purchase of property is required to become the successful bidder, the cost of that property is in the total fixed price as either a direct or indirect cost or that property MUST be listed as a deliverable. The Government DOES NOT have title to any property purchased in anticipation of or as a result of a successful fixed price competitive proposal – other than a listed deliverable or through bad things happening, i.e., termination! Title under Cost Reimbursable Contracts Title to Government property is determined by Paragraph (e)(3)(i). It states, “Title to all property purchased by the Contractor for which the Contractor is entitled to be reimbursed as a direct item of cost under this contract shall pass to and vest in the Government upon the vendor's delivery of such property.” This paragraph has three components to it:

1. The Government claims title to ALL property, 2. To which the university is entitled to Reimbursement. This issue of entitled to

reimbursement brings into play to other issues, or sub issues: a. First, for an item to be entitled to reimbursed it must be Reasonable, Allocable

and Allowable. These terms are defined in A-21 (which, by the way, is

20

incorporated into the FAR through Part 31.3) and play an important role in what the university MAY or MAY NOT charge the Government.

b. Second, the property must be charged DIRECT. Indirect charged and it is university property.

c. Third, under the issue of Cost Accounting Standards, universities have their own application of Cost Account Standards set forth in A-21. One of the critical ones for property – CAS 9905.502—Consistency in Allocating Costs Incurred for the Same Purpose by Educational Institutions,

3. And lastly, the Government states the exact instant WHEN it claims title – under this paragraph of the clause – at vendor’s delivery.

Paragraph (e)(3)(ii) AMPLIFIES the title provisions to provide other situations where the Government takes title. These may be more applicable to a commercial production environment than a university setting – but they are still important to understand. There are four actions that impact title. Specifically, the Government claims title to all OTHER property, i.e., property not delivered by a vendor, upon:

1. Issuance of that property (Say from a stock room setting where the company maintains its own inventory)

2. Commencement of processing (Company owned raw stock out on a factory floor which is then used for the instant contract)

3. Reimbursement (Getting paid for the property as a direct item of cost) with the overarching umbrella condition…

4. Whichever occurs First! A note about accounting and property management (And we should have at least one. Paragraph (e)(1) of FAR 52.245-1 provides guidance regarding any installation or improvements to that Government property. If the asset IS an item of Government property, acquired under an account that direct changes the Government for that property, there are two restrictions placed upon any improvements or other actions:

1. You cannot install that GP such that it becomes non-severable as defined in 52.245-1(a), and

2. Any improvements made to the GP do NOT affect its title. That item remains Government property INCLUDING any of the improvements made to it.

Again, up-front planning and understanding the award conditions will save lots of work later. So, how does this Section (e)(3) and (e)(4) apply to universities? Fortunately we are different!!! When in doubt, read the prescriptive language to the Government in FAR 45.107(a)(3). It states, “The contracting officer shall use the clause with its Alternate II when a contract for the conduct of basic or applied research at nonprofit institutions of higher education or at nonprofit organizations whose primary purpose is the conduct of scientific research (see 35.104) is contemplated.” This is a key clause for universities! The first statement you see in Alternate II is, “As prescribed in 45.1-7(a)(3), substitute the following for paragraph (e)(3) of the basic clause.” In essence, the original (e(3) goes away and is replaced by the following:

“Title to property …purchased with funds available for research and having a unit acquisition cost of less than $5,000 shall vest in the contractor...provided that the contractor obtained the Contracting Officer’s approval before each acquisition.”

21

This is great, right! No mess, no fuss, the university owns anything it purchases under $5,000 under a government contract. Think again; not quite so simple. First, many research administrators tend to substitute ‘equipment’ for property in this sentence. Second, the contracting officer has to give her approval for the purchase of all property per this sentence. Unlike a grant, the fact that the Property is already identified in the budget that is in your contract does not mean that the property purchase has been approved (a significant difference between contracts and grants). A specific request for approval has to be submitted to the contracting officer for approval. For example, NASA is very strict about this requirement. Each agency has their own system for this approval and it is up to the research administrator to know or find out what that system is. There is a possibility that you can have this approval written into the terms of the contract but do not count on it. Another consideration of this purchase approval is tied to A-21. Remember, A-21 is discussed as policy in FAR Subpart 31.3. Section F of A-21 discusses certain costs that are associated with facilities and administrative (“F&A”) expenses. Many types of property are considered “general purpose” in a university setting (such as laptops, cameras, printers, stamps, etc.) but is needed to support the research but is normally purchased with F&A funds. The typical reason is that this property cannot be controlled to the extent that it is identified with one specific project. As such, when requesting approval to purchase property documentation is required to justify the purchase in that 1) it will be used only on this one project, 2) it is not a duplication of a cost incurred under F&A, and 3) there is a need for this specific purchase that cannot be supported by other property already at the university. Now the fun part of Alternate II (yes, there is a lot more to know). Like most businesses, capital equipment is a carve-out of property that is defined as costing over $5,000 with a life of one year for IRS purposes so that capital depreciation costs can be determined. Keeping this in mind, the second half of Alternate II says the following:

“Title to property purchased with funds available for research and having a unit acquisition cost of $5,000 or more shall vest in as set forth in the contract. If title to property vests in the contractor under this this paragraph, the contractor agrees that no costs shall be allowed for any depreciation, amortization, or use under any existing or future contract or subcontract thereunder. The contractor shall furnish the contracting officer a list of all property to which title is vested in the contractor under this paragraph within 10 days following the end of the calendar quarter during which it was received.”

Where does one start with this section of Alternate II? First, distinguish between property required to support the research vs. property that will go into a deliverable or is a deliverable to the Government. It is in the best interest of a university to recognize under a Cost reimbursement type contract that any property purchased that will go into a deliverable would be considered Government property. If it is a general piece of equipment over $5000 used to SUPPORT the program and does NOT go into the deliverable – then you need to determine – is it F&A chargeable. For property over $5,000 that is to be acquired to support the research, make sure that property is identified. Work with the contracting office to determine who, the Government or the university, will take title and document it in the contract. This includes property that will be fabricated

22

(starts out as parts but becomes a piece of equipment with a value over $5,000). It is important that the project team makes a conscious decision on what is best for the university – to ask for title or to recognize purchased property as government owned property. Need (now and in the future), use, liability and cost of ownership are criteria on which to make this decision. At the end of the contract, one more requirement must be met. Property purchased under a government contract will require that the university request disposition if title is not vested in the university. FAR 52.245-1 paragraph (j) provides detailed directions in regard to the reporting of excess Government property – as well as specific time frames for these actions to be started by the university AND completed by the Government. Again a reminder, Property, where title is with the Government, cannot be used on any other project (even another government project) without specific approval of the contracting officer. Also, remember 31 USC 63.6306 (Title 31, Money and Finance, Subtitle V, General Assistance Administration) and Title 15 USC, Commerce and Trade, Section 3710, Utilization of Federal Technology, (i) Research Equipment, that is our earlier discussion of a trust relationship. FAR Part 35, Research and Development Contracts In all the discussion above about FAR 52.245-1, do not forget about your other FAR sources to support your negotiations. FAR 35.014, Government Property and Title, states that “the requirements in Part 45 for establishing and maintaining control over Government property apply to all R&D contracts. However, Section (b) can be critical to the cause:

(b) In implementing 31 U.S.C. 6306, and unless an agency head provides otherwise, the policies in paragraphs (1) through (4) following, regarding title to equipment (and other tangible personal property) purchased by the contractor using Government funds provided for the conduct of basic or applied scientific research, apply to contracts with nonprofit institutions of higher education and nonprofit organizations whose primary purpose is the conduct of scientific research:

(1) If the contractor obtains the contracting officer’s advance approval, the contractor shall automatically acquire and retain title to any item of equipment costing less than $5,000 (or a lesser amount established by agency regulations) acquired on a reimbursable basis. (2) If purchased equipment costs $5,000 (or a lesser amount established by agency regulations) or more, and as the parties specifically agree in the contract, title may—

(i) Vest in the contractor upon acquisition without further obligation to the Government; (ii) Vest in the contractor, subject to the Government’s right to direct transfer of the title to the Government or to a third party within 12 months after the contract’s completion or termination (transfer of title to the Government or third party shall not be the basis for any claim by the contractor); or (iii) Vest in the Government, if the contracting officer determines that vesting of title in the contractor would not further the objectives of the agency’s research program.

23

(3) If title to equipment is vested in the contractor, depreciation, amortization, or use charges are not allowable with respect to that equipment under any existing or future Government contract or subcontract. (4) If the contract is performed at a Government installation and there is a continuing need for the equipment following contract completion, title need not be transferred to the contractor.

(c) The absence of an agreement covering title to equipment acquired by the contractor with Government funds that cost $1,000 or more does not limit an agency’s right to act to vest title in a contractor as authorized by 31 U.S.C. 6306.

Talk about repeatability in the FAR and other regulations… Some Agency Specifics Recently, universities have been experiencing federal sponsors that are requiring Government title to property under all contracts both fixed price and cost type. Primarily, these sponsors have been Management and Operating (“M&O”) contractors at federal laboratories under the Department of Energy. The justification they are using is that they are required to utilize the subcontracting requirements of DEAR 970.945-1 instead of the standard FAR 42.245-1. This DEAR supplement clause is appropriate for contractors providing on-site support to the M&Os, but not to universities performing research projects at the university. One explanation provided is that since the university operating the M&O is on a Government Facility or laboratory – that lab needs to be able to continue operation even if the incumbent university leaves and another is brought in to operate the lab. Universities need to be aware that the laboratories may ask for a detailed budget for small dollar proposals, which is their right, in order to make a price acceptability determination, but then modify the FAR clause associated with their “normal” university agreements to include Government title to all property even in fixed price awards. Negotiating with the laboratories is difficult even with a strong basis so Government title to property becomes a university decision with all the issues related to the first part of this article. PROPERTY ASSOCIATED WITH SUBAWARDS AND SUBCONTRACTS In this article, understand that subawards are issued under federal financial assistance agreements and subcontracts are issued under federal procurement contracts. Normally, when a university receives a subaward which passes through a federal grant or cooperative agreement, the property clauses or agency policies associated with the grant or cooperative agreement are flowed to and must be accepted by the subawardee. A-110 property terms should be the basis of most subawards unless special circumstances are involved. Sometimes a non-profit or for-profit organization that received the prime requires title to any property purchased. If you are the subawardee, you should try to negotiate title for your university based on the agency practices and A-110. If you cannot, then the terms and conditions of the subaward prevail -- but be sure to negotiate those topics already discussed under non-federal granting agencies above; that is, liability issues, normal wear and tear, maintenance, and shipping costs at the conclusion of the grant. Caution is urged if you are a subcontractor for a FOR PROFIT CONTRACTOR. If a for-profit is given title through your acquisition, you may be guilty of providing a non-taxed purchase to a for-profit organization for the benefit of the for-profit. That purchase may have been made using a higher education discount not available to for-profits. If you are a public university, you will be using state funds (your purchasing system) to assist a for-profit by buying the item for them tax

24

free. We recommend that you negotiate Government ownership or ask the for-profit to purchase the equipment and provide it to you in a similar way that the Government provides GFP. There is no requirement to flow down title to the recipient of the subaward unless the grant or cooperative agreement has specific wording requiring that flow down. If your university is the prime recipient of a grant or cooperative agreement, you should make property title decisions based on the sponsor’s and your university’s best interest. If your university is the recipient of a subcontract based on a federal prime contract, title to equipment may be defined in either the subcontract instrument you receive from the prime or terms and conditions of the prime award may be flowed down as part of the subcontract. Sometimes property clauses are in both the subcontract and the prime flow down clauses. In this case, try to remove one or the other or be sure to negotiate an ‘order of precedence’ clause in the subcontract to clarify which clause takes priority. We suggest that your university provide a proposal submittal letter with your budget and technical proposal to the Prime. In this submittal letter, outline the clauses you believe are appropriate for the subcontract you expect to receive. Be sure to include a request for the Property Clause inclusive of Alt II so that the prime contractor will have this information when negotiating its contract with the Agency. Finally, if you are recipient of a federal contract with the Government Property clause, hopefully you negotiated Alternate II (for basic and applied research) and defined in the contract where title to property will reside that will remain with the university and where title to deliverable property will exchange hands. It is critical to understand that there is no requirement to flow down the Alternate II of the Government property clause to a for-profit entity. Just because you, the university, may acquire title through the Alternate II provision of the Government property clause -- you cannot turn around and provide the equivalent title vesting allowance to a for-profit subcontractor. Typically, when working with a for-profit organization, the university should take title as the prime contractor with the intention that, ultimately the title will vest in the government. This discussion should be part of your negotiation. This may be a good option if there are many pieces of purchased property or a piece of high valued of property required for the project. We provide this example to show that by being the prime there should not be an “automatic” decision of property title when you have a subcontract. Make a conscious decision regarding property title that is in accordance with the regulations and the best interests of the parties. One other note -- remember, the prime is responsible for the actions of the subcontractor including the adequacy of their property management system and any property reporting required by the contract. OTHER CONSIDERATIONS Most universities have equipment definition thresholds of $5,000 and a life of one year. What happens when a funding agency requires property control at some value below $5,000? Also, some agencies, such as the M&O contractors discussed above, have a concept called “sensitive property.” If possible, negotiate to the $5,000 threshold. If sensitive property is to be used under the grant or contract, be sure to have a specific definition of the type of property that is expected to be controlled and any specific requirements for that control! As a research administrator, you

25

must be sure that your university has mechanism to track, control and manage that sensitive property within its property management system. THINGS TO REMEMBER The authors of this article are strong proponents of up-front planning, actually reading the grant, cooperative agreement or contract and all the clauses of that instrument, and making conscious decisions when it comes to Property. The critical time in the planning is prior to proposal submittal. However, if that is not possible, be sure and develop your strategy while in negotiations prior to award. The key to research property administration is recognizing the consequences of improper application of the property clauses, the lack of property clauses, misunderstanding the property clauses, or the incorrect property clauses. Putting property in perspective to the statement of work defined in the award takes some thought. Here are some recommendations to consider:

Every decision regarding property should conform to your university’s property administration practices and controls.

It is usually best to obtain property title for your university upon acquisition. However, other options are available and may be more appropriate to the circumstances. Decisions should take into consideration the management procedures that are in place at your university.

Non-standard property language in a grant, cooperative agreement or contract is usually a cause for extra scrutiny and discussion.

If GFP is available, be sure the Government includes a list/description of the GFP in the appropriate solicitation and award document (FAR 45.201(a)).

Grants (A-110) provide more flexibility for use of property than contracts (FAR). FAR 52.245-1 with Alt II (if appropriate) is a “friendly” university/non-profit clause but

the research administrator must think through the entire spectrum of possibilities to properly control property acquired.

There is a requirement to flow property management requirements to subawardees or subcontractors. There is no requirement to flow the prime property conditions, i.e., title vesting language and liability considerations to a subawardee or subcontractor if other considerations make sense for that individual project.

Be very mindful when addressing title to property purchased by a for-profit organization under a university prime grant or contract.

Fixed price awards should generally not require sponsor or Government title under competitive conditions other than for deliverable items.

Read the entire property clause even if it looks like standard FAR or A-110 language. Think we are through? NOT SO FAST. Go back to the beginning of this article and read it again. There are a number of concerns that need to be considered when property title is part of the equation.

26

Reference Notes: A-110. OMB Circular A-110, Uniform Administrative Requirements for Grants and Agreements with Institutions of Higher Education, Hospitals and other Nonprofit organizations, now codified in 2 CFR 215 A-21. OMB Circular A-21, Cost Principals for Education Institutions, now codified in 2 CFR 220 FAR - Federal Acquisition Regulations, codified in 48 CFR, Chapter 1 i Garner, B. A. (Ed.), (1999). Black’s Law Dictionary (7th ed.). St. Paul, Minnesota: West Publishing Co.

BIOS Kathleen Lorenzi, CPCM is the Associate Director, Office of Contracts and Grants at the University of Colorado Boulder. She is a Certified Professional Contract Manager (CPCM) through the National Contract Management Association (NCMA) with over 27 years in contract management and research administration, and a member of NCURA since 2002. Kathy has been a member of many workshops and panels with both NCURA and NCMA on topics such as FAR, negotiating agreements, and export controls. Vincent “Bo” Bogdanski is a Senior Research Administrator at Colorado State University. He has over 20 years of government contracting experience and has been an NCURA member since 1994. Bo has written several articles for NCURA Magazine, has discussed the FAR on NCURA TV, and has been a member of many workshops and panels regarding the FAR. Dr. Douglas N. Goetz, CPPM, CF is President and CEO of GP Consultants – specializing in Contract Property Management issues. He received his BA and MA from Hunter College of the City University of New York, and his Doctorate (Ph.D.) from The Ohio State University in National Security Policy Studies and Adult Education. He has served on the faculty of the Defense Acquisition University (DAU) in Dayton, Ohio and previously the Air Force Institute of Technology (AFIT) at Wright Patterson AFB, Ohio, for nearly thirty years. Dr. Goetz has had extensive experience as a Property Administrator within the Department of Defense. He has traveled extensively through the United States and overseas researching the application of the Government Property Management Requirement. He has experienced Property Management up close and personal in the war zones of the Balkans and Iraq – as well as far flung operations in Japan, Guam, Turkey and Saudi Arabia, to name just a few locations. Based upon his research he has written and has had published over 100 articles and multiple textbooks. His publications have included articles for numerous professional magazines and journals including articles for the National Contract Management Association and the National Property Management Association – with numerous articles receiving awards of Technical Excellence. He served as the National Editor of the “Property Professional,” an international publication, for twenty years and is now the Editor Emeritus. He also serves as the Editor of the NPMA Journal of Property and Asset Management.

27

Dr. Goetz was the Program Manager and Professor for the Defense Contract Property Management Series of Courses offered at AFIT and DAU where he designed and developed the curricula for the Department of Defense Industrial Property Series (GS-1103). His expertise also allowed him to lecture in Contract Law, Contract Management and the Executive Level Contract Management Courses. Dr. Goetz’ awards are impressive: He was the 1990 recipient of the Federal Property Manager of the Year award presented by the National Property Management Association and the United States Government in the field of Property Management. In 1993 he received the Jack Griffiths Property Manager of the Year award, and in 1998 the Lifetime Achievement Award from the National Property Management Association and in 2007 was presented the NCMA Alan E. Peterson Award for Distinguished Service in Government Contracts. He has also been recognized for his teaching abilities – awarded the John Demidovich Excellence in Teaching Award by AFIT in 1990 and in 2008, he was awarded the Defense Acquisition University Teacher of the Year. He has received both the Meritorious Civilian Service Award and the Superior Civilian Service Award. And in June of 2013 he was inducted into the Defense Acquisition University Hall of Fame for his outstanding contributions to the Defense Acquisition University and the property profession, Dr. Goetz is listed in Marquis’ “Who’s Who in American Education,” “Who’s Who in America,” and “Who’s Who in the World.”

28

How Much Are Your Capital Assets Really Costing You?

by: William M. Love, CPPS

Space Coast Chapter

Overview

If your goal is to maximize operational efficiencies (and the resultant profits) then knowing your true cost of capital asset ownership will help you make more informed decisions about what to buy, how many to buy, when to buy, and when to retire these assets from active service. After all, you initially traded one asset (cash) to obtain these capital assets for hopefully only one reason – to generate profitable sales of products or services that will provide you with even more cash. Practically speaking, if you adopt anything less than this strategy then you may find your organization slipping from a “for-profit” state into one that resembles a philanthropic, a state that will not be pleasing to your stockholders. From a cash flow and operational excellence perspective, it can only benefit you to have as much relevant information on hand as possible to facilitate your planning and decision making. This information will help you make changes to your processes, streamline functions, eliminate duplication and waste, and generally reduce overall operating expenses related to owning assets. In addition, this kind of valuable information provides financial and operational data that drives timely decisions that directly impact such things as overhead and bid rates. By trading your liquid assets (usually cash) with outside vendors for assets that support the creation of products for sale (the infrastructure), or become saleable products in and of themselves, you utilize business processes that create only two outputs: products or services. The net profit or loss from these processes is directly dependent upon how well, or how poorly, your organization functions as a coordinated entity. So, why do you need to know about asset management? Whether you realize it or not, virtually everyone in your organization touches assets every day during the performance of their jobs. Ultimately, their actions should directly or indirectly support the creation of other assets that will be sold. This White Paper describes a cost model that provides valuable information to help facilitate your decision-making processes related to capital asset acquisition and utilization. Besides the obvious costs, there are other costs associated with these assets including the functions of sourcing and procuring, for example, that you may not normally consider. As a point of reference, this cost model begins at the point of physical receipt of the item at the receiving dock and ends at the moment of final disposal when we actually turn over physical possession of the asset to another entity. It measures the direct and obvious costs, while emphasizing that other hidden and less obvious costs exist as well. Depending on the size and complexity of your organization, it may not be possible to calculate some expenses, such as sourcing and procurement costs, and then assign them to specific capital

29

assets. And even though other costs mentioned in this paper will not directly impact the cost calculations in the cost model itself, it’s important to understand that each of these other spread or allocated costs, whether indirect, hidden, or otherwise related to these same assets, will impact your profit and loss calculations, as each capital asset is placed into service or taken out of service for final disposition. Capital Assets Defined The National Property Management Association (NPMA) defines a capital asset this way:

“Capital long-term assets that are not bought and sold in the ordinary course of business. The term usually refers to fixed assets such as machinery, equipment, buildings and land.” (ASTM E2135)

Your own company definition of a capital asset may read something like this:

“Capital assets are not provided to us by a customer or the government. They are purchased with our own corporate or division overhead money. They are not intended for resale. They have an estimated useful life of at least 3-5 years or more, and will cost a minimum of $3-5,000 dollars. These assets can be used on multiple contracts and for multiple purposes, to help generate income or otherwise support the infrastructure.”

There are only three basic types of “assets” that can be incorporated into your business processes. The first asset type (capital) either supports the creation of products for sale or it supports the infrastructure. The second asset type is people, an asset that sometimes gets overlooked in the overall production equation. The third asset type consists of items or assets purchased for resale (equipment/inventory/material/parts/etc.). Depending on the nature of your business, you will use some mix of capital assets and people to modify, combine or otherwise prepare for sale the other purchased items, or assets. In other words, every business entity will have only three inputs that are combined in some fashion to create only two outputs, namely, products or services. Cost Types Defined

Costs include both one-time and ongoing or recurring costs that relate to these assets as well as unexpected but other direct costs, such as repairs. This model provides an explanation of the carrying costs and how they were determined by the cost calculation model. The model incorporates multiple data points that are explained below. Each of these key data points has its own detailed back-up file of explanation to show how its particular costs were calculated. At least one example of such a back-up file is shown in this paper. It has to do with how storage costs were calculated. Some costs are defined as direct and some are indirect. Some may be allocated and some may be prorated on a percentage basis across a particular cross-section of the business. Regardless of how you may classify your costs, they all contribute to the total cost of keeping capital assets on hand. For example, sometimes acquisition costs may be attached to specific assets or groups of

30

like assets. Insurance, property taxes and similar costs, on the other hand, will usually have to be spread over the total population of assets for a particular location, campus or universe of assets, depending on the size of your organization. In this cost model example, however, property taxes have been calculated and averaged out for a particular group of assets. The model incorporates seven different kinds of costs. They include everything from the one-time costs related to each asset, to the ongoing lifecycle costs once the asset gets inducted into the system and placed into service. For example, every asset has a one-time receiving cost. Likewise, each one has a final disposition (property disposal) cost once its useful life has ended. The cumulative result of these transactions can be averaged over an operating period, however, for certain types of assets, to arrive at an approximate per unit cost for these types of transactions. Keep in mind also that if you have certain unique and specific costs related to your particular kind of business, you can certainly add them in or substitute them for other costs that may not relate to your operations. The specific costs that make up this model include the following seven types:

1. Receiving (a one-time cost, including tagging, unless the asset is repurposed later) 2. Maintenance and Repair (as needed throughout the in-service lifecycle) 3. Storage (as needed) 4. Calibration (usually at least annually or some other predefined frequency) 5. Property Tax (annual) 6. Depreciation (annual) 7. Disposal (a one-time cost)

The terminology used here is somewhat interchangeable. That is, such terms as property, equipment, and assets may all refer to the same uniquely tagged item. Other terms such as inventory, piece parts, and materials all refer to what the industry normally considers loose parts, or other things that do not have individual and unique asset identifiers, tags, or labels to differentiate one unit from another. This White Paper concerns itself with the former category. Mandates and Industry Requirements Capital asset management reaches far and wide across a broad spectrum of interests. When we bid on jobs, or perform work on government contracts, we have to identify a certain baseline or infrastructure that supports and justifies our costs. If we are to eventually recover the cost of the capital assets that make up our infrastructure then we must price our work and our services accordingly. As a result, we have to show a certain level of accountability to our stockholders, customers, government agencies, and others. On a high level, these are some of those other drivers that impact and influence how we manage our capital assets:

1. SOX – the Sarbanes-Oxley Public Company Accounting Reform and Investor Protection Act of 2002

2. ISO – International Standards Organization: an international standard-setting body composed of representatives from various national standards organizations. ISO promulgates worldwide proprietary industrial and commercial standards.

31

3. ASTM, AIA, NPMA, etc. – Industry standards and practices (e.g., ASTM E2453-05: Standard Practice for Determining the Life-Cycle Cost of Ownership of Personal Property).

4. FAR – Federal Acquisition Regulation, issued by agencies of the U.S. federal government to govern the acquisition process for goods and services.

5. ICSA – Internal Control Self-Assessment, and other internal command media 6. DCAA – Under the authority, direction, and control of the U.S. Under Secretary of

Defense (Comptroller), performs contract audits for the U.S. DoD and provides accounting and financial advisory services regarding contracts and subcontracts to all DoD components responsible for procurement and contract administration.

