When is a Loss a “Loss”Presented By:

Kendrick Dickerson

Kendrick.dickerson@dcma.mil

May 2, 2013

CLEARED FOR PUBLIC RELEASE

• At the end of this session, attendees will know: • The regulatory definition of “loss of Government property” (FAR

45.101 and DFARS 252.245-7002)• The difference between “loss of Government property” and

reasonable inventory adjustments• FAR and DFARS requirements on “loss of Government property”

including:• Government requirements (policy/oversight)

• Contractor requirements (reporting & disclosure)

• Government’s policy on self-insurance

• Contractor, property administrator, and contracting officer

responsibilities

Learning Objectives

First things First

What is a loss?

Losses are:

“…unintended, unforeseen, or accidental loss, damage or destruction of Government property that reduces the Government’s expected economic benefits of the property.”

“Loss of Government Property” as defined in the Federal Acquisition Regulation 52.245-1, APRIL 2012

But there is much more to the story…

Personal Property

Land

PP&E Inventory/OM&S

Real Property Repairables

Facilities

Internal Use Software

Consumables

Equipment

Military Equipment

General Purpose Equipment

Structures

Buildings

What is Gov’t Property?

Linear

Assets

2017: DoD audit readiness goal!

2017

Assets

Personal Property

Land

PP&E Inventory/OM&S

Real Property Repairables

Facilities

Internal Use Software

Consumables

Equipment

Military Equipment

General Purpose Equipment

Structures

Buildings

Government Property (cont.)

Linear

Distilled into four (4) types under the Federal Acquisition Regulation

Equipment Special Tooling Material

For Repair

For “Use”

“Contract Property”

Special Test Equip.

Personal Property

1. Equipment (for use or repair)2. Special Tooling3. Special Test Equipment4. Material

Assets

1

432

types of contract property4

Current Regulatory Landscape

• Federal Acquisition Regulation (FAR)• Part 45-Government’s Policy

• Clause 52.245-1 (June 2007, August 2010, April 2012)

• Defense Federal Acquisition Regulation Supplement (DFARS)• Part 245—DoD Policy

• DFARS clauses:

• 252.211-7007 (Reporting of GFE to the DoD UID Registry)*

• 252.245-7001 (Tagging, Labeling and Marking of GFP)

• 252.245-7002 (Reporting Loss of Government Property)

• 252.245-7003 (Contractor Property Management System Admin.)

• 252.245-7004 (Reporting, Reutilization, and Disposal)

• Procedure, Guidance and Information

* Under revision: DFARS case 2012-D001

The Regulatory State

• Federal Acquisition Regulations System (Title 48 of the U.S. Code of Federal Regulations (CFR))• Federal Acquisition Regulation = Chapter 1, Parts 1-99 of 48 CFR• Defense Federal Acquisition Regulations = Chapter 2 , Parts 200-

299 of 48 CFR

• FAR: provides uniform policies and procedures for acquisitions by executive agencies of the Federal Government• Issued and maintained by (DoD), General Services

Administration and the National Aeronautics and Space Administration

• DFARS: issued and maintained by DoD• DoD specific; delegations of FAR authorities

Background

• “Contract property” losses• Challenging• Complex (but not complicated)• Often misunderstood• Many inter-connecting parts

• Until recently, “loss” was not defined• “Losses” were just about anything; e.g., “shortages,” “variances,” destructive testing

(purposeful), inventory adjustments, normal wear and tear, manufacturing defects, maintenance actions

• Wide swings of interpretation

• Result: • Inconsistent reporting• Inefficiency (= cost)

What does the FAR say?

What are contractors required to do?

• Lets look at basic requirements• FAR 52.245-1 (APRIL 2012)

The Contractor shall have a system of internal controls to manage (control, use, preserve, protect, repair and maintain) Government property in its possession.

• A stewardship responsibility:

“Contractor’s responsibility extends from the initial acquisition and receipt of property, through stewardship, custody, and use until formally relieved of responsibility by authorized means, including delivery, consumption, expending, sale (as surplus property), or other disposition, or via a completed investigation, evaluation, and final determination for lost, damaged, destroyed, or stolen property.”

