loss liability prime sub 2013 - cdn.ymaws.com...loss • liability for loss of government property...

LIABILITY FOR LOSS OF GOVERNMENT

PROPERTYPrime and Sub!

LIABILITY FOR LOSS OF GOVERNMENT

PROPERTYPrime and Sub!

(c) 2013 GP Consultants

Presented by:

Dr. Douglas N. Goetz, CPPM, CFPresident, GP Consultants LLC

LOSS• Liability for Loss 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

» Well save THOSE for another time!


LOSSFAR 52.245‐1(a)

• DEFINITION of LOSS:– “Loss of Government Property” means unintended,

unforeseen or accidental loss, damage or destruction to Government property that reduces the Government’s expected economic benefits of the property. Loss of Government property does not include purposeful destructive testing, obsolescence, normal wear and tear or manufacturing defects. Loss of Government property includes, but is not limited to—1) Items that cannot be found after a reasonable search:2) Theft:3) Damage resulting in unexpected harm to property requiring repair

to restore the item to usable condition; or4) Destruction resulting from incidents that render the item useless

for its intended purpose or beyond economical repair.


SIMPLY PUT…LOSS HAPPENS!!!


GOVERNMENT’s OVERARCHING POLICY45.104

• 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– NEGOTIATED Fixed Price contracts for which price is NOT based upon an exception at FAR 15.403‐1:


LOSS POLICY45.104

• Therefore, by process of elimination, without the policy stating such, under WHAT TYPE of contract is the contractor held liable for Loss, theft, damage, or destruction?– FIXED PRICE for which there IS an exception at FAR 15.403‐1

– In other words where there is no requirement for a certificate of Current Cost and Pricing Data

• Or what in the “old days” we called a Fixed Price Competitive contract, or a one step process.


LIABILITY FOR LOSSLIABILITY FOR LOSS

• 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 LOSSFULL RISK OF LOSS

• FIXED PRICE Contract– (Under a COMPETITIVE contract)

– (52.245‐1 Alternate I)– “The contractor assumes the risk of, and shall be

responsible for, ANY loss 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, THEFT, DAMAGE OR DESTRUCTION

EXCEPT FOR:– REASONABLE WEAR AND TEAR OR

– REASONABLE AND PROPER CONSUMPTION


FULL RISK OF LOSSFULL RISK OF LOSS

• YOU SOLVE THE PROBLEM!!!• SCENARIO:

– CONTRACTOR HAS 1 ITEM OF ST– ACQUISITION COST ‐ $200– AGE ‐ 10 Years Old

• CONTRACTOR LOSES THE ST• TWO QUESTIONS:

– IS THE CONTRACTOR LIABLE?• ____________________ (Simple yes or no answer.)

– FOR HOW MUCH IS THE CONTRACTOR LIABLE?• ____________________


LIABILITY FOR LDD&TLIABILITY FOR LDD&T

• QUANTUM–ACQUISITION COST?–APPRECIATED VALUE?–DEPRECIATED VALUE?–SCRAP VALUE?–REPLACEMENT COST?


CASE LAWCASE 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&TLIABILITY FOR LDD&T

• The Court used the term

“Intrinsic Value”To define QUANTUM

– The QUANTUM may range from• Replacement cost where the Government has a need ‐‐either current or probable future

• Repair cost for DAMAGED GP where the Government has a need ‐‐ current or 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”“INTRINSIC VALUE”

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 damaged.Government still has a current or probable Future need.LIABILITY VALUATION:

REPAIRREPAIR

GP is damaged.Government has NO current or probable

Future need.LIABILITY VALUATION:

SALVAGESALVAGE(c) 2013 GP Consultants

QUICK RECAP

• Under the FULL RISK OF LOSS concept– Fixed Price Competitive Contracts–Quantum means…

•INTRINSIC VALUE TO THE GOVERNMENT


LIMITED RISK OF LOSS• WHEN IS THE LIMITED RISK OF LOSS CONCEPT APPLIED?– Cost Reimbursement Contracts– T&M Contracts– LH Contracts– FP Contracts awarded on the basis of submission of certified cost or pricing data. (In other words Negotiated)

• USING the regular version of the GP Clause –52.245‐1– In other words we use the regular paragraph (h) in the clause

– NOTE – DOD has a variation to this in the DFARS. See Next Slide (c) 2013 GP Consultants

LIMITED RISK OF LOSS

• 245.104 Responsibility and liability for Government property. – In addition to the contract types listed at FAR 45.104, contractors are NOT held liable for loss of Government property under negotiated fixed‐price contracts awarded on a basis other than submission of certified cost or pricing data.

• So, for DOD Contracts – NEGOTIATED Contracts below the threshold for requiring a Cert of Cost and Pricing Data NOW ALLOW/REQUIRE the use of the LIMITED RISK OF LOSS Provision within the GP Clause (FAR 52.245‐1(h)).


LIMITED RISK OF LOSS52.245‐1 (h)

• Unless otherwise provided in the contract, the contractor shall

NOTbe liable for loss of Government

property EXCEPT…



• EXCEPT… THE CONTRACTOR SHALL BE LIABLE when one of the following applies:–1. The Risk is Covered by INSURANCE–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 INSURANCEmay come into play:– INSTANCE # 1

• 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

– Generally, INSURANCE for GP is NOT an ALLOWABLE expense (See FAR Part 31)


INSURANCE

• INSTANCE # 2 –“In Fact” Insurance

•Anyone got an example???


DEFINITIONS

• 2nd allowance where the Government MAY hold the Contractor Liable has THREEComponents:– Willful Misconduct– Lack of Good Faith – On The Part Of Managerial Personnel


DEFINITIONS

• DEFINE:–Willful Misconduct

• Either a deliberate act or failure to act that causes or results in Loss, Damage or Destruction to Government property.