7. MACRS – Modified Accelerated Cost Recovery System for asset depreciation required by the U.S. income tax code.

Lifecycle Cost Examples Calculated Throughout its normal functional lifecycle, we can determine when an asset’s net book value will reach either zero or some predetermined residual value. By plugging in the average annual rate of depreciation for a particular type of asset, we can compare its utilization/output value to decide whether to keep it in service or retire it. And based on a measured burn rate for all related expenses, (including average maintenance and repair) we can know when and how much cost has been accumulated to date, in order to predict a disposition timeline. For example, we may buy an asset for $20,000 that has a depreciable life of five years. By the end of year 5, its net book value will be zero. However, it may still be fully functional and producing its share of product/profits. Rather than get rid of it and spend another $20,000, we may keep it in service until such time that all additional expenses to maintain this asset reach a certain predetermined ceiling. This tolerance level may range anywhere from 50% to 75% of the original cost. Based on the strength of cash flow, however, some companies may have no choice but to continue repairing an older asset even beyond its original threshold simply because they cannot afford the total cost to replace it. The affordability issue also includes the capacity, or willingness, to finance such a purchase. Between the receiving and the disposing steps related to an asset, there will be other expenses associated with it such as property taxes, maintenance and repairs made to it, and calibration performed on it, in the case of a piece of test equipment, for example. Also during its lifecycle, it may be repurposed and combined with other parts or assets. In such a case, it becomes a new asset and its lifecycle starts over and a new depreciation schedule begins that reflects another cost baseline. In this case, the previous asset is zeroed out and retired on the books, since it reached the end of its originally intended lifecycle and usefulness.

32

Cost Factor Details

There are several types of cost that contribute to the overall cost of capital asset ownership, as shown in Figure 1. These “cost accumulators” manifest themselves throughout the lifecycle of the asset and many do not occur in any particular order except for the receiving, tagging and final disposition. The model captures these costs and calculates the total cost of keeping that asset on hand. The words in red represent those expenses that have been identified specifically in this cost model. The words in black represent other costs that need to be considered but are not part of this particular cost model example. Many of these represent the indirect, overhead, or associated but more difficult to measure costs. Overall, the model should help us understand certain key performance indicators about a business. One of these performance indicators measures our ability to produce income with company assets. The objective, of course, is to produce the maximum amount of income with the minimum number of assets.

Figure 1. Capital Asset Cost Accumulators.

33

Return on Assets – Why is this so important?

We calculate this particular efficiency measurement with something called the Return on Assets formula:

ROA = Net Income / Total Assets This number tells us "what our company can do with what we have." In other words, how many dollars of earnings do we generate from each dollar of assets we control? To increase this value, which is a key measure of operational efficiency, we need to reduce the number of assets on hand (without sacrificing output) or generate more cash flow with the same number of assets by increasing their utility value. In other words, what percent of time are the assets actually being used compared to the number of hours they remain idle (on a daily, weekly, monthly basis)? Return on assets gives an indication of the capital intensity of the company, which will depend on the industry. Companies that require large initial investments will generally have lower returns on assets. However, this doesn’t mean a low ROA necessarily translates to poor profitability or lack of efficiency. The ROA is also a useful number for comparing competing companies in the same industry. The number will vary widely across different or non-related industries. Since the assets of the company are comprised of both debt and equity, both of these types of financing are used to fund the operations of the company. The ROA figure gives investors an idea of how effectively the company is converting the money it has to invest into net income. The higher the ROA number, the better, because the company is earning more money on less investment. For example, if Company ABC has a net income of $1 million and total assets of $5 million, its ROA is 20%. However, if Company XYZ earns the same $1 million, but has total assets of $10 million, it has an ROA of 10%. Based on this example, the first company is better at converting its investment into profit, assuming they’re in the same industry. But back to the Cost Accumulators. As the timeline shifts to the right, the total per asset cost rises proportionately. The model calculates what this percentage increase is on a sliding scale. In other words, in Figure 1, the cost for an item at the end of year 5 is X% of the acquisition cost, and will increase at an irregular rate throughout the asset’s lifecycle. (In this model, a few of the actual costs have been averaged after three years of operation to predict future costs.) The Five Types of Value

This project also defines the more subjective value types that are associated with capital asset ownership. While costs are specific amounts that can be directly or indirectly attributed to the acquisition, utilization, and final disposition of capital assets, values are less definitive. However, these values directly influence decisions that are made regarding the use of, the useful life of, and ultimately the timely disposition of, these assets. There are five types of values (described following Figure 2 below) that are associated with, and must be considered, when studying this particular universe of capital assets, especially when it comes to making decisions related to their use and ultimate disposition. Each value type has its unique definition and has been constructed over time based on such drivers that include those

34

described above in the Mandates and Industry Requirements section. Other factors like current market value (for replacement of the asset) based on supply and demand and technology-refresh upgrades drive these values. Also, utility or output-related value, (what can the asset produce that is saleable that will generate cash flow and profit?), drives these value definitions. Figure 2 illustrates the relationships of these values to one another. Also following the figure is a brief explanation of each value and why and how they impact the decision making process.

Figure 2. Capital Asset Valuation Curves. a. Acquisition Value (AV). For this project, we define this value as the collective efforts that have to be expended that lead up to the actual receipt of the item. However, the actual cost of specific assets does not come into play here on the “value” side of the equation. We are only considering the costs associated with acquiring these assets. So, regardless of the original purchase price of a capital asset, these front end costs must all be factored in to the total value determination. (Our internal metrics do not associate cost with specific types or groups of assets due to the large volume of transactions and numbers of assets that are processed annually.) Figure 2 displays acquisition value as simply the actual cost of the item as a starting point for illustration.

Depreciated Value

Time (Years)

1 2 3 4 5 6

10,000

Replacement ValueAcquisition Value

Utility Value

Zone of Diminishing Returns

Economic Value

Zone of Replacement Tolerance

What is the true value of capital asset ownership?

8,000

6,000

4,000

2,000

0

12,000

Bill Love September, 2012

Cost (Dollars)

Zone of Maximum Productivity

35

b. Net Book Value (NBV) (shown as Depreciated Value). Per generally accepted accounting principles (GAAP) this is the actual depreciated value that is calculated by taking the purchase price and subtracting the accumulated depreciation to date from it to arrive at the current period balance sheet value of that asset. These GAAP practices must comply with Internal Revenue Service (IRS) regulations and corporate practices to produce a consistent and auditable transaction history record. The curve shown here is based on a straight line method. c. Replacement Value (RV). This is the current market value or cost to buy another like item to replace or provide back-up to a similar asset in form, fit and function. From an insurance underwriter’s perspective, this is the baseline value that determines annual premiums payable for covering the cost to replace these assets, if and when that becomes necessary. Replacement value is calculated from inflation tables provided by insurance companies and is based on the original purchase cost of each asset. Asset values for all assets currently listed as active and on the books are adjusted annually from these tables. d. Utility Value (UV). This is the value the asset creates based on its usefulness to the company, in terms of how it produces items for sale, or how it provides a service that generates revenue. The challenge is to balance the net utility value against the cost of money and cash flow needs. In other words, to follow a strict practice of asset replacement based strictly on net book value may maximize the depreciation tax write-off for income tax purposes, (thus lowering the amount of income taxes paid) but to buy a like replacement item every five years may take more cash in the long run. And from a utility value, for example, that same asset, were it not replaced, may continue to produce at or near capacity with minimum operating expense (maintenance and repairs, e.g.). So the next logical question you have to ask is does the money that would have been spent to replace that asset provide even greater overall (economic) value were that same cash spent (or managed) otherwise? e. Economic Value (EV). This is a measured value that someone is willing to give up for one item or service in order to obtain a different item or service. In a supply and demand market-driven economy, the amount that a person is willing to pay for something tells how much of all other goods and services they are willing to give up to get that item. This is known as the “willingness to pay” and represents a trade-off for one item over another item. This is somewhat related to the utility value because it impacts cash flow. There are tradeoffs that need to be weighed and measured in order to gain the maximum possible advantage or financial gain. The Three Zones of Lifecycle Value

In addition to the seven costs and the five values, I’ve defined three decision zones, also shown in Figure 2. The first zone on the left side is the Zone of Maximum Productivity (ZMP). This represents that time in an asset’s lifecycle during which it produces its designed and expected output. Usually during this period, the costs, if any, associated with this asset have been relatively minor from the time it was first acquired and placed into service. It will have experienced normal depreciation throughout this period from a net book value perspective, but will have maintained virtually all its utility value.

36

The Zone of Diminishing Returns (ZDR) represents a range (rather than a point) in time where the asset starts to lose its full capacity to produce the same output as it did when it was first purchased and placed into service. Theoretically, the cost to use and maintain this item drops below the breakeven point of its output value at some point in this zone. That is to say, the asset’s yield or output rate after a certain point fails to increase proportionately compared to additional outlays of cash or investments of time and labor that have been put into it to keep it productive. While mathematically there may be a single point of diminishing returns on the timeline early in the left most area of this zone (a single vertical line at the three-year mark, for example), if no action is taken to replace the asset, the return on this asset will gradually drop proportionately with aging. And while that single mathematical point may make theoretical sense from a cash flow/asset replacement perspective, in reality that asset doesn’t suddenly come to a screeching halt on a day certain on the mathematical timeline. Thus, we need the ZDR. As time progresses the Zone of Replacement Tolerance (ZRT) begins to overlap the ZDR and essentially drives the ultimate decision as to what to do with the asset. The eight options are:

1. Sell it 2. Scrap it 3. Donate it 4. Replace it 5. Upgrade it 6. Retain it as is 7. Cannibalize it 8. Repurpose/rebuild it

As time marches on, the replacement tolerance increases proportionately. That is to say, as the asset’s maintenance and repair costs and down-time increase, and its productivity decreases and management patience wears thin, it becomes increasingly easier to make a disposition decision. And as its potential replacement asset continues to increase in price on the open market, the motivation to take that particular aging asset out of service increases proportionately. In other words, how long can you tolerate taking no action on a certain asset, because the longer it stays in service, the more cost it will incur, the less value it will produce, and the more its replacement item will cost? Value Features Provided by the Tool There are four types or categories of features (think: value added) that can be derived from this cost model tool.

1. Rates and Relationships

a. Relationships of assets to one another related to maintenance and repair costs, compared to age or length in service: similar assets bought at about the same time and price will have varying cost histories that can be compared to determine what percent of a particular asset type may require more maintenance and repair (M&R) than another type. Perhaps a particular brand or model consistently

37

outperforms that of another manufacturer, or it requires much less maintenance over the same operating period of time.

b. How long an asset has been kept in service past its fully depreciated lifespan: some assets may last longer than others based on percentage of use, which directly impacts the wear and tear and associated M&R and calibration costs.

c. Rate of accumulated costs per item per asset per period: this shows how much total cost an asset accumulates over defined periods of time.

d. Spend rates based on historical data by cost type: groups of assets require differing amounts of care, which determines the rate at which spending occurs.

e. Relationship of costs to age of assets: overall assessments can be made per group or type of assets based on longevity or time in service.

f. Relationship of costs to initial asset purchase price: this compares how much has been spent to keep the asset as compared to what it cost in the first place to acquire the asset.

2. Dollar Cost Values

a. Accumulated costs per year per asset: shows bulk accumulated costs per asset per time period.

b. Escalated costs by percentage from year to year: this is a built-in adjustable percentage that allows for the annual increase in prices due to inflation or other factors.

c. Average operating cost per month per asset: this breaks down each asset’s monthly operating cost based on an extended period of time such as a year.

d. Accumulated depreciation per asset per year: shows how much has been written off per asset per year, and how much depreciation expense has accumulated for that asset.

e. Net book value per asset per year: shows what is left to depreciate against the asset based on its purchase price and the number of years it has been in use, which can be compared to average in-service lifecycle history.

f. Balance of money to spend before defined thresholds are reached: shows at a glance how much money is left to spend against the allowable limit per asset. These limits or thresholds may be somewhat arbitrary and may be subject to change based on cost and performance factors.

g. Replacement cost of the asset per year based on estimated and adjustable escalation rates: it projects out what the future cost would be to replace the asset at a certain price in a certain year.

3. Averages and Trends

a. Changes in cost from year to year per cost type: based on actual cost figures, you may be able to see how particular types of assets change in cost over certain periods of time. Does increase in age always equal increase in cost?

b. Number of months until certain thresholds are met or exceeded per asset: helps project cash flow for certain types of expenses.

38

c. Trends over multiple years within and beyond an asset’s depreciable lifespan: shows how long assets may outlive their “book” value and life.

4. For Planning Purposes

a. Cash flow estimates for maintenance and repair, and asset replacement b. Retirement of assets based on cost and/or age c. Strategic planning for overall capital expenditures d. Technology refresh timing

Cost Calculations Baseline

As you build your model to perform cost calculations, recognize that each type of cost consists of a variety of inputs that come from different sources. Some information may come from emails and attachments, some from source documents and other spreadsheets, and some from telephone or personal interviews with various subject matter experts (SMEs) on the topic. These inputs are entered into individual Excel worksheet tabs, by name. In other words, there is a Property Taxes Cost tab, a Calibration Cost tab, a Storage Cost tab, and so on. Found within each tab is an Item No. column, a Value column, a Description column, and a Source / Basis / Calculations column, which when combined, make up the cost calculation roadmap for that particular cost, as shown in Figure 3. The red number is the amount of expense that is carried over to the cost model’s master tab where all costs are accumulated. Each type of expense tab will have its own unique number of line items and set of calculations, based on the many factors that come into play during the research and analysis of that particular type of expense. The column headers, however, remain constant for all tabs. (The three columns to the far right in this Figure 3 worksheet example related to storage cost by location are unique to this cost tab and do not appear in any other cost tabs.)

Figure 3. Excel Worksheet Backup Data Calculations for Storage Cost.

39

The Four Asset Lifecycle Cost Types

There are four different groupings of cost in this model that come into play when determining the total cost per asset.

1. The one-time costs consist of two items: the receiving cost and the disposal cost. 2. The annual fixed costs are the depreciation expense, property tax, and insurance. 3. The as-needed per event cost is the calibration and maintenance and repair of items. 4. The annual as-needed cost is the cost to store an asset after it is taken out of service.