Contractor Resp (cont.)

• What makes a good system? • Must be “adequate”* (satisfy the requirements of FAR 52.245-1)• Strong management

• Up-to-date

• Strong internal controls

• Timelines where they make sense

• Clear lines of authority

• Outlines organizational accountability

• Describes methods for performing tasks• Addresses (additional) contract terms and conditions

*and approved under the DFARS BSR

 

Relief of Responsibility (cont.)

• Relief of stewardship responsibility. Contractors are granted relief when:• Property is consumed or expended or otherwise accounted for,

in the performance of the contract, INCLUDING reasonable inventory adjustments of material as determined by the property administrator;

• Property administrator grants relief of responsibility and liability for loss of Government property

• Notice! • 1) adjustments; and 2) “loss” are broken out separately• This is intentional Why? Because adjustments and “loss’ are

two different things• Defined differently

• Managed differently

• Reported differently

So then, what exactly is a Loss of Government property as opposed to a (reasonable) inventory adjustment?

Let us contrast and compare

Losses are…

We know from the previous slide that losses are:

“…unintended, unforeseen, or accidental loss, damage or destruction of Government property that reduces the Government’s expected economic benefits of the property.”

“Loss of Government Property” as defined in the Federal Acquisition Regulation 52.245-1, APRIL 2012

Losses are (cont.)

• Includes:• Property that can’t be found after a reasonable search• Theft• Damage or destruction from unexpected incidents rendering the item useless for its

intended purpose

• Does not include:• Reasonable inventory adjustments • Purposeful destruction testing• Obsolescence• Normal wear and tear• Manufacturing defects

• So…we now know what a loss is/isn’t

• Okay then, so what exactly are inventory adjustments?• The better question is—what are reasonable inventory

adjustments?• Neither the FAR or DFARS offer a definition • GOOGLE:

• Inventory adjustments: 27,100,000 results• Reasonable inventory adjustments: 7,070,000 results

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Reasonable Differences: “Losses that occur naturally as a result of shrinkage, residue from the loading process, material sinking into the ground, etc. Such losses can be expected to fluctuate, depending on the commodity, method of storage, etc.”

DNSCM 4145.1

Inventory Adjustments (cont.)

• Inventory adjustments must be reasonable• Inventory adjustments must be:

• Reasonable (reference FAR 31.205-26(c) and 52.245-1)• Pre-defined, not upon arrival. In other words, documented in the

property management procedure• Posted to the accountable property record (IAW procedure);

typically not “reported” to the property administrator; contractor adjust records internally—without PA approval/involvement

• Why…because the process should have already be documented and agreed to in the property management procedure (PA reviews adjustment mechanisms and documentation during the review)

• Considered “loss of GP” if not defined in the procedure (in which case, the PA must review, approve, etc.)

Oh, by the way…

• Reasonable inventory adjustments are also mentioned in FAR Part 31:

• FAR 31.205-26:

“Reasonable adjustments arising from differences

between periodic physical inventories and book

inventories may be included in arriving at costs…”

• PS: “Property” is mentioned in many “FAR” off places—always look around

Lets take it a step further…

What does the DFARS say?

DFARS Definition of Property Loss

• DFARS clause 252.245-7002 (FEBRUARY 2011)• Loss of Government Property:

“…unintended, unforeseen, or accidental loss, damage or destruction of Government property that reduces the Government’s expected economic benefits of the property.”

• Notice anything?

• Same definition as the FAR

• Both FAR and DFARS have the same definition of “Loss of Government Property” And…

DFARS(cont.)

• We see the same inclusions and exclusions:

• Includes:• Property that can’t be found after a reasonable search, theft

• Damage or destruction from unexpected incidents rendering the item useless for its intended purpose

• Does not include:• Reasonable inventory adjustments

• Purposeful destruction testing

• Obsolescence, normal wear and tear, manufacturing defects

[From DFARS clause 252.245-7002 (FEBRUARY 2011)]

So, as you can see, both FAR and DFARS say the same thing…but,

…the DFARS takes things a bit further!

