CLEARED FOR PUBLIC RELEASE
When is a Loss a “Loss”
Presented By:
Tom Ruckdaschel
tom.ruckdaschel@dcma.mil
June 26, 2012
I do not speak for the assigned
Property Administrator
2
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.
Learning Objectives
• 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
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…
What is Gov’t Property?
Assets
Inventory/OM&S
PP&E
Real Property
Personal Property
Land
Internal Use
Software
Facilities
Equipment
Buildings
Structures
Linear
Military
Equipment
General Purpose
Equipment
Repairables
Consumables
2017: DoD audit readiness goal!
Government Property (cont.)
Assets
Inventory/OM&S
PP&E
Real Property
Personal Property
Land
Internal Use
Software
Facilities
Equipment
Buildings
Structures
Linear
Military
Equipment
General Purpose
Equipment
Repairables
Consumables
Distilled into four (4) types under
the Federal Acquisition Regulation
“Contract Property”
Assets
Personal Property
1
Equipment
Special Tooling
For Repair
2
Special Test Equip.
3
Material
4
For “Use”
1. Equipment (for use or repair)
2. Special Tooling
3. Special Test Equipment
4. Material
4 types of contract property
“Contract Property”(cont.)
Assets
Personal Property
Equipment
Cost Principles
Special Tooling
Special Test Equip.
FAR 31.205-40
 Either acquired under CR
contracts, or
 Furnished by the Gov’t
(regardless of contract type)
Material
FAR 31.205-26
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 200299 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
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
21
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 nonsensitive…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
"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
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Comparison of Variation Types
Special causes, for example,
could result from someone
tripping over the shooter
when the gun is fired
Special Cause
Common causes,
for example,
could result from
equipment out of
adjustment.
Common Causes
32
Pop Quiz
Example for
educational
purposes only
Is this normal variation?
Source: http://www.nasa.gov/pdf/65776main_noaa_np_mishap.pdf
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)
36
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
Intrinsic Value
GP is Lost or destroyed.
Government has NO
current or probable
Future need.
LIABILITY VALUATION:
GP is Lost or destroyed.
Government STILL has a
current or probable
Future need.
LIABILITY VALUATION:
SCRAP VALUE
REPLACEMENT
GP is damaged
Government has NO
current or probable
Future need.
VALUATION:
SALVAGE
GP is damaged
Government still has a
current or probable
Future need.
VALUATION:
REPAIR
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?