Depending on when in the asset’s lifecycle you choose to identify costs to date, some or all of these above four groupings of cost may apply. For example, at the end of year two of a five-year asset lifespan (from a depreciation perspective), there will have been the initial receiving and tagging cost, any maintenance and repair costs during the first two years, probably calibration cost (if the asset is a piece of test equipment, for example), and the associated annual depreciation for those first two years. A tab in the cost model labeled Cost Item Categories groups and summarizes these four different kinds of cost, as shown in Figures 7a, 7b, 7c and 7d. Analyze Phase Overview

Once all the available data is gathered, it is entered into the master spreadsheet for processing. Two of these items consist of one-time only costs, namely, the Receiving Cost and the Disposal Cost. Any asset is only purchased once and is only disposed of one time. The remaining columns represent cost types that may occur more than once for a particular asset throughout its lifecycle. One challenge is to show specific cost types, both total one-time and recurring, by type of expense. The one-time costs will be reported separately from the other on-going costs, but the combined amounts represent the actual and total cost for those assets for their complete lifecycles, once again as shown in the Figure 7 series. Cost Model Explanation

As part of the master spreadsheet, Figure 4, Asset Information Baseline, this tab displays the Carrying Cost Model for Special Assets. This model will allow you to determine many key things about capital assets and cash flow. Beginning in the upper left corner, there is some basic information about the asset that is displayed under the header of Asset Information Baseline. These first 11 columns of information are fixed and serve as the baseline for all other year-by-year calculations, from 1 to 10 years, as shown in Figures 5 and 6. Whether you have a few dozen line items, several hundred individual assets, or even thousands of items, this baseline information applies to them all.

40

Figure 4. Asset Information Baseline. There are 21 columns of various types of information related to each asset for each year of the 10 years in this model. The 21 column headers are identical for each of the 10 years, only the data changes each year. The columns with descriptions and actual data (from Year 4 in this particular example) are displayed below in Figures 5 and 6. A more detailed explanation is given beginning in Table 1 below for each of the columns in the baseline portion of the cost model. Table 2 explains the remainder of the 21 columns that display to the right of the baseline columns.

41

Figure 5. Cost Model Columns 1-11.

42

Figure 6. Cost Model Columns 12-21.

43

Figure 7-a. Cost Model Summary of One-time Costs.

AB

C A

ss

ets

DE

F A

sse

ts

GH

I A

sset

s

AB

C A

ss

ets

DE

F A

sse

ts

GH

I A

ss

ets

AB

C A

ss

ets

DE

F A

sse

ts

GH

I A

sset

s

DE

F

DE

F

AB

C

DE

F

GH

I A

BC

DE

F

GH

I A

BC

DE

F

GH

I

1

44

Figure 7-b. Cost Model Summary of Annual Fixed Cost.

AB

C A

ss

ets

DE

F A

sse

ts

GH

I A

sset

s

AB

C A

ss

ets

DE

F A

ss

ets

GH

I A

ss

ets

AB

C A

ss

ets

DE

F A

sse

ts

GH

I A

sset

s

DE

F

DE

F

AB

C

DE

F

GH

I A

BC

DE

F

GH

I A

BC

DE

F

GH

I

2

45

Figure 7-c. Cost Model Summary of As-needed Per Event Cost.

AB

C A

ss

ets

DE

F A

sse

ts

GH

I A

sset

s

AB

C A

ss

ets

DE

F A

ss

ets

GH

I A

sse

ts

AB

C A

ss

ets

DE

F A

sse

ts

GH

I A

sset

s

DE

F

DE

F

AB

C

DE

F

GH

I A

BC

DE

F

GH

I A

BC

DE

F

GH

I

3

46

Figure 7-d. Cost Model Summary of Annual As-needed Cost.

AB

C A

ss

ets

DE

F A

sse

ts

GH

I A

sset

s

AB

C A

ss

ets

DE

F A

ss

ets

GH

I A

sse

ts

AB

C A

ss

ets

DE

F A

sse

ts

GH

I A

sset

s

DE

F

DE

F

AB

C

DE

F

GH

I A

BC

DE

F

GH

I A

BC

DE

F

GH

I

4

47

------------------------------------------------------------------------------------------------------------------- Table 1. Asset Information Baseline Description.

Column Name

Cell Description Explanation (M = manually loaded, C = calculated)

A Start Date This is the starting date when each asset is entered into the system. This date serves as the starting point for all depreciation and time-in-service measurement purposes. It can be changed to reflect different operating periods or lengths of years, if desired, to look at “what-ifs”. (M)

B Current Date This is the most current date, or the date from which a transaction is calculated. (This is a manual entry that can be entered multiple times based on what you want to calculate as of a certain date.) (M)

C Asset Identifier This is the individual asset identifier that uniquely tags each asset. No two assets will have the same identification number. (M)

D Asset Description The asset's unique description. (It’s important to use the same consistent descriptions to avoid confusion and loss of data. And consistent usage saves a great deal of time in searching and sorting for items.) (M)

E Initial Cost This is the amount paid for the asset, the purchase price, when it was first acquired. (M)

F Number of Months Since Start Date

The number of months the asset has been in the system, based on whatever date is in the Current Date column. (C)

G Number of Years in Service

The number of years the asset has been in the system, based on the number of months divided by 12. (C)

H Number of Years to Depreciate

The time in years that the asset will be depreciated based on a pre-determined standard for that type of asset. (This is a one-time manual entry.) (M)

I Number of Months to Depreciate

The number of months the asset will be depreciated, based on the number of years times 12. (C)

J Depreciation Expense Per Year (Straight Line)

This is the amount that is written off each year for depreciation expense against the original cost of that asset. This table is set up for a straight-line method, meaning the same amount is written off each year until the net book value reaches zero. Divide initial cost by total years. (C)

K Depreciation Expense Per Month (Straight Line)

The annual expense charged to depreciation, based on the purchase price of the asset, divided by the number of months to depreciate. (C)

48

Table 2. Asset Transaction Activity Categories.

Column Name

Cell Description Explanation (M = manually loaded, C = calculated)

BZ Accumulated Depreciation Cost by the End of

This is the sum total of each year’s depreciation cost for those assets as of the end of that year. (C)

CA Net Book Value by the End of

This is the remaining net book value for the assets after the accumulated depreciation expense has been deducted from the initial cost. (C)

CB At Current Depreciation Rate, Months Remaining Until Asset's NBV = 0 (-X = months past NBV0)

This is how many months remain until the asset reaches a net book value of zero. A negative number means the asset has been kept in service that many months past the month when it reached the zero book value. Divide the initial cost (E) by the depreciation expense per month (K) then subtract the number of spending months by that year’s end (CG). (C)

CC Maintenance and Repair Cost for

This is the amount of maintenance and repair cost for the asset for that entire year. (M)

CD Average Calibration Cost for

This is the cost to calibrate this asset each year. (M/C)

CE Annual Property Tax Cost for

This is the annual property tax cost for this asset, based on an average total value for those types of assets. (M/C)

CF Total All Cost at the End of

This is the total amount of all costs associated with that asset for the entire year. (C)

CG Number of Spending Months by the End of

This is the total number of months that costs have been expended against the asset through the end of that year. (C)

CH Average Total Monthly Cost

This is the amount of all cost divided by the number of months to date. (C)

CI Maint and Repair Cost to Date by the End of

This is the total of all maintenance and repair costs accumulated for the asset as of the end of this year, including all previous years. (C)

CJ % of M&R Cost to Date to Initial Cost, at the End of

This is the percent of maintenance and repair cost spent to date, compared to the initial cost of the asset, as of the end of this year. Divide the M&R cost to date by the initial cost. (C)

CK Maximum M&R Cost Allowed Before Replacing the Asset

This is the maximum amount of money that has been approved to spend on the asset for maintenance and repairs before it is taken out of service and replaced. (M)

CL % of M&R Cost Limit to Original Asset Purchase Cost

This is the relationship of the M&R cost limit to the initial cost of the asset. In other words, no more than this percentage of the purchase cost will be spent to repair this asset. Divide the M&R dollar cost limit by the purchase cost of the asset. (C)

CM % Spent of Actual M&R Cost Against the Allowed Limit

This is the percent of actual maintenance and repair cost that has been spent against the allowed limit to spend for that asset. Divide the actual cost to date by the maximum allowed limit. (C)

49

CN Balance to Spend to Reach the Allowed M&R Limit

This is the amount of money left to spend before the maximum allowed limit is reached for that asset. Subtract CI from CK. (C)

CO Average Amount of M&R Monthly Spending

This is the average amount of maintenance and repair money being spent per month, as of the end of that year. Divide the total M&R money spent to date by the number of months that have elapsed to date. (C)

CP At Current M&R Spend Rate, Months Remaining Until the Asset Replacement Threshold is Reached

This is the number of months that remain until the maximum allowed M&R cost will be reached. Divide the balance to spend by the monthly rate of spending to get the number of months remaining to spend. (C)

CQ % of All Cost to Date to Initial Cost, at the End of

This is the percent of all costs that have been spent to date compared to the original purchase cost of the asset. Divide all cost to date by the original purchase cost of the asset. (C)

CR At Current Spend Rate, Months Remaining Until Initial Purchase Cost is Exceeded

This is the number of months that remain until everything spent to date will exceed the original price of the asset. Subtract all costs to date from the initial cost then divide by the average total monthly cost. (Initial cost (E) minus the total of all cost (CF) divided by the average total monthly cost (CH). (C)

CS Purchase Cost of the Same Asset After

This is what it would cost to buy the same asset at the end of this year; includes an annual built-in multiplier (e.g., 3%). (M/C)

CT % Increase Over the Initial Buy After

This is the percentage increase above what the original purchase price of the asset was, as of the end of this year. Divide CS by the initial cost of the asset. (C)

Conclusion

ou should now have a better understanding of what it costs to own capital assets, no matter the size or type of your organization. The outright purchase of an asset simply triggers the start of its cost meter and this meter

will run until the asset physically leaves your possession for the final time. The moment you acquire the asset, and even more certainly place the asset into service, it generates costs. The expectation is that this capital asset, in concert with other like assets that support and periodically replace it, will also generate (or support the generation of) sales revenue and create a state of profitability that will repeat itself in perpetuity. You must practice intelligent information management if you expect to make decisions that positively impact cash flow and operational strategies. And when you have the right tools available that provide key data, your chances of making good decisions rise significantly.

Y

50

And finally, when you understand the differences between, and the unique definitions of, cost and value, it will help you manage with a broader and richer perspective. Decisions have ramifications. Cash flow and profitability depend on the right decisions. The more you know, the more effective your decisions will be, and hopefully, the more successful the results. So, now you should be empowered to generate the answer to that all-important question: “How much are your capital assets really costing you?” BIO William M. Love, CPPS, is an Asset Analyst, a Lean Six Sigma Green Belt, and a member of the Enterprise Asset Management Solutions team for the Government Communications Systems division at Harris Corporation in Palm Bay, Florida. Prior to joining Harris 12 years ago, Bill worked at GE, Lockheed Martin and several smaller commercial companies. His almost 40 years of experience includes computer conversion consulting, accounting and tax management, production operations management, proposal development and technical writing, and economic analysis and market research. This cost model will be presented at the National Education Seminar in Orlando, Florida in July, 2013.

51

What It Takes To Become A Respected Property Manager

and Subject Matter Expert

By

Robert J McFarland, CPPM/CF

Hoosiers Chapter

OVERVIEW: Take a journey through the rigors of becoming a Respected Property Manager and Subject Matter Expert (SME). While some may tell you that you need to know FAR 52.245-1 and others will tell you need your National Property Management Association (NPMA) certifications to become a solid Property Manager this article will make you aware that there is so much more you need to know and be able to work effectively to be a productive member of your management team and be recognized by your peers as a Subject Matter Expert. This discussion will take you through the various subjects you need to know and understand from a Property Management perspective to effectively contribute to your company’s mission. It is essential that Property Managers are able to effectively manage streamlined, effective property control systems but you also must ensure that risk is minimized and the impact on the company’s ability to be profitable is not compromised. We will look into all the disciplines that enable a good Property Manager to become a valuable member of the management team and an expert in the Property Management profession. For many years Property Managers dealt with only compliance and most senior management had little to no visibility to Property Management requirements, the cost of managing property or the value that can be achieved by managing assets efficiently and effectively. The recent inclusion of Property Management in the Department of Defense (DoD) Business Systems Rule (BSR) has provided positive visibility for Property Management and the importance of establishing an effective Property Management System. While the Business System Rule only applies to the part of a contractors system that manages Government Property (GP) it does tie many of the key functions in business that are necessary to run any efficient Organization. The Business Systems Rule provides some visibility into what the Government considers necessary to run a business under their contracts. This should send a bright signal to all senior management of the benefits that can be achieved by operating a single accountability system that maximizes the company’s investment in assets. Companies have a significant investment in assets and

53

most companies have no idea what their Total Cost Of Ownership (TCO) amounts to. A solid property manager must be able to lead a company on all aspects of property management and be able to address and advise the company on all control areas critical to the operation of a world-class property system. We will go into several key areas within the organization where the Property Manager must not only know the Property Management Laws, Regulations and Policies but also know the Laws, Regulations and Policies in every organization that acquires, uses or may dispose of assets. When the Property Manager has the respect and confidence of senior management the property control system will be compliant, efficient and effective. Moreover integration of all the accountability responsibilities will result in the elimination of overlap and duplication in all areas, significantly reduce cost and improve profitability. Basic Property Management Skills: A Property Manager must be able to manage customer expectations. They should completely understand the contract requirements and what responsibilities the company has and any special provisions documented in the contract. Proactive property managers are involved in the Request For Proposal (RFP) / Request For Quote (RFQ) so that the team knows and understands the property management requirements in the document so that any proposal can include the cost of compliance but, more importantly, be able to collaborate with all organizations to identify Government Property and Material on existing contracts that may be used to keep cost down and obtain authorization within the terms and conditions of the contract. The Property Manager must completely understand the technical requirements of the Property Manager position and keep current with all changes to laws, regulations and Company Policies for Property Management System requirements including all key process areas that affect property management and the Property Management System. An effective Property Manager should understand the regulatory process, the regulatory change process including the formal communication process of all proposed and final rule changes in the Federal Register. The Property Manager must understand the Human Resources (HR) system. It is imperative that you completely understand this process so that you can properly staff your organization with qualified people and be able to work the system to be able to compensate your employees for performance, special achievements and promotions. Property Managers must have strong communication skills. They must be able to communicate with customers, Property Management Staff, Other Organizations and senior management. This ability is critical to the overall success of the property system and avoids any surprises that will impact the system. In addition to the communication skills discussed above it is imperative that the property manager be able to develop and execute effective Property Management training programs to all employees and organizations so that everyone understands what is required, why it’s required, what the benefits are and any impact or risk on the company when the process is not followed.

54

Along with all of these basic management skills I strongly believe that anyone accepting a Property Manager position must have “Managerial Courage”. I generally tell my classes, customers and colleagues that when you are a good property manager you will not be in a position to improve your popularity or increase your Christmas card list. Managerial courage means that you will always take the high road and consistently represent issues directly, honestly and in the best interest of the business. Sounds easy but I do not know many people who are willing to bring the tough issues to management when it may involve manpower reductions, elimination of functions or just simply relate to a personal issue. Last but not least, you must establish yourself as the company representative on all issues related to Property Management. You cannot allow anyone else making independent decisions relating to the management and control of assets. Other organizations are not trained and do not know the impact across the entire system. That includes all organizations and all levels of management, while this may not sit well with people in Procurement, Legal, Finance at first, it is up to you to ensure them and demonstrate to them that there is value in making you the focal point for these decisions. If you know your stuff this will not take time and they will involve you when they want to make a change that may impact assets or asset control. Business Management Skills The Company Property Manager is responsible for the planning, execution and reporting of all property control system requirements and communication of all results to management and the customer. Those responsibilities include planning & controlling physical inventories, general customer correspondence, loss reporting, corrective action plans, property procedures, property plan as well as system metrics, performance reviews and many other critical administrative actions. In order to facilitate everyday activity the property manager must be extremely capable of using Microsoft Office or other similar programs including software for project planning and accountable record system software. While as the Property Manager you may not create most of these documents, it is essential you are proficient at using the software so you can review, monitor, sort and comment effectively to ensure that communication and data are accurate and professional. You must know and understand your company’s budgeting system so that the organization is properly funded to accomplish your responsibilities. Included in this process is salary planning including promotions and any recognition contingency. You must anticipate supplies, materials, training, travel, computer equipment and software as well as any discrete items you are directly responsible for. You must be accomplished in people management skills. Your responsibilities will require delicate management situations between employees, customers as well as other organizations and senior management. I strongly suggest using a management training and follow-up system that provides you information about your management skills as

55

perceived by you, your employees, peers and management. This is a valuable tool to help you improve your skills. You must be fully knowledgeable about all key functions in the Property Management System. You must fully understand Contracts, Engineering, Accounting, Operations, Facilities, Program Offices, Human Resources including Environmental Health and Safety (EH&S). You must fully understand how contracts are executed, how requirements are generated, how orders and inventories are controlled and how all assets and materials are dispositioned. If you do not understand each organizations responsibility and how each organization interacts with other organizations you will not be able to identify issues or efficiencies that can be implemented. You must be a consulting resource to each organization so that the system supports their responsibilities but prevents any over-lap or duplication. Understanding The Regulatory Process The Property Manager must be aware of the regulatory process including all Federal Regulations and any supplemental regulations issued by a contracting activity. Certainly the Department of Defense (DoD), National Aeronautics and Space Administration (NASA), Department of Energy (DoE) and many other agencies have supplemental regulations that may be implemented in your contracts. Since the regulations change daily the property manager should be familiar with the change process and know which version of the regulations apply to each contract you are responsible to execute. The property manager should be familiar with the Federal Register and be able to research proposed rules and final rules so that you can provide input to the change process to protect your company’s interests as well as communicate to senior management what changes are under consideration and what impact they may have on your system and the company. The Property Managers responsibilities include being knowledgeable about any laws that can impact your property control system. Certainly you must know and understand Environmental, Health & Safety, Import/Export Laws, ITAR, Internal Revenue Rules that apply to assets, any local laws like Ad Valorem tax requirements so that you can provide guidance to key organizations and senior management. I also believe that the Property Manager must be familiar with settled law that relates to Property Management issues. Certainly, legal precedents can be invaluable when trying to represent the company on issues that can lead to conflict with a customer or costly changes to your property control system. Knowing and understanding the “Christian Doctrine” is essential when interpreting regulatory issues that can arise if certain regulations are not included in your contract. Understanding Regulations The Property Manager must understand the Parts of the Federal Acquisition Regulations (FAR) that apply to Property Management and be able to represent the Property

56

department with other key departments who may be governed by these Parts of the FAR. I hear so many people pontificate that FAR Part 52.245-1 is the Property Management governing regulation. That is not a complete answer and while I agree that this is a critical requirement we must be aware that when the property regulations were re-written the changes were made in 26 parts of the FAR. It is essential that the property manager know the impact that all of those parts have on the Property Management System (PMS). A Property Manager must also understand the impact of supplemental regulations, the Business System Rule and how to interpret conflicts between regulatory requirements within a contract. Simply put, courts generally rule against the writer of the contract when ruling on contracts that contain regulatory conflicts. Follow The Contract Even If…… Actually this is not much different than getting your kids Christmas gifts assembled on Christmas morning. When in doubt…read the directions!!!!! The same is true with contracts! The three most important things you need to do with the contract is read the contract, read the contract and read the contract. Having some exposure to the printing world in my younger days (Yes I was young at one time and actually set type by hand.) there was a rule that typesetters had at their workstation. It simply stated the obvious… “Follow the copy even if it goes out the window.” The same is true with contracts, follow the contract and when in doubt read it again. The contract defines the rules of engagement between your company and your customer. When reviewing contracts know where to look for the documentation you need to perform your responsibilities. You will find almost, if not all, of the FAR requirements (referred to as FAR callouts) in one section of the contract. In addition you need to pay attention to any special provisions that affect any part of your property management system and believe me they can cover a multitude of areas that you may not expect. In order to fully understand the requirements and special provisions you should read and have a good understanding of the statement of work. Know what is required and what you need to have in your system to support the timely execution of the contract schedule. Understanding Company Policy The Property Manager must be familiar with the company corporate policies. It is imperative that we know how the company wants to run the business to establish an efficient and effective Property Management System. We need to understand the policies from other organizations and make sure we do not create any conflicts or compliance issues within their discipline. I will go into some specific issues you need to watch for in the next section but in general, you must be knowledgeable of the asset management requirements in these areas:

Finance & Accounting Program Office Contracts

57

Legal Operations Engineering Human Resources Facilities Calibration & Maintenance Occupational Health & Safety

We really need to know how our system needs to support these areas, understand key compliance Issues and communicate with the program office prior to contract startup to understand the contract objectives and identify any property issues we believe need special attention. Understanding Other Business Disciplines It is imperative that we understand certain requirements that come from other organizations that are not in the Property Management regulations but are required under the contract and are executed by other organizations. We must know and understand these requirements. We must include them in our Property Management System; ensure our procedures and plans meet all compliance requirements, our staff is knowledgeable, trained and that our Property Management training program includes visibility to these issues. It is essential that we collaborate with all these organizations to ensure the company can execute the contract without compliance issues. I will go through some of the key departments and identify some key areas but remember this is not an all-exclusive list and certainly each company may have their own unique issues. The contracts department is a very critical area. The Property Manager should be involved in all proposed business and be a participant on all Request For Proposal (RFP’s) and Request For Quotation (RFQ’s) teams and support the effort by ensuring that all Property Management issues are addressed. The Property Manger should ensure an adequate Property Management Plan is included as well as a full list of existing Government Property required for this contract. We also need to make sure the correct Property Clauses are in the contract, check for any special provisions that need to be addressed and make sure we identify in the contract any existing Government Property accountable to current contracts that we may need to use so that authorization for use without cost is included in the contract. The Property organization and the Contracts organization must interface during contract performance on any number of administrative issues and Property Management must lead all activity related to contract closure that relates to assets accountable to the contract and certify to the Contracts department that all assets have been properly dispositioned and the Property Records have a zero balance against the contract. The Property Manager must interface with the program office to ensure the Property Control System supports all aspects of the contract. It is imperative for the Property Manager to identify any Property Management issues to the Program Office so that

58

resolution can be communicated to the customer. On-going communication will avoid compliance issues and ensure program performance. The Finance and Accounting departments require our utmost attention. Certainly if your responsibilities include responsibility for all property you must know how to address all the issues but even if you are only responsible for Government Property you must be aware of how the Finance and Accounting departments requirements impact the Property Management System. The Property Manager must be familiar with the company’s Cost Disclosure Statement (CDS) and how assets will be charged. We also must have a good understanding of the Cost Accounting Standards (CAS) that apply to Property Management so that we provide proper guidance with respect to acquisition, use and disposal of assets. The key CAS requirements we must know are CAS 402 “Consistency In Allocating Cost For The Same Purpose”, CAS 404 “Capitalization Of Tangible Assets” and CAS 409 “Depreciation of Capital Assets”. These issues will impact the Property System, decisions the Property Manager will make and certainly the guidance they provide to employees with respect to Acquisition, Use and Disposal. For those who do manage company assets we must be aware of any tax issues related to assets or inventory and while the Accounting department may only be interested in Capital assets we need to make sure we have accountability of all assets that require control so that the contract can be effectively executed. Property Management must have a good working relationship with the legal department so that Property Management issues are communicated between legal and the Property Management department. Since the legal department provides the company with expert advice on legal issues many times problems that may affect Property Management will be directed to the lawyers without getting Property Management involved. The Property Manager must have open communication with the legal staff and provide input on any issue related to asset or material management. In addition, the contracts department is frequently asked to review subcontract language, procurement flow-down requirements and vendor terms and conditions which all affect the Property Management System. The legal staff is generally very supportive of getting Property Management input and most will admit they are not Property experts and in many cases are not that familiar with the FAR since they basically deal with laws and legal precedents. To be polite, I believe it is safe to say that Property Managers are generally in agreement that Engineers are their most difficult challenge. While this is generally true, Engineers are absolutely critical to contract performance. For those who contract to build a product this is especially true. Everything under the contract must be designed, Engineers must take the design and create the drawings necessary to build the product and those drawings in turn are broken into Parts Lists which are used to buy the materials necessary to build the product. Since all items charged as a direct item of cost must have a documented requirement, the engineers are critical to our contract and we need to make sure they understand the Property Management System Requirements. The Operations or Production department is involved in almost every aspect of the Property Management system. Since they are critical in contract performance and

59

delivery of product they need to understand how the Property Management System works and we must train and monitor activity in so many areas because their mindset is solely focused on meeting schedule. Because of their role, they consume the majority of material that we need to make sure was acquired for the contract it was used on and was consumed in reasonable quantities to the documented requirements. In addition, the production environment can use lots of chemicals and solvents that may require special attention during use, storage and disposal. Also, some of the machine tools may have chemicals that require special attention when being moved or dispositioned. The Property Manager needs to work closely with Operations to make sure they are trained in Property Management areas that affect them and to ensure them that we understand their commitment and the value to the company of delivering product on time, but ensure them that it must be done in accordance with the approved Property Management System rules. I can’t tell you how many times in the past 50 years that our Property department has found out about product deliveries “after the fact” and without proper paperwork. In every case they justified their action by saying that the VP of Operations gave them a direct order to get the item delivered no matter what. What I can tell you is that every time I followed up with the VP they admitted to giving the direction but denied that they authorized it to be done outside the formal process or without the proper paperwork. This area needs constant attention and it is generally good practice to identify an experienced Property Professional as a direct point of contact so they can get immediate response to their issues. The Facilities department in most companies manages the maintenance of the real property and assets. It is essential that the Property Management department and Facilities department work together to ensure all assets are properly maintained and that the Property records document the maintenance and can support the transaction with a proper source document. There are very few contractors today with a Government Facilities contract, but for those who do, the Facilities department has very detailed requirements with respect to establishing a Facilities Maintenance Program and ensuring that the program is executed in a timely manner. Although the FAR re-write eliminated all the Facilities Government Property Clauses there are still some contracting activities entering into facilities contracts and providing facilities to contractors. If you happen to enter into a Facilities contract or convince a contracting activity to provide your company facilities type assets, I would make sure you document all communication in writing since the Government has eliminated all FAR clauses and sections on Facilities. Property Management must have a close working relationship with the Calibration department to ensure equipment is calibrated in a timely manner and documented in the official property records and is supported by a source document. This can be a difficult area to work since both Property Management and Calibration have different requirements they can be managed to provide better visibility and more accurate records. Calibration departments constantly are looking for assets to ensure timely calibration so if you integrate the property record system and the calibration system you can have more accurate records and better visibility of an assets location. The other issue that requires co-ordination between Calibration and Property Management is identifying all the assets that require calibration. This can be difficult with company assets that are not capitalized

60

since from an accounting point of view they are an expense but they still require an accountable record, a calibration schedule must be established and location must be recorded so that calibration can be accomplished. While the Human Resources Organization is not critical to the operation of the Property Management system it is essential in helping staff and training your Property Management professionals. In addition, your relationship with Human Resources is essential in establishing a multi-tiered job description program, adequate compensation levels, timely progression and compensation for your staff. They are also essential in the authorization of training programs and formal degree programs including the reimbursement of cost to the employee. The Property Manager must also work closely with the Environmental, Health and Safety department to ensure that all sensitive property and material are managed properly and that all required documentation is coordinated and reported as required by the Property Management System and the Occupational, Health and Safety department policies. The Property Manager and the Property Control System must adequately follow all laws and regulations with respect to the Import or Export of assets or material. Most companies have an organization to manage this responsibility but we need to make sure they completely understand the Property System requirements. The Property Manager and the Property Control System must adequately follow all laws and regulations with respect to managing assets and material under ITAR. Most companies have an organization to manage this responsibility but we need to make sure they completely understand the Property System requirements. Understanding Business Objectives & Plans It is essential that the Property Manager participate in all activities related to planning and objectives of the company. The Property Manager adds value and can assist in streamlining processes and systems and brings a unique perspective to the team. I have provided a list of some of the business planning activities that most company’s use but very often the Property Manager is not included. We must be proactive and insist that we become a team member in shaping the company’s future.