Reporting Requirements

•DFARS 252.245-7002 Paragraph (b) (1): “The contractor shall use the DCMA eTools

software application for reporting loss of Government property”

Paragraph (b) (2): “Unless otherwise provided for in this contract, the requirements of paragraph (b) (1) of this clause do not apply to normal and reasonable adjustments of non-sensitive…losses of low-risk consumable material such as common hardware, etc. Such “losses” are typically a result of normal process variation.

“Normal Process Variation”

• So, what is normal process variation?• Better question: what is variation(?):• Variation is: “A change in data, a characteristic, or a function that

is caused by one of four factors:”*1) Special causes; 2) Common causes

3) Tampering; 4) Structural variation

• For today, we will cover two (2) types of variation:•Common cause: chance, not assignable, natural pattern•Special cause: assignable, definable, unnatural pattern

• Easy to distinguish•Common cause: predictable; not a surprise•Special cause: a surprise; not predictable

*DoD LSS Green Belt Course

Comparison of Variation Types

Special causes, for example, could result from someone tripping over the shooter when the gun is fired

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Common Causes

Special Cause

Common causes, for example, could result from equipment out of adjustment.

Is this normal variation?Source: http://www.nasa.gov/pdf/65776main_noaa_np_mishap.pdf

Example for educationalpurposes only

Pop Quiz

Inventory Adjustments (cont.)

• So, normal variation can be identified as being produced by common causes

• Back to the DFARS clause:The Contractor shall report losses of Government property outside normal process variation; e.g., losses due to—

•Theft; poor storage

•Lack of physical security

•Acts of God

• Why?• Because these events would not likely be attributed to

common causes

"When calculating inventory record accuracy, it is necessary to define what will be considered an error. An error can be defined in various ways, including (1) any error in the item record, such as location, description, and quantity or (2) quantity errors exceeding established tolerances.

Tolerance is a range within which an actual value or quantity can disagree with the inventory record and still be considered accurate for the purposes of calculating inventory record accuracy." Executive Guide: Best Practices in Achieving Consistent, Accurate Physical Counts of Inventory and Related Property GAO-02-447G (March 2002) 

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What About FAR Reporting Requirements?

• FAR reporting requirements [52.245-1(f) (vi) (A)]:“Unless otherwise directed by the Property Administrator, the contractor

shall investigate and promptly furnish…a written narrative of all incidents

of loss damage, destruction, or theft, as soon as the facts become known

or when requested by the Government.”

• You will notice—the FAR does not say:“… unless otherwise directed by the Property Administrator,

the contractor shall investigate and report to the Government all incidents of inventory adjustments.”

• Why? Another pop quiz!

Reporting Requirements (cont.)

• Why? Because losses and adjustments are two different things• As we said earlier…contractors are granted relief when:

• Property is consumed or expended or otherwise accounted for, in the performance of the contract, INCLUDING reasonable inventory adjustments of material as determined by the property administrator

• Bottom Line: Both FAR and DFARS language deliberately distinguishes between losses and adjustments

• And so should you!

PA Responsibilities

• So what happens in a real “loss of Government Property” situation

• First• Review: the contract (The Gov’t generally self-insures, but be mindful of

unique contract terms and conditions)

• Second:• Examine: facts and circumstances

• Third• Determine casualty; nexus to the contractor’s property system; is a

deficiency involved(?)• Appropriateness and effectiveness of corrective actions

• Relieve contractor of responsibility and liability or recommend the Contracting Officer hold contractor responsible/liable

What if the loss occurred at a sub?

• The FAR is “blind” to where the loss occurred• The prime contractor is responsible for its subs

• The contract terms and conditions for liability are between Government and prime contractor

• “Where” does not matter to the FAR; what matters is who signed the contract; i.e., who is accountable

• However…• The prime is required to flow down to its subs the “appropriate”

risk of loss provision• If the prime flowed down full risk of loss and held its

subcontractor financially responsible, the Government would be entitled to the monies received (“otherwise reimbursed”)

CO Responsibilities

• Assuming the PA recommends the contractor be held responsible and liable

• Review the PA’s recommendations• Determine:

• The extent of contractor responsibility and liability• Intrinsic value of the property (PAs can assist here!)

• Is the property still needed for contract performance (?)

• If damaged, can the property be repaired (?)

• Appropriate form of recovery• Repair

• Replace

• Other; i.e., financial restitution

Contracting Officer Resp.

•Review PA’s recommendation•Determine:

• Extent of contractor liability—what does the contract say?• “Intrinsic” value (value to the owner)

• Dynalectron Corp vs. U.S. (ASBCA No 29,831; 85-3 BCA para 18,320)

• Appropriate form and method of recovery• Repair• Replace• Other ($)

•Make the call•Inform contractor

Liability Policy

• The Government generally self insures against property loss-

“The magnitude of the government’s resources obviously makes it more

advantageous for the Government to carry its own risks than to shift them to

private insurers at rates sufficient to cover all costs, to pay their operating

expenses, including agency of broker’s commissions, and to leave such insurers a

profit.” (19 Comp. Gen 211, 214 (1939))

• The FAR provides basic policy at FAR 45.104

•

GP is Lost or destroyed.Government STILL has a

current or probable Future need.LIABILITY VALUATION:

REPLACEMENTREPLACEMENT

GP is Lost or destroyed.Government has NO current or probable Future need.LIABILITY VALUATION:

SCRAP VALUESCRAP VALUE

GP is damagedGovernment still has a current or probable Future need.

VALUATION:REPAIR

GP is damagedGovernment has NO current or probable

Future need. VALUATION:

SALVAGESALVAGE

Intrinsic Value

Bottom Line/Take Aways

• So now we know what losses are--• Reasonable inventory adjustments are not losses• Loss of Government property are not (cannot be) reasonable inventory adjustments

• Reasonableness must be pre-determined—not upon arrival• LOSSES always apply to Equipment, Special Tooling or Special Test

Equipment –and high-risk ; i.e., sensitive property• Inventory adjustments NEVER apply to Equipment, Special Tooling or

Special Test Equipment • LOSSES sometimes apply to Material—but not always

Why is all this important?? Your turn!

Summary Conclusions

• It’s important to stress that the concepts presented here are general guidelines

• Individual circumstances will vary• Is the contractor’s system adequate/approved?

• Does it have significant deficiencies?

• Is sensitive property involved?

• Much preparation needs to go into ensuring these guidelines apply

• None of this happens “upon arrival”

• Property administrator must agree

• Collaboration is key

ANY QUESTIONS?

BACK UP SLIDES

PMSA

• Property Management System Analysis• A form of compliance audit. Engagement/approach can differ

from contractor to contractor. Depends on:• PA’s Risk Assessment: High/Moderate/Low

• How contractor is structured; one overarching system may consist of several assessable units; OR each assessable unit may itself be a separate system (if the processes at each assessable unit are sufficiently distinct)

• Criteria: does each unit contain like business processes/internal controls; are processes centralized or widely distributed; e.g., do separate locations have their own controls?

• Note: assessable units may fall under the same disclosure statement; however, this is not a factor for conducting a PMSA/approving or disapproving the contractor’s system

• Tracked in CPAS by primary CAGE

PMSAs (cont.)

• “Standard”• On site at contactor facility• Formal testing of contractor’s system; i.e., statistical sampling,

physical reviews, entrance & exit conferences, etc.

• Analysis of applicable property life cycle processes:

• “Limited”• Desk Audit• Interview contractor personnel; series of questions covering

each applicable process

• Validate through documentation as necessary

Liability Policy (cont.)

• FAR 45.104, Responsibility and Liability for Government Property

• [Generally]… contractors are not held liability for loss of Government property under the following types of contracts:• Cost-reimbursement contracts

• Time and material contracts

• Labor hour contracts

• Fixed-price contracts awarded on the basis of submission of cost or pricing data [by default, this means FP contracts of the negotiated variety]

• So…what contract types are missing from this list?• Fixed-price contracts awarded NOT on the basis of submission of cost or

pricing data

Liability Policy (cont.)

• Fixed-price contracts awarded NOT on the basis of submission of cost or pricing data can be either:• Negotiated contract (FAR part 15)• “Competitive” (non negotiated/FAR part 14) contract (sealed bids)—in such cases, award is based on price and price-

related factors

• In 2011, DoD added* one more contract type to the list of those where the Govt would self-insure:

Negotiated fixed-price contracts awarded on a basis

other than submission of cost or pricing data

* DFARS case 2010-D018

So for DoD…the policy is now:

• [Generally]… contractors are not held liable for loss of Government property under the following types of contracts:• Cost-reimbursement contracts

• Time and material contracts

• Labor hour contracts

• Fixed-price contracts awarded on the basis of submission of cost or pricing data

• Negotiated fixed-price contracts awarded on a basis other than submission of cost or pricing data (DFARS allowance)

• So…what contract type is now missing from this list?• Non-negotiated fixed-price contracts; i.e., sealed bid contracts (FAR part 14)

PPPP

PP

PPIf Full or Limited Liability Flowed Down

PRIME K:Full Liability

PPPRIME K: Limited Liability

If Full LiabilityFlowed Down PP

PA should not relieve prime until ($) compensation resolved

Prime is liable regardless of flow down

Issue!

No issueFP COMPETITIVESUB KFP COMPETITIVE

CR, T&M, 0rFP NEGOTIATED

FP COMPETITIVESUB K

PCOnyPCOny

PP

PP

PPPRIME K: Limited Liability

PRIME K: Limited Liability

PP

If Limited Liability

Flowed Down

If Limited Liability

Flowed Down

PP

PA may relieve prime of liability

And prime relieve sub.

Prime should have flowed down full liability!

Finding

PA requestCorrective Action toPMS

CR, T&M, 0rFP NEGOTIATED

SUB K

CR, T&M, 0rFP NEGOTIATED No issue

CR, T&M, 0rFP NEGOTIATED

FP COMPETITIVESUB K

[Proposed] Standard Inventory Reporting Convention

• 52.245-1 (f) (1) (iv). The contractor is required to disclose physical inventory results

• Standard reporting convention (based on customary industry practice/ASTM 2132)• Summary level conclusions• Narrative of how the inventory was accomplished; i.e., IAW

contractor procedures (which should include reporting protocols; i.e., cumulative(?), monthly(?), timelines, etc.

• Start and stop points/dates (as applicable)• Methodology; e.g., cycle counting, wall-to-wall, “opportunistic”• A statement that records are in agreement except for:

• Property loss (as defined by FAR part 45.101)

• Inventory adjustments of material (as per the contractor’s procedure; must be reasonable, etc.)

• Other information as may be required

•

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New Question

PCARSS – Add New Inventory Schedule, Contractor User Role

If “Yes” is selected for “Does the reported property require the

transfer of accountability to

another contract?” The User must enter a

Contract Number.

December 12, 2011PCARSS/MDO

Pop Quiz

• How many “acquisition” related issues did you identify?

• Negotiation

• Specifications (standards)

• Quality

• Ethics

• Pricing

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Two Types of VariationTwo Types of Variation

Two types of variation are visible in a Control Chart:

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Common CauseAlways present to some degree in the process

Special CauseSomething different happening at a certain time and place

Common Cause Variation

• Usually part of the process

• Acting totally at random and independently

• Root causes are in the key elements of the system • Slight variations in raw materials

• People

• Slight machine vibration

• Environment

• A fundamental improvement is required to reduce common cause variation

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Special Cause Variation

• Variation in a process from other than common causes - not inherent in the process• Can be detected by spotting

outliers

• Usually easy to eliminate

• Due to a specific cause that we can isolate

ex: Major power outage across entire installation; Computer crash during Fiscal Year End processing

• The effects are intermittent and unpredictable

• All processes must be brought into statistical control by first detecting and removing the special cause variation

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Reducing Variation

• Eliminate special cause variation

• By isolating root causes and

controlling processes

• Reduce common cause variation

• By improving the system

• Anticipate variation.

• By designing robust processes

and products

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The two types of variation require different approaches and tools to detect and attack them.