–Lack of Good Faith• Failure to honestly carry out a duty including gross neglect or disregard of the terms of the Government property clause or of appropriate directions from the Property Administrator (PA).


Note: These definitions are from the “OLD” DoD Property Manual 4161.2-M. These terms are NOT defined in the FAR.

ONE MORE DEFINITIONONE MORE DEFINITION

•DEFINE “Managerial Personnel?”

I’m thePrez!


MANAGERIAL PERSONNELMANAGERIAL 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 LAWCASE 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!



• LAST OPTION TO HOLD A CONTRACTOR LIABLE…– The Contracting Officer has, in writing, revoked the Government's assumption of risk for loss of Government property due to a determination under paragraph (g) of this clause that the Contractor's property management practices are inadequate, and/or present an undue risk to the Government, and the Contractor failed to take timely corrective action.


ACO AuthorityMust be in WRITING!


• When the Government “REVOKES” its ASSUMPTION OF RISK – the contractor

becomes liable for “ANY” Loss, theft, damage, or destruction of Government Property, regardless of how it occurs,

UNLESS…


LIMITED RISK OF LOSSLIMITED RISK OF LOSS

• Contractor may be granted relief if…– If the Contractor can establish by clear and convincing evidence that the loss of Government property occurred while the Contractor had:

• adequate property management practices or • the loss did not result from the Contractor's failure to maintain adequate property management practices,

– the Contractor shall NOT be held liable.


WHY?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 Management System!)– In point of fact YOU – each and every one of you – does the same thing in your PERSONAL LIVES!!!

– EXAMPLE???


SUBCONTRACTOR CONTROL AND

LIABILITY


SUBCONTRACTOR CONTROLIS A CONTRACTUAL REQUIREMENT:FAR 52.245‐1(b) “Property management”

(1) The Contractor shall have a system of internal controls to manage (control, use, preserve, protect, repair and maintain) Government property in its possession….(2) The 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, disposition, or via a completed investigation, evaluation, and final determination for lost, damaged, destroyed, or stolen property. This requirement applies to all Government property under the contractor’s accountability, stewardship, possession or control, including its vendors or subcontractors (see (f)(1)(v)). (3) The Contractor shall include the requirements of this clause in all subcontracts under which Government property is acquired or furnished for subcontract performance.

(c) 2013 GP Consultants LLC

SUBCONTRACTOR CONTROL

IS A CONTRACTUAL REQUIREMENT:FAR 52.245‐1(f)(1) “Contractor Plans and Systems”

Contractors shall develop property management plans, systems, and procedures at the contract, program, site or entity level to enable the following outcomes:…

(v) Subcontractor control. (A) The Contractor shall award subcontracts that

clearly identify assets to be provided and shall ensure

APPROPRIATE flow down of contract terms and conditions, (e.g., limited liability for loss of Government property). (B) The Contractor shall assure its subcontracts are

properly administered and reviews are periodically performed to determine the adequacy of the subcontractor’s property management system.


SUBCONTRACTOR CONTROL

• It is the CONTRACTOR’S responsibility to establish the PROCESS, i.e., the methods and methodologies, to accomplish this process in accordance with & using:– ILPs and– VCSes and– CCPs!


CAREFUL ON FLOW DOWN!!!

• LIMITED RISK OF LOSS FLOWDOWN– Simplest analysis – if the Prime flows down the requirement for Cert of Current Cost and Pricing data – They may flow down the “Limited” R of L

– FAR 52.215‐12 or 52.215‐13 for Mods• Subcontractor Cost and Pricing Data

– Other Applications:• It depends… Some examples:• Large quantity of GP• High Dollar Value of GP



• FULL RISK OF LOSS – 52.245‐1– Simple answer – flow down FULL R of L to the SUB when ALT. I (Full R of L) is in the PRIME contract.

– If Limited R of L is in the Prime then the PRIME must make a CONSCIOUS DECISION as to the APPLICATION of the FULL R of L.

• Competitive Contracts– Multiple bidders– No Negotiations

• Where situation WARRANTS FULL R of LRHETORICAL QUESTION – For a company’s property, if they “loan” it out, what do THEY require? Full…Limited?


A DECISION TREE APPROACH!Let me show you these concepts in

greater specificity!


FIXED PRICE (COMPETITIVE)PRIME CONTRACT/CONTRACTOR

WITH NORequirement for a Cert of Current Cost and Pricing Data)

WITH GOVERNMENT PROPERTY CLAUSEOf FAR 52.245-1 (Alternate I)

FULL RISK OF LOSS

REGARDLESS OF THE PRICING ARRANGEMENTOF THE SUBCONTRACT

PRIME WOULD AUTOMATICALLY FLOW DOWN THE

FULL RISK OF LOSSTO ITS

SUBCONTRACTORS AND VENDORSWHEN

GP IS PROVIDED TO SUB+

GP MANAGEMENT REQUIREMENTS.

FIRST FAR APPLICATION

Why is it simple? IF Prime has Full risk of loss –Sub should have Full Risk of Loss!

NOTE: If Prime flows down LIMITED Risk of Loss to its sub -- A RARITY -- it does NOT effect the liability of the prime.

The Prime is still liable.

1. COST REIMBURSEMENT NEGOTIATED or2. FIXED PRICE NEGOTIATED

PRIME CONTRACT/CONTRACTOREXCEEDING $700,000

(Requiring a Cert of Current Cost and Pricing Data)AND FAR 52.215-12*

ANDPRIME HAS GOVERNMENT PROPERTY CLAUSE

Of FAR 52.245-1LIMITED RISK OF LOSS

COST REIMBURSEMENTSUBCONