When is a Loss a “Loss”Presented By:

Tom Ruckdaschel

tom.ruckdaschel@dcma.milJune 26, 2012

CLEARED FOR PUBLIC RELEASE

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I do not speak for the assigned Property Administrator

The information contained in this presentation represents only the personal views of the presenter and not necessarily those of the United States Government, DoD or DCMA. The information presented should not be construed as changing or modifying any statute, regulation, DoD or DCMA policy or guidance, or any term(s) of any contract with the United States Government or any department or agency of the United States Government. The information presented also does not affect in any way, any on-going or future property management system analysis. 

• 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

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types of contract property4

Equipment Special Tooling Material

“Contract Property”(cont.)

Special Test Equip.

Personal Property

Assets

FAR 31.205-40 FAR 31.205-26Cost Principles

Either acquired under CR contracts, or

Furnished by the Gov’t (regardless of contract type)

Not talking progress or advanced payment property (yes, I know Gov’t has title during the life of the contract)

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

I give you...Tom’s definition:

Reasonable inventory adjustments are:

“Differences between record and actual counts that are within established ranges or tolerances.”

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

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"Special Cause variation in a process (say, an inventory count) stems from an unusual, identifiable occurrence (like product damage from a roof leak); whereas Common Cause is natural or random variation that is inherent in the process (perhaps routine variation between different people measuring square footage, or fluctuations due to the time of day that a warehouse inventory is conducted, etc.).“

DCMA LSS office

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?