LIABILITY
FOR LOSS,
DAMAGE, DESTRUCTION OR
THEFT OF GOVERNMENT
Presented by
PROPERTY
Dr. Douglas N. Goetz, CPPM, CF
Professor of Contract Management
Retired – Now Intermittent
Defense Acquisition University
President, GP Consultants LLC
LOSS, THEFT DAMAGE and
DESTRUCTION OF
GOVERNMENT PROPERTY
DOES HAPPEN!
$500 Million
Satellite!
$139 Million
Damage!
LDD&T
• Liability for Loss, Damage, Destruction or
Theft of Government Property in the
possession of the contractor takes MANY
different forms.
• This presentation will cover:
– Loss of “Pure” Government Property
• This presentation will NOT cover other
liability provisions such as:
– Loss of Progress Payments Inventory
– Loss of Delivered End Items
– Loss under the Ground and Flight Risk clause
– I put some of those topics at the end.
GOVERNMENT OVERARCHING POLICY
45.104
• Generally, contractors are NOT
held liable for loss, damage,
destruction or theft 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.
LDD&T
45.104
• Therefore, by process of elimination,
without the policy stating such, under
WHAT TYPE of contract is the contractor
held liable for Loss, damage, destruction
of theft?
• FIXED PRICE contracts where there is NO
requirement for the submission of Cost or
Pricing Data
– See FAR 45.107(a)(2)
LIABILITY FOR L,D,D&T
• SO, in ESSENCE there are TWO
FORMS of LIABILITY:
– LIMITED RISK OF LOSS PROVISIONS
• Found at 52.245-1(h)
And the
– FULL RISK OF LOSS PROVISIONS
• Found at 52.245-1 (Alternate I)
FULL RISK OF LOSS
• FIXED PRICE Contract
– (What we use to call a COMPETITIVE contract)
– (52.245-1 Alternate I)
• “The contractor assumes the risk of and
shall be responsible for any loss, damage,
destruction, or theft of Government
property upon its delivery to the
contractor as Government-furnished
property. However, the contractor is NOT
responsible for reasonable wear and tear
to Government property or for
Government property properly consumed
in performing this contract.”
FULL RISK OF LOSS
• IN ENGLISH…
• CONTRACTOR IS LIABLE FOR
“ANY”
LOSS DAMAGE OR DESTRUCTION
EXCEPT FOR:
– REASONABLE WEAR AND TEAR OR
– REASONABLE AND PROPER
CONSUMPTION
FULL RISK OF LOSS
• SCENARIO:
– CONTRACTOR HAS 1 ITEM OF ST
– ACQUISITION COST - $200
– AGE - 10 Years Old
• CONTRACTOR LOSES THE ST
• TWO QUESTIONS:
– IS THE CONTRACTOR LIABLE?
– FOR HOW MUCH IS THE CONTRACTOR
LIABLE?
LIABILITY FOR LDD&T
• QUANTUM
–ACQUISITION COST
–APPRECIATED COST
–DEPRECIATED COST
–SCRAP VALUE
–REPLACEMENT COST
CASE LAW
• QUANTUM was Determined
by a Court Case
– Dynalectron Corporation vs U.S.
– ASBCA No 29,831;
85-3 BCA Para 18,320
LIABILITY FOR LDD&T
• The Court used the term
“Intrinsic Value”
To define QUANTUM
– The QUANTUM may range from
• Replacement cost where the G has need -either current or probable future
• Repair cost for DAMAGED GP where the G
has a current of future need for the GP
• Salvage value for DAMAGED GP where the
Government has no need for the GP
• Scrap value for LOST GP where the
Government has no need for the GP
Valuation of Lost, Damaged or
Destroyed Government Property for
Liability Purposes
“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
Probably
Little Pennies!
REPLACEMENT
GP is damaged.
Government has NO
current or probable
Future need.
LIABILITY VALUATION:
SALVAGE
GP is damaged.
Government still has a
current or probable
Future need.
LIABILITY VALUATION:
REPAIR
Could be
Big $!
LIMITED RISK OF LOSS
• WHEN IS THE LIMITED RISK OF
LOSS CONCEPT APPLIED?
– Cost Reimbursement Contracts
– T&M Contracts
– LH Contracts
– FP Contracts (Competitive)
• USING the regular version of the GP
Clause – 52.245-1
– In other words we use the regular
paragraph (h) in the clause
LIMITED RISK OF LOSS
52.245-1 (h)
• Unless otherwise provided
in the contract, the
contractor shall
NOT
be liable for loss, damage,
destruction or theft to the
Government property
EXCEPT…
LIMITED RISK OF LOSS
• EXCEPT… THE CONTRACTOR SHALL BE
LIABLE when one of the following applies:
– 1. The Risk is Covered by INSURANCE
• Generally INSURANCE on GP is NOT an
ALLOWABLE expense (See FAR Part 31)
– 2. WILLFUL MISCONDUCT, LACK OF
GOOD FAITH ON THE PART OF
MANAGERIAL PERSONNEL
– 3. WITHDRAWAL of the Government’s
Assumption of Risk
INSURANCE
• Generally we have two instances
where insurance may come into play:
– INSURANCE that the Government
REQUIRES the contractor to acquire
• MUST BE SPECIFIED IN THE CONTRACT
• IF Contract is SILENT – INSURANCE IS NOT
REQUIRED and therefore NOT ALLOWABLE
– “In Fact” Insurance
• Anyone got an example???
DEFINITIONS
• DEFINE:
–Willful Misconduct
–Lack of Good Faith
The Saga of the Drunken Fork
Lift Operator
ONE MORE DEFINITION
•DEFINE
“Managerial
Personnel?”
I’m the
Prez!
MANAGERIAL PERSONNEL
• As used in this clause means:
– the Contractor’s directors, officers,
managers, superintendents, or equivalent
representatives
– who have supervision or direction of…
– ALL OR SUBSTANTIALLY ALL of the
contractor’s business;
– ALL OR SUBSTANTIALLY ALL of the
contractor’s operation at any one plant or
a separate and complete major industrial
operation connected with performing the
contract
CASE LAW
• Fairchild Hiller Corporation ASBCA No.
14387 (1971)
– Contract for the Stripping, Washing, and
Cleaning of C-130 Aircraft
• The burning of aircraft No. 1
• The burning of aircraft No. 2
– Methylethyl-ketone & Naptha Based Solution
• The court was concerned with the actions of
the CONTRACTOR’S MANAGERIAL
PERSONNEL.
Not its lower level employees!
LIMITED RISK OF LOSS
• LAST OPTION TO HOLD A
CONTRACT LIABLE…
– WITHDRAWAL of the Government’s
Assumption of Risk due to a
determination that the Contractor’s
property management practices are
INADEQUATE and/or present an
UNDUE RISK to the Government….
LIMITED RISK OF LOSS
• When the Government
“WITHDRAWS” its ASSUMPTION OF
RISK – the contractor becomes liable
for “ANY” Loss, damage,
destruction or theft of Government
Property, regardless of how it
occurs,
UNLESS…
LIMITED RISK OF LOSS
• Contractor may be granted relief
if clear and convincing evidence
is presented that shows:
– Loss, damage, destruction or theft
occurred while system was
adequate
– Loss, damage, destruction or theft
did not occur as a result of PCS
status (NEXUS)
– NOTE: The burden of proof rests
with the contractor
WHY?
• Why does the Government
have this policy?
• It is an economically
advantageous methodology
to have the Government act
as a Self Insurer. So long as
the Contractor is a “Good
Insurance Risk.” (In other
words, maintains an
adequate Property Control
System!)
REVIEW
• FP Competitive Contract
– Contractor Liable for ALL LTDD!
• FP(Neg), CR, T&M
– Government bears RISK OF LOSS for
LTDD… Except
• Willful Misconduct, Lack of Good Faith –
Part of MANAGERIAL PERSONNEL
• QUANTUM – when Contractor is liable
– INTRINSIC VALUE!
THANK YOU!
Dr. Douglas N. Goetz, CPPM, CF
OLD DAU PROFESSOR
Recently Retired – now Rehired.
President of the newly incorporated GP Associates.
Chief cook and bottle washer at Home, responsible
for all “honeydue” requirements – though my wife
has told me to stay out of HER house!
233 N. Maple Ave
Fairborn, OH 45324
GPDOCTOR@ATT.NET
1- 888-576-0200
Ahhhhh, but there is more…
The following
slides are
LAGNIAPPE
for you!
CONTRACTOR RESPONSIBILITIES
• Contractor shall report:
– In accordance with the Government
Property Clause at 52.245-1(f)(vi)(A)
– Unless otherwise directed by the Property
Administrator, the Contractor shall
investigate and promptly furnish to the
Property Administrator, 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.
– ASTM VCS E-2131 Paragraph 5.
Procedures sets forth a time frame of NOT
MORE THAN 24 hours for reporting the
LDD.
CONTRACTOR REPORTS
• Such reports shall, at a minimum,
contain the following information:
– (1) Date of incident (if known).
– (2) The name, commercial description,
manufacturer, model number, and National
Stock Number (if applicable).
– (3) Quantity.
– (4) Unique Item Identifier (if available).
– (5) Accountable Contract number.
– (6) A statement indicating current or future
need.
– (7) Acquisition cost, or if applicable,
estimated scrap proceeds, estimated repair
or replacement costs.
CONTRACTOR REPORTS
– (8) All known interests in commingled property
of which the Government property is a part.
– (9) Cause and corrective action taken or to be
taken to prevent recurrence.
– (10) A statement that the Government will
receive any reimbursement covering the loss,
damage, destruction, or theft, in the event the
Contractor was or will be reimbursed or
compensated.
– (11) Copies of all supporting documentation.
– (12) Last known location.
– (13) A statement that the property did or did not
contain sensitive or hazardous material, and if
so, that the appropriate agencies were notified.
VCS STANDARD
• ASTM E-2131-01 is a VCS for Loss,
Damage or Destruction of Property
– Paragraph 8 of this VCS deals with the
Form and Structure of the Report.
– As the GP Clause, 52.245-1, set forth the
Government requirement the clausal
form takes precedence – though the
contract may amplify the information
provided per the VCS.
– Para. 5.2 of the VCS also sets forth a
reporting time frame of
• 30 calendar days or
• Submission of an interim report
Report of LDD&T
MAJOR CONCERN!!!
• PAs should encourage
contractors to establish a
process for handling low dollar,
low quantity, low criticality item
LDD&T reporting on a periodic
versus immediate basis
Report of LDD&T
MAJOR CONCERN!!!
• For Example:
– Where small quantities of material are
lost, or low value items are destroyed
[Not sensitive or Critical] and are not
needed for replacement due to a bulk
purchase – report on a quarterly basis
or biannual basis.
– Reduces administrative costs
– No significance or materiality to the
Property Management System.
PROPERTY ADMINISTRATOR’S
RESPONSIBILITIES
• Investigation
– Must reach a valid and supportable
conclusion!
• Interface with other Government
representatives (where appropriate)
• See DoD 4161.2-M Chapter 2
• Request Corrective actions
– where necessary to Property Control
System
PROPERTY ADMINISTRATOR’S
RESPONSIBILITIES
• ESTABLISH CASE FILE
–SEE DOD 4161.2-M
• LOG or Register of all LD&D
Events
• Copy of Contractor’s Report
• PA’s Investigative Report
• Final Resolution
PROPERTY ADMINISTRATOR’S
RESPONSIBILITIES
• RELIEF OF RESPONSIBILITY
– PA has the AUTHORITY to Grant “Relief
of Responsibility,” where appropriate
• FAR 45.105(d) When the property administrator
determines that a reported case of loss, damage,
destruction or theft of Government property constitutes
a risk assumed by the Government, the property
administrator shall notify the contractor in writing
that they are granted relief of responsibility
in accordance with 52.245-1(f)(1)(vii) as the risk of loss
is the responsibility of the Government.
PROPERTY ADMINISTRATOR’S
RESPONSIBILITIES
• NOTIFY THE CONTRACTING
OFFICER
– Where the property administrator
determines that the risk of loss is not
assumed by the Government, the
property administrator shall forward a
recommendation requesting that the
contracting officer hold the contractor
liable.
REMEMBER!!!
The PA
DOES NOT
have the authority to HOLD the
contractor Liable!
That is a CO AUTHORITY!
EVALUATION OF LDD&T
• ASTM STANDARD:
– E-2131-01 Item 7. Acceptable LDD
Ratios:
• 7.1.1 Acceptable LDD for non high-risk …
Property = 2% or less ($ or Quantity)
• 7.1.2 Acceptable LDD for high-risk
property = 0% ($ or Quantity)
EVALUATION OF DISCREPANCIES
• WARNING – THE STANDARDS DO NOT DETERMINE
LIABILITY FOR LDDT. THAT IS DETERMINED BY
THE LIABILITY PROVISION IN THE CONTRACT.
