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…
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
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
22
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
• Pre-defined, not upon arrival. Objective and measurable, 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
32
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
33
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)
37
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?
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)
FP COMPETITIVE
PRIME K:
Full P
Liability
CR, T&M, 0r
FP NEGOTIATED
PRIME K:
P
Limited
Liability
FP COMPETITIVE
SUB K
If Full Liability
FlowedPDown
No issue
Prime is
liable
P
regardless
of flow down
FP COMPETITIVE
SUB K
If Full Liability
PDown
Flowed
Issue!
PA should not
relieve prime
until ($)
compensation
resolved
P
CR, T&M, 0r
FP NEGOTIATED
CR, T&M, 0r
FP NEGOTIATED
SUB K
PRIME K:
P
Limited
Liability
If Limited
P
Liability
Flowed Down
CR, T&M, 0r
FP NEGOTIATED
FP COMPETITIVE
SUB K
PRIME K:
Limited
P
Liability
If Limited
Liability
P
Flowed Down
No issue
PA may relieve
prime of liability
And prime
relieve sub.
P
Prime should
have flowed
down full
liability?
PCOny
[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
•
PCARSS – Add New Inventory Schedule,
Contractor User Role
New Question
If “Yes” is selected for
“Does the reported
property require the
transfer of
accountability to
another contract?”
The User must enter a
Contract Number.
PCARSS/MDO
December 12, 2011
58
Pop Quiz
• How many “acquisition” related issues did you identify?
• Negotiation
• Specifications (standards)
• Quality
• Ethics
• Pricing
59
Two Types of Variation
 Two types of variation are visible in a Control
Chart:
Special Cause
Something different happening
at a certain time and place
60
Common Cause
Always present to some
degree in the process
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
61
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
62
Reducing Variation
The two types of variation require different approaches
and tools to detect and attack them.
• 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
63