Participate In Company 5 Year Plan Participate In “New Acquisitions” & Due Diligence Evaluations Participate In Contingency Planning Participate in Succession Planning Participate in All RFP’s & RFQ’s Participate In All Cost Disclosure Statement Changes Participate in Skills Planning & Interruption Planning Develop A Budget To Support All Requirements Develop Meaningful Management Reports Develop & Report Meaningful Performance Metrics

61

Reports & Metrics MUST Demonstrate Value

Establish & Communicate The Property System Value The Property Manager’s primary responsibility is to establish a Property Management System that is compliant to all contract requirements, all Corporate policies and any special requirements. It is essential that the Property Manager ensure that the system is efficient, effective, minimizes the cost of compliance and contributes to the company’s profitability. The Property System must be documented with detailed procedures so that the processes are fully documented and the users are able to use the system properly. A system that is adequately documented will institutionalize the process and avoid freelancing or using “tribal knowledge” or what they think needs to be done. One of the most critical responsibilities in maintaining your procedures is to constantly monitor your internal (on-line) procedure control system to make sure that other organizations are not making changes to their procedures that create a conflict with your Property Management procedures. The Property procedures should be the baseline for your Property Management plan and you must monitor all aspects of the system to ensure compliance, creditability and customer confidence. Good advice is to trust but verify everything in your system. You need to constantly check your records, which can be accomplished with periodic reports on spreadsheets that can be sorted to disclose obvious issues. A comprehensive Self-Assessment Program (SAP) must be implemented to ensure that procedures are followed and any deficiencies are identified in a timely manner to avoid compliance issues or adding cost to the process without value. The Property Manager must use the physical inventory reconciliation as a tool to identify any system weaknesses. A properly reconciled inventory should identify area to be reviewed to strengthen system effectiveness. Using issues identified in the inventory reconciliation are excellent indicators for the Self-Assessment Team to prioritize and review. The entire Property Management System must be communicated to all employees and the Property Manager must implement a comprehensive training program that defines how the system works and why the company needs to do things as described in the Property Management Plan and approved procedures. In addition to the training program the Property Manager needs to implement an effective Awareness program using timely communication, posters and visual aides to support overall awareness of the Property Management System requirements.

62

Effectively Communicate The Property Organizations Value The Property Manager’s ultimate responsibility is to support the work and the Professional Property Staff that make the system work efficiently and effectively. Management reports, documented with meaningful metrics, must be communicated to senior management on a periodic basis and need to include staff performance that will support employee growth. Employee growth and upward mobility must be planned and executed with documentation the will encourage management support for compensation awards and promotions. These reports and metrics must always be documented in terms that management understands. You must communicate new concepts along with organizational benefits and all communications must demonstrate value in dollars. That is the language that management understands best. Your Property Management staff needs to be supported by name and you must use all opportunities to recognize your staff. Use recognition systems that are available, when justified, as often as possible Solving Conflicts I would like to share some general knowledge I picked up in my 50 years of working property issues. While I realize we are all different, these are some good guidelines that served me well. See if you can use some of these. I really believe they will help you. Face Conflict & Controversy Head ON!! Never Let It Linger It Will NOT Solve Itself Fairly Negotiate Resolution Face To Face Maintain Company Policy Never Take Sides Never, Never, Never Deal With Rumors Never Let “Third Person” Innuendo Be Used

“They Said”, “He Said”, “She Said”……….Demand Names & Facts!!!!! Never Accept General Responses to Detailed Questions

That will take too long and would cost too much Demand How long and How Much! What would happen if not done?

Managing Customer Expectations I would like to share some customer relationship experience I picked up over the years of working property systems. While I realize we are all different these are some good guidelines that served me well. See if you can use some of these. I really believe they will help you. Always Make Your Customer Requirements A Priority Never Accept Requirements That Are Not In The Contract Monitor Your System Diligently

63

Correct Deficiencies Efficiently & Effectively Do NOT Apply Band Aides Always Disclose Issues to Management & Your Customer Keep Your Customer & Management Informed At All Times

NO SURPRISES….. Good Or Bad Use The Reagan Philosophy For ALL Information

“Trust -- But Verify” Summary & Experience As Property Managers we have a very unique opportunity but it comes with a great deal of responsibility. Until recently there has been no formal educational path for the requirements of a property system and even now the education is basically reserved for Property Management Professionals. While there are professional classes and workshops through some professional organizations there is no single source of information or training that will prepare you for everything you will encounter as a Property Management Professional. My old boss had great words of wisdom that not only apply to Property Management but to every organization in the company. Rolf always said:

“You Go To College To Get A Degree And You Come To Work To Get An Education”

Experience is extremely important in our profession. An experienced Property Manager is critical to the Company’s ability to run efficiently and effectively without compliance issues that could be costly. There are so many variables, so many different functional disciplines the Property Manager must be proficient in and I can attest to the fact that senior management MUST rely on you because they have little to no experience in what is required. We have covered many areas the Property Manager must know and understand but I can assure you that there are many we have not covered and just as many that probably have not occurred… YET!!! Your knowledge and experience are extremely important to your company. It is your job to make sure they understand just how important your organization is and be able to demonstrate the value you add. As the Property Manager you must take charge of all issues related to Property Management and The Property Management System. You CAN and MUST be the sole resource that the Company and the Customer rely on for all decisions.

64

For demonstration purposes I have included a couple of situations I have encountered in my 50 years in this industry for your information and to demonstrate how several organizations can be involved very quickly in any given issue. Beware and have fun. The Property Managers role is challenging, dynamic, interesting and provides a great opportunity to contribute to your company’s goals and objectives including the ability to add value with significant cost savings. Summary & Experience War Story # 1 “You Are A New Property Manager And Have A Requirement To Conduct A Physical Inventory. Your new Boss Calls You In And Demands That The Results Be Better Than Prior Inventories.” You Have No Evidence Of Any Corrective Action Taken After The 2 Previous Periodic Inventories That Resulted in The Loss Of Almost 12,000 Capital Items Valued At Almost $20,000,000. (Acquisition Value).” You conduct The Periodic Inventory And Report Results To Management Weekly. “ Upon Completion Your Results Indicate A Gain of Almost 11,500 Capital Items Valued At About $19,500,000. Did You Do A Better Inventory?

As Dr. Goetz would say “It Depends” on your definition of “Good”. What Problems Were Solved Or Created?

Many Previously Lost Assets Located Property records are more accurate What about tax issues? What about accelerated write-offs? What about any Acquisition to replace previous losses? What about impact on useful life calculations? What about Financial Reporting impact? What about any legal issues? Is This A Material Issue That Should Be Reported To Independent

Auditors? Should It Be Reported As A Material Issue On The Company’s Annual

Report? What Can Be Done To Prevent Management Or Customer Concerns? In Addition You Inventoried Government Property And Had a Few Losses But Many Gains to Line Items & Dollars. What Problems Were Solved Or Created?

Were The Items Previously Reported & Relief Of Liability Determined? o Yes

What Can Be Done To Prevent Management Or Customer Concerns?

65

I just wanted to show you how many issues can come from one issue. Property Managers must be able to work cross functionally with knowledge and experience to ensure a resolution is achieved that makes the system work more effectively, at lower cost and improved accuracy. Summary & Experience War Story # 2

Your Company Acquires A Company And You Are Not Involved In The Due Diligence.

You Are Told They Are Small, Have No Government Property And Were Acquired Basically For Their Technology & Some Key People

Since You Manage A Centralized Property Management System For All Property You Need To Accurately Bring The Assets Into Your System.

The Purchase Terms & Conditions For Payment Were 50% At Acquisition With A Final Payment Of 50% In 18 Months.

You Have Sworn Allegiance To The Reagan Philosophy! You Send A Small Team Down To Develop A Plan To Bring The Assets To

Record BUT…… You Have A Well Trained Staff And They Have Questions

o The Company Has Several Government Contracts o All Of The Contracts Are Cost Type o Research By The Property Team Indicates That Everything Was Charged

Direct: Equipment Facility Items Material Office Supplies

Resolution of this issue involved

Corporate & Division Finance Corporate & Division Accounting Corporate & Division Legal Corporate & Division Procurement The Contracting Officers The Property Administrators Resolution Held Up Final Payment And The Amount Paid For The Acquisition.

66

BIO Robert McFarland is currently the President and Chief Operating Officer (COO) of Asset Management Consulting (AMC) where he has assisted clients for over 50 years with property system issues in the Defense, DOE, Health Care, Commercial and public sectors. The common thread behind all of his accomplishments is his unique ability to resolve property system issues by implementing system changes that are fully compliant while improving efficiency and reducing cost. Bob is a recognized expert in the interpretation and practical application of Government Property Regulations. His experience spans over 51 years working for most of the top government contractors as a problem solver and corporate leader. His experience covers a broad range of operations with many product lines and diversity of applications from manufacturing aircraft and tanks to the production of electronic components. In addition Mr. McFarland has helped commercial enterprise, medical centers and the public sector implement cost effective property management systems that provide control and reduce cost. Robert McFarland was employed by ITT Aerospace & Defense systems as the Manager, Property Management for Aerospace/Communications Division from 2001 to 2011. At ITT Bob developed and implemented the Value Based Asset Management program which has lead to more than $35 Million in cost savings/avoidance at ITT CS’ The Value Based Asset Management program was awarded the ITT Best Practice award in 2005. In addition he established the ITT Corporate Property Council to support all defense operations on property management issues. Bob represented ITT on the Aerospace Industries Association (AIA), Property Management Committee. Mr. McFarland has worked tirelessly toward Acquisition Reform and has been recognized for his efforts and achievements by high-level government officials, industry executives, and consultants in the Property Management field. Bob has and continues to lead industry initiatives that will reduce the cost of managing Government Property by implementing commercial practice. His achievements have been well documented in class deviations issued by the government to suspend costly regulatory changes and implementation of more cost-effective practices. Robert McFarland is a recognized author, educator, and lecturer in the Property Management Profession. Bob’s teaching experience includes audiences at all levels of the organization from top executives to working level employees. Bob has conducted training session's worldwide, authored award winning articles and is a highly sought guest speaker and lecturer. At the request of the government, Mr. McFarland guest lectures on industry issues and initiatives at the Executive Government Property Management Seminars for high-ranking government officials. Mr. McFarland is very active in the National Property Management Association and has been president of three chapters, served nationally as Vice President of Administration, Director and Vice President of Finance. Bob has been recognized with three local chapter “Property Management Person of the Year" awards, “The National Presidents

67

Outstanding Member” award and recognition as an outstanding author. In 2009 Bob was awarded the prestigious Jack Griffith’s Award as the Property Person of the year by NPMA.

68

Total Asset Management: From Acquire to Retire By

Steven F. Holland, CPPM CF NOVA Chapter Member

Our day and age is being defined by how the federal government can show and provide value to the taxpayers. Some call it the Age of Austerity. What it might really be is the stride toward an era of effectiveness and efficiency. When Federal Asset Managers look at their portfolios, they must do so with an eye toward the customer—and the customer in this case is the American taxpayer.

The goal, then, must be to get a handle on your entire portfolio and enough understanding to justify future investments. It’s not enough to have a 50 percent or 75 percent understanding of what you have, how you’re using it, and how it fits into your overall strategy for your organization. Federal leaders must have a complete grasp—and that’s where Total Asset Management comes in.

Property Management Policy: A History

What keeps a Federal Asset Manager awake at night? Or, for that matter, an executive responsible for asset management? Is it the creeping realization that you don’t know what assets you have, where they are, or whether you’ll be able to achieve an unqualified audit opinion?

These questions, and those sleepless nights, can be traced back to 1949, when to the Federal Property and Administrative Services Act was enacted for the purpose of prescribing methods for the procurement and polices of managing personal property assets and non-personal services in the most effective and efficient manner.

There are documents that provide guidance that affects property management. The Federal Property Management Regulation (FPMR) was written with this in mind (see sidebar), but over the years, many of its sections, if not all, have been superseded or incorporated into the Federal Management Regulation (FMR). As a result, it is this subsequent document, and not its predecessor that evolved into the Federal Asset Managers’ “bible”—the primary reference for managing federal property.

Of particular note within the FMR is the separation of “Personal Property” (Subchapter B) and “Government Property Accountable to a U.S. Government Contract” (codified under Title 48, Code of Federal Regulations (CFR), Chapter 1, Parts 45 and 52.245). Subchapter B covers

TheFederalPropertyandAdministrativeServicesActpermittedforthecreationoftheFederalPropertyManagementRegulation(FPMR)andtheFederalManagementRegulation(FMR)underTitle41oftheCodeofFederalRegulations.Otherkeystatutesandguidancerelatedtoaccountabilityandauditabilitythatareimportanttounderstandincludethefollowing:

•ChiefFinancialOfficersActof1990(CFOAct)(Pub.L.101‐576)

•FederalFinancialManagementImprovementAct(FFMIA)of1996(Pub.L.104‐208)

•AccountabilityofTaxDollarsActof2002(ATDA)(Pub.L.107‐289)

•FASABStatementofFederalFinancialAccountingStandards

•OfficeofManagementandBudget(OMB)CircularA‐123,Management’sResponsibilityforInternalControl

•OMBCircularA‐136Revised,FinancialReportingRequirements.

69

personal property requirements, including disposition, sale, donation, replacement of personal property, management of government aircraft, and motor vehicle management. Despite this clear delineation, federal and contract government property both must be accounted for and recorded as required in the government’s Asset Management System of Record (AMSR) for accountability and financial reporting purposes and included in the agency’s financial statements under “Assets.”

In the 1990s, new legislation called for improvements to the government’s financial management; in the Chief Financial Officers Act of 1990 (CFO Act) and later in the Federal Financial Management Improvement Act (FFMIA) of 1996, new mandates were set to ensure the accuracy and verifiability of financial and property ledger data through an agency’s financial management system. These mandates solidified the need for management and agency personnel adherence to established property and financial management principles.

The FFMIA requires each agency to implement and maintain financial management systems that comply substantially with federal financial management systems requirements, federal accounting standards, and the United States Standard General Ledger (USSGL) at the transaction level. Additionally, the FFMIA lists seven key aspects where federal financial management needs to improve:

Provide consistency in federal financial accounting by agencies from one fiscal year to the next

Require federal financial management systems to support full disclosure of federal financial data

Increase the accountability and credibility of federal financial management

Improve performance, productivity, and efficiency in federal financial management

Establish financial management systems to control costs of the federal government

Improve upon the requirements of federal statutes (e.g., CFO Act, Government Performance Results Act of 1993 [GPRA], Government Management Reform Act of 1994 [GMRA])

Increase agency capabilities to monitor execution of the budget more readily.

The ATDA requires that agencies with budget authority over $25 million submit audited financial statements to Congress and the Office of Management and Budget (OMB) by March 1 of each year. Agency financial statements that are audited by an independent audit firm can help strengthen accountability, better monitor assets and liabilities, enhance cost controls, and identify inefficiencies and material weaknesses. Improved financial information can also help reduce fraud, waste, and abuse.

OMB Circular A-123 requires federal managers to “improve accountability and effectiveness of Federal programs and operations by assessing, correcting, and reporting on internal controls.”

“The Federal Government has an overriding obligation to American taxpayers. It should perform its

functions efficiently and effectively while ensuring that its actions result in the best value for the

taxpayers.” President Barack Obama,

March 4, 2009

70

This circular gets its authority from the Federal Managers’ Financial Integrity Act of 1982, as codified in Title 31 of United States Code, Section 3512 (31 U.S.C. 3512). Federal managers must establish a program to develop and maintain internal controls to achieve effective and efficient operations, reliable financial reporting, compliance with applicable statutes and regulations, and assurances in its Performance and Accountability Report (PAR), including a separate assurance on internal control over financial reporting (ICOFR).

OMB Circular A-136 requires federal agencies to submit audited financial statements, interim financial statements, and PARs to OMB, U.S. Department of the Treasury, and Congress in accordance with the CFO Act and ATDA statutory requirements in preparation of the Financial Report of the United States Government.1

Challenges and a More Strategic Approach

With these statutory and regulatory requirements in place, federal agencies still are experiencing challenges in achieving an unqualified “clean” audit opinion partially related to Asset Management. This stems from not knowing what assets they have, where they are, and what their value is. Auditability is a huge issue within the federal government now. Agencies are working hard toward achieving an unqualified audit opinion before the end of FY2017. Congress mandated in the 2010 Defense Authorization Act, Section 1003, Audit Readiness of Financial Statements of the Department of Defense2 that the Department of Defense (DoD) achieve audit readiness before FY2017. The U.S. Government Accountability Office cannot render an opinion of the federal government’s FY2012 Financial Report because of widespread material weaknesses, significant uncertainties, and other limitations. The Office of Management and Budget (OMB) indicated that one of the major “showstoppers” in preventing both DoD and the federal government from achieving an unqualified opinion is property, plant, and equipment (PP&E).3 These authoritative documents aren’t published as recommendations, they are statutory and regulatory requirements that must be followed and implemented.

Furthermore, there is a lack of government-wide strategic asset management planning within the federal government, due to Asset Managers not knowing the complete “big picture” of what federal assets they have and asset’s that are accountable to an agency’s prime contract.

The solution is to adopt Total Asset Management (TAM) and bring a total life cycle approach to these efforts.

Agencies that develop a TAM program ensure that strategic planning and management decisions related to PP&E assets are made throughout all phases of the asset management life cycle from “acquire to retire” (A2R). TAM via A2R is a holistic management process and approach that comprises all necessary business functions throughout the entire asset management life cycle:

1 U.S. Department of the Treasury, Financial Management Service, website: http://www.fms.treas.gov/finrep12/fr_index_new.html. 2 National Defense Authorization Act of 2010, Section 1003, H.R. 2647, January 6, 2009. 3 Under Secretary of Defense (Acquisition, Technology and Logistics) and Under Secretary of Defense (Comptroller) Memorandum, “Property,

Plant and Equipment Program Management Office,” December 6, 2000.

71

acquire, receive, account, use, maintain, and retire (dispose) PP&E. Not only is A2R comprehensive, but it also is consistent in supporting an agency’s mission and strategic approach and goals. This is a critical element, since every federal agency needs to remain strategic in order to achieve compliance. Agencies must also be compliant with federal laws and regulations, accounting standards, and control guidance throughout the asset management life cycle. These various directives are put in place to help federal employees meet their fiduciary responsibilities as good stewards of U.S. government property, and a TAM program should reflect their intentions.

With these in mind, an agency’s strategy must incorporate continuous improvement, compliance, and integration of systems and data to favorably impact the agency, its component organizations, and its mission. Because of this, the agency’s service delivery requirements must be a core consideration as well.

Agencies that adopt an A2R asset management approach will be able to ensure that all internal organizations comply with requirements related to PP&E. Furthermore, agencies that utilize a TAM strategic approach will establish the key foundation in developing the maturity of their asset management life cycle: a strategic philosophy that enables the agency to continue to grow and evolve, ensure compliance, favorably impact mission goals, and ultimately share information throughout the organization by enabling the program’s components to respond to emergency situations. Figure 1 defines the strategic philosophy used in a successful TAM program.

Figure 1. Total Asset Management Strategic Philosophy

As an agency starts to achieve compliance, the TAM program begins to mature. Agencies that are compliant have established asset and financial management policies, systems, and processes to identify, record, and account for assets that are acquired. At this level of maturity, an Asset

72

Manager knows what assets the organization has. It is critical for agencies to use information technology (IT) in a TAM program to record asset information (for example, nomenclature, manufacturer’s name, model number, serial number, asset value, and physical location) in order to locate assets whenever needed, especially in an emergency situation. IT systems and processes are employed to access detailed asset and summary information, including the total volume and acquisition cost of all assets in the agency’s portfolio. As the agency further matures, it is able to maintain critical operational and asset condition status and improve asset utilization.

Additionally, Asset Managers can assist in acquiring the right element to achieve standardization, an important state for ensuring an agency can continue to meet its needs. Standardization can eliminate costs associated with spares, training, maintenance, etc.; improve operations; and assist in maximizing the agency’s return on investment (ROI). An agency’s program will further mature by incorporating integrated strategic planning, acquisition, financial management, property controls, utilization, and disposal processes into its actions. Once incorporated, a fully mature agency is able to quickly meet requirements when emergency situations arise, share information throughout organizational components, and favorably impact the agency and its missions. This strategic approach fully incorporates the A2R life cycle management process.

Acquire to Retire

The A2R process has six phases (illustrated in Figure 2), beginning with acquire. Toward the end of the process, when an asset in usable condition is no longer required for its intended purpose, it must be declared excess and advertised. Advertising excess property within an agency or within the federal government can lead to achieving further utility of assets. If there is no claim for the asset, it is processed for disposal (retire). If there is a claim to reutilize the asset, it is transferred to the gaining organization or agency, and the asset re-enters the receive phase of the A2R process, bypassing the acquire stage.

Figure 2. Acquire to Retire Life Cycle Management Process

In addition to the six core phases, the A2R process also includes multiple sub-functions within each phase:

Acquire

Requirements identification

Sourcing

Contract management

EndStart Acquisition Receiving Accounting Utilization Maintenance Disposal

73

Procurement

Receiving

Establish property accountability

Support invoice payment

Accounting

Asset valuation

Asset records

Invoice payment

Utilization

Use

Movement

Maintenance

Internal controls

Financial reporting

Disposal

Asset screening

Asset disposal

Asset record retirement

Acquisition (Acquire)

Acquisition, the first phase of the property management life cycle, is where agencies obtain property following an identified need and approval of an acquisition plan. Acquisition is “the means of acquiring by contract of supplies or services (including construction) with appropriated funds for the use of the federal government through purchase or lease, whether the supplies or services are already in existence or must be created, developed, demonstrated, and evaluated. Acquisition begins at the point when agency needs are established and includes the description of requirements to satisfy agency needs, solicitation and selection of sources, award of contracts, contract financing, contract performance, contract administration, and those technical and management functions directly related to the process of fulfilling agency needs by contract.”4

During this phase, an acquisition strategy is developed to provide a roadmap for personnel to follow, beginning with program initiation and lasting through post-production support. Strategic goals of acquisition include the following:

tailoring the strategy to meet the specific needs of each individual program

4 Federal Acquisition Regulation (FAR), Part 2.101, Definition of Acquisition.

74

minimizing time and satisfying an identified need

obtaining the right asset at the right time and at the best value

linking program decisions to demonstrated accomplishments in development, system acquisition, initial production, testing, and ultimately, life cycle support.

The key elements of this phase include acquisition planning, acquisition process, and delivery.

Acquisition Planning

Acquisition planning is where the efforts of all personnel responsible for an acquisition are coordinated and integrated into a comprehensive acquisition plan that fulfills the agency’s requirements in a timely manner. This phase begins as soon as the agency need is identified. Once the need is identified, the acquisition plan is the document that provides the overall strategy for accomplishing and managing an acquisition. It formally documents the approach in screening available excess as the first source of supply, filling the need, optimizing resources, and satisfying the policy requirements for the acquisition. There are two key regulations related to the acquisition of personal property that we need to answer “What are the goals of these regulations?”—the Federal Acquisition Regulation (FAR), and FMR (as stated in 48 CFR § 8.102, and 41 CFR § 102.35.15(b) respectively). Based on this question, all federal agencies must screen for and use available excess property as the first source of supply to satisfy the need before initiating a new procurement. If excess property is not available to satisfy an agency requirement, then a new procurement can be initiated through the development of a Procurement Requisition (PR). The requestor develops the PR, including specifications, an Independent Government Cost Estimate (IGCE), and a Statement of Work (SOW) to start the acquisition process.

Acquisition Process

The acquisition process is cyclic, and all stages within it must be met in order for the agency to achieve a contract award. However, receiving agency approval of the acquisition plan is the first critical milestone. This is a go-or-no-go decision! Depending on the complexity of the acquisition, each stage of the process may require minimal or substantial documentation and action on the part of agency personnel. The simplified acquisition process requires minimal documentation because this process is used for purchases of supplies and services less than $150,000, which are usually commercial off-the-shelf products. However, specialized or services that require a contractor to manufacture, develop, or perform usually have detailed specifications or an SOW, and the full contract acquisition process is necessary. Regardless if goods (property) or services are acquired through a simplified acquisition process or the full contract negotiation process, they all must be formally received by the agency so it can document the delivery, receipt, and acceptance in order for the contractor to be paid.

75

Delivery

The delivery is the point in which the vendor’s carrier physically delivers the property to agency’s receiving facility. Deliveries can be made in complete and partial shipments. A shipment is complete when all products are delivered by the vendor’s carrier to the agency. A partial shipment is when only a portion of products are delivered. Partial shipments are made because one or more products are not ready for shipment by the vendor or are back-ordered. After the delivery of property is accepted, the property is processed through the receiving phase.

Receiving

The second phase, receiving, is the process of accepting property (equipment, operating materials and supplies, or internal use software) into an agency; this is where the agency’s obligation and responsibility for asset management and accountability begin. This process starts when a supplier’s delivery arrives at the receiving facility, the delivery person (e.g., carrier) must obtain the receiving person’s signature on behalf of the agency. Receiving documentation is created to establish physical custody and accountability. Documentation can include an agency receiving report, vendor’s packing list, invoice, carrier’s freight bill, commercial or government bill of lading, or a DD Form 1149, Requisition and Invoice/Shipping Document.

The receiving agency documents the receipt comparing it with the vendor’s packing list or shipping document. This documentation provides multiple organizations (such as receiving, procurement, finance [accounts payable], property management, material management, and transportation) with a paper trail showing that the property purchased by the agency has been received. Accountability is established upon proof of receipt and a receiving record is created. Receiving documentation is valuable because it demonstrates proof of receipt when an agency actually received the property into the agency’s custody. Proof of receipt is also critical for capitalized and donated property because the receipt date substantiates your agency’s general ledger entries and property tax reports. The key identifier in the agency’s AMSR is the property tag number. When property is received, it is physically identified during the receiving process with a property tag that identifies ownership of the property to the funding agency. Property identification tags can consist of various types and material based on the environment in which the asset will be used. Depending on the control requirements, some assets may use a property tag made of polyester, plastic, or metal, and some may require an radio frequency identification (RFID) tag for constant control. Accountable assets must have a serialized number recorded on the property tag, whereas, non-accountable property may only have a type of tag that identifies only U.S. Government ownership. Traceability of property tags must be correlated to the receiving documentation, and procurement and property record to substantiate ownership and accountability of the property.

76

Accounting

The third phase, accounting, involves recording and maintaining the property and financial transactions in a business system of record in order to support the agency’s financial statements. According to the CFO Act, each agency’s CFO is responsible for the financial accounting for all PP&E and must sign a Statement of Assurance ensuring the accuracy of the financial records and that the agency achieved an unqualified “clean” audit opinion. These requirements are driven by multiple statutes, regulations and control guidance. One of the key guidance documents for Asset Managers and Financial Managers is the Federal Accounting Standards Advisory Board’s (FASAB) Statement of Federal Financial Accounting Standard (SFFAS) No. 6, “Accounting for Property, Plant and Equipment.” PP&E is defined as tangible assets that have an estimated useful life of two years or more, are not intended for sale in the ordinary course of agency operations, and have been acquired or constructed with the intention of being used or being available for use by the agency. PP&E includes internal use software, as well as property acquired under a capital lease. PP&E excludes consumable and expendable items such as operating materials and supplies. Table 1 shows the total volume of government property on the federal government’s financial statement for fiscal year 2012. The U.S. Government has $855 billion invested in PP&E!5

Table 1. U.S. Government’s FY12 Property, Plant and Equipment, Net

Auditability

The agency CFO is responsible for auditability and must ensure compliance with all federal statutes, regulations, and control guidance relative to financial management. Auditability of PP&E generally refers to maintaining policy, systems, business processes, and internal controls designed to support the agency’s financial statements (e.g., balance sheet). The purpose of auditability is to ensure the financial condition and total value of the agency’s PP&E, including government property in the possession of contractors, is accurately presented in these statements. To achieve auditability of PP&E, an agency must be able to document the five management assertions for all assets and sustain an internal independent audit. The five assertions shown in

5 Summarized from GAO Report, GAO-13-271R, Financial Audit: U.S. Government’s Fiscal Years 2012 and 2011 Consolidated Financial

Statements, Note 8.

Asset Category Dollar ValueFurniture, fixtures, and equipment 475.7$ Buildings, structures, and facilities 238.6$ Construction in progress 93.6$ Land 22.9$ Internal use software 13.5$ Other property, plant, and equipment 4.5$ Leasehold improvements 4.2$ Assets under capital lease 2.0$

Total Property, Plant, and Equipment, Net 855.0$

(in billions of dollars)

77

Figure 3 include Existence or Occurrence, Completeness, Valuation or Allocation, Rights and Obligations, and Presentation and Disclosure.

Figure 3. Five Management Assertions

Once an independent audit of the agency’s financial management system has been conducted, there are four types of audit opinions an agency can receive:6

Unqualified (“Clean”)—when an agency’s financial statements are free from material misstatements and are in accordance with generally accepted accounting principles (GAAP).

Qualified—when an agency’s financial statements are fairly presented but there is a misstatement or some portion of the financial statements could not be audited.

Disclaimer—when an auditor is unable to form an opinion on the agency’s financial statements.

6 Office of Management and Budget, Audit Requirements for Federal Financial Statements, OMB Bulletin No. 07-04, September 4, 2007, P.14,

at http://www.whitehouse.gov/sites/default/files/omb/assets/omb/bulletins/fy2007/b07-04.pdf.

78

Adverse—when information contained in the agency’s financial statements is materially incorrect.

These audit opinions usually indicate the following:

If the financial information in the agency’s financial management system is presented fairly

If there are any deficiencies in ICOFR

If there is compliance with public laws, federal regulations, generally accepted accounting principles, financial accounting standards, OMB circulars, procurement awards (contracts and interagency agreements), and financial assistance awards (grants)

CFOs must have the confidence and be able to rely on the financial information provided by their organization and financial systems in order to make informed decisions in managing government programs, and also ensure compliance with federal statutes, regulations, and control guidance (e.g., OMB circulars, and FASAB standards).

A successful independent audit shows that an agency demonstrates documentation of all five management assertions, there are complete and accurate PP&E records, a clear and documented audit trail for all assets, and the financial statements are free from material misstatements. This leads to the auditors issuing the agency an unqualified “clean” audit opinion. Auditability is a key aspect within a TAM program. However, one aspect of TAM is utilization, and monitoring utilization is the key to ensuring the agency receives the full benefit from the use of its assets.

Utilization

The fourth phase, utilization, is a series of activities that involves placing an asset into use and tracking the asset’s usage throughout its useful life. Another form of Asset Manager within a federal agency is the National Utilization Officer (NUO). NUOs are responsible for maintaining an effective utilization program. Two key aspects of an effective utilization program include maximizing the usage of an asset throughout its useful life and making assets available for reutilization when they become idle or excess within an agency. Asset Managers that demonstrate effective utilization are performing their stewardship responsibility for the property under their agency’s accountability and control. NUOs must remain in the forefront of utilization issues both from an operational and financial perspective. They need to identify valuable asset performance improvements and report them within their agency to promote business efficiencies and contributions to the agency’s goals and objectives,.

NUOs that monitor usage of their agency’s assets through audits and utilization reviews are able to focus on data validation, data accuracy, and the risks and benefits to the asset management program. NUOs provide value to their agency by asserting themselves in business operations when property is involved. NUOs can help their program managers establish their initial complement of equipment by reviewing asset classes to transfer excess or underutilized equipment within the agency. They can also assist program managers in standardizing

79

equipment from an Operation and Maintenance (O&M) perspective, and this helps in multiple ways. It eliminates the need for additional spares and supplies to maintain the equipment, it reduces the need for training on multiple assets, and it supports reutilization of assets across business operations. NUOs advertise equipment when it is declared excess to current requirements or available from a program that completed or was just terminated. Advertising excess equipment throughout an agency is essential in facilitating reutilization.

Reutilization is the identification of idle or excess assets that can be advertised throughout an agency against known requirements in order to keep the asset in use. NUOs are responsible for maximizing the ROI of their agency’s asset portfolio. NUOs must use their AMSR to identify idle, obsolete, and excess assets in order for reutilization to be institutionalized within the business process. Furthermore, agency organizations must be willing to share assets when they are idle. Reutilization of assets reduces or eliminates unnecessary new procurements of like assets and reduces costs for storage, security, and physical inventory. Reutilization of assets is the best use of the taxpayer dollars, especially in agencies with tight or limited budgets. It enables agencies to get “more bang for the buck,” and it demonstrates good stewardship.

Maintenance

The fifth phase, maintenance, is the act of maintaining assets in proper working condition or preserving it from failure or decline. Assets must be maintained throughout their useful life in order to ensure that the product or service can be provided on time and as required. Maintenance consists of multiple variations, like preventative maintenance, calibration, unscheduled maintenance, and repair. While Asset Managers are not responsible for an asset’s performance, they must ensure that all compliance requirements are fulfilled from the asset management perspective. Asset Managers that maintain an effective program to monitor maintenance can help their agency identify the cost and frequency of repairs compared with the cost to replace or refurbish an asset or its criticality and availability. When the cost of repair exceeds the acquisition cost of the asset, the asset is considered beyond economical repair (BER) or in salvage condition (Condition Code “X”).7 Then it is up to the NUO to determine the best method of disposal of assets in a BER condition, including any recovery of costs.

Disposal (Retire)

The sixth and final phase, disposal, is the process where assets are disposed of through transfer, exchange, sale, recycle, donation, and abandonment or destruction methods, and the assets are removed from the agency’s official property records. The property disposal process is regulated by multiple parts of the CFR under Title 41, Chapter 102. The General Services Administration (GSA) prescribes policy related to the disposal of excess personal property under 41 CFR § 102-36, Disposition of Excess Personal Property. This policy promotes the maximum use of excess government personal property by U.S. executive agencies.

7 41 CFR § 102-36.240, Disposal Condition Codes.

80

Asset Managers must seek, use, and improve ways to manage excess property within their agency ensuring they are cost-effective and maximize the agency’s ROI. Idle and excess assets are usually identified during a periodic physical inventory or a utilization audit. Idle assets represent an available source of income. Identifying and advertising idle assets throughout an agency can lead to improved reutilization. However, if no requirement to reutilize the assets exists within the agency or the federal government, it can be a source of revenue from the sales or recycling process.

Recycling has become a highly important process throughout the federal government, as well as the private and public sectors. Two executive orders—EO 13423, Strengthening Federal Environmental, Energy, and Transportation Management, and EO13514, Federal Leadership in Environmental, Energy, and Economic Performance—require federal agencies to manage and continually improve sustainable practices in recycling, electronics stewardship, optimizing real property portfolios, and fleet management, among others. Through effective recycling programs, federal agencies can generate revenue and reduce waste streams. Recycling excess property when it can no longer meet fit, form, and function or the agency’s operational requirements is the most responsible method of disposal. Recycling paper waste, scrap metal, electronics, toner cartridges, circuit boards, and many other materials and supplies used during the normal course of an agency’s business are great sources of revenue. Whether it is disintegrating paper and making pucks or briquettes to sell to paper companies, returning toner cartridges to a manufacturer and receiving a core fee, smelting circuit boards to recover precious metals, or scrap metal for metal content, all can provide an agency with additional sources of revenue or in some cases, a credit to the U.S. Treasury. All credits to the U.S. Treasury are documented as a miscellaneous receipt.

When a federal disposal program is administered effectively and efficiently, it can save the U.S. Government millions of dollars annually. Government property that is excess to one federal agency’s requirements may be utilized by another federal agency, thus preventing unnecessary expenditure of federal funds for a new procurement. A true benefit to the American taxpayer!

Conclusion

There are many aspects to Total Asset Management. Agencies that develop a strategic approach to asset management and a philosophy that incorporates compliance, integration of systems and data, financial accountability, internal controls, and continuous improvement, will provide a positive impact on the agency’s financial position and its mission.

Maintaining accurate accountability, visibility, and records of assets from acquire to retire is essential. From the determination of the need for property through acquisition planning and the procurement process to receipt, utilization, maintenance, and disposal, all are key government functions that must be performed with dedication and rigor. Federal Asset Management executives and their staff must ensure that all accountable PP&E acquired by the agency is received, identified to agency ownership, has a correct valuation verifiable by supplier invoice,

81

and is accurately recorded and maintained in the agency’s AMSR throughout the asset management life cycle. An effective TAM program with complete, accurate, and verifiable asset records will sustain any independent audits of PP&E and will enable the agency to achieve an unqualified “clean” audit opinion.

The benefits that result from a fully-functioning TAM program gives federal asset managers and executives the “peace of mind” knowing what assets they have, whether they have complete and accurate accountability, where the assets are located, what condition they are in, when they can be advertised for reutilization, and when they can be disposed. The key benefit when an agency establishes a TAM program using the A2R life cycle approach, it enables the agency to achieve auditability and an unqualified audit opinion relative to PP&E every fiscal year.

Biography

Steven Holland is a Senior Consultant with LMI in McLean, Virginia. He has more than 30 years of experience in asset and logistics management as a contractor and consultant to the federal government. Mr. Holland has supported several federal logistics and asset management projects for the Department of Homeland Security, the Environmental Protection Agency, and various organizations within the Intelligence Community. His subject matter expertise and implementation of

industry leading best practices have led to results that endure. Mr. Holland’s education includes a Bachelors of Business Administration with concentration in Acquisition and Contract Management with honors from Strayer University. He currently holds NPMA CPPS, CPPA, and CPPM certifications and was recently awarded NPMA’s Consulting Fellow recognition. Mr. Holland has been a member of NPMA since 1988 and is a current member of the NOVA Chapter. He also serves as a Co-Director of NPMA Conference and Seminar Planning Committee.

82

4025 Tampa RoadSuite 1203

Oldsmar, FL 34677Telephone: 813.475.6998

Fax: 813.749.0812Email: [email protected]

THE NPMA JOURNAL OF PROPERTY AND ASSET MANAGEMENT ...

Documents

Transcript of THE NPMA JOURNAL OF PROPERTY AND ASSET MANAGEMENT ...