– THE STANDARD’S RATIOS IMPACT THE RISK
ASSESSMENT APPLIED TO THE CONTRACTOR
AND THE SUBSEQUENT AUDIT FREQUENCY.
– THE STANDARD’S RATIOS IMPACT THE
DETERMINATION OF COMPLIANCE/ADEQUACY
OF THE CONTRACTOR’S PROPERTY
MANAGEMENT SYSTEM WHICH MAY IMPACT
LIABILITY.
CONTRACTING OFFICER’S
RESPONSIBILITIES
• ACO SHALL issue final liability
determination where contractor is
held liable
• ACO may make a contract price
adjustment or withhold financing,
• ACO SHALL request corrective
action for contractor’s property
control system (45.105)
OTHER LIABILITY CONCERNS
• Loss of Progress Payments
Inventory
• Loss of Delivered End Item Prior
to Shipment
• Destruction of Government
Vegetation and a bunch more!
Progress & Performance Based
Payments Inventory
FAR 52.232-16
(e) Risk of loss. Before delivery to and
acceptance by the Government, the Contractor
shall bear the risk of loss for property, the title
to which vests in the Government under this
clause, except to the extent the Government
expressly assumes the risk. The Contractor
shall repay the Government an amount equal
to the unliquidated progress payments that are
based on costs allocable to property that is
damaged, lost, stolen, or destroyed.
Progress & Performance Based
Payments Inventory
FAR 52.232-16
• Does the Government have to prove
Willful Misconduct, Lack of Good
Faith on the Part of Managerial
Personnel?
• NO – The contractor bears
ABSOLUTE LIABILITY!
Progress & Performance Based
Payments Inventory
FAR 52.232-16
• For How Much (QUANTUM) is
the Contractor Liable?
• Up the amount of
UNLIQUIDATED PROGRESS
PAYMENTS?
DELIVERED END ITEMS
• What happens if the contractor
produces an End Item, it is
inspected and accepted by the
Government – it is at the
contractor’s place of
performance, but has not yet
been delivered AND IT IS
DESTROYED OR LOST OR
DAMAGED???
DELIVERED END ITEMS
• Litton Systems, Inc./Guidance &
Control Systems Division
• ASBCA 29672, August 1987
• 1 Test Unit - $427, 692
DELIVERED END ITEMS
• Since they’re Government Property the
Government assumes the risk of Loss –
Right?
• Check out the FOB Clauses…
– 52.247-29 - F.o.b. - Origin.
– 52.247-30 - F.o.b. - Origin, Contractors
Facility.
– 52.247-34 - F.o.b. - Destination.
– 52.247-35 - F.o.b. - Destination, Within
Consignees Premises.
– 52.247-37 - F.o.b. -- Vessel, Port of Shipment.
• PLUS LOTS OF “Variations!!!”
DELIVERED END ITEMS
• (b) The Contractor shall -–(4) Be responsible for any loss of
and/or damage to the goods -• (i) Occurring before delivery to the
carrier;
DELIVERED END ITEMS
• The contractor says, “Wait a minute! I
did my job. You got your product.
Why am I liable?”
• READ THE CONTRACT!!!
• WARNING TO CONTRACTORS…
– Don’t be so quick to “ship in place”
without CLEAR LANGUAGE as to WHO
bears the risk of loss for accepted but not
yet delivered END ITEMS!!!
So – Ya’ think liability is
EASY???
• It’s not!!!
• Not because of the FAR Regulations, but
because of LAW and COMMERCIAL
PRACTICE.
– Things Like the UCC
– Things like the COMMON Law of Bailment
– Things Like the INSURANCE Industry
– And things like Accidents!!!
SOME FUTURE
PONDERINGS
 Out the “Ground and Flight Risk Clause”
in the DFARS
• 252.228-7001 (Bonds & Insurance)
 Out the “Protection of Government Buildings,
Equipment, and Vegetation.”
• 52.237-2 (Service Contracting Provision)
 Out the “Limitation of Liability.”
 52.246.23 (Quality Assurance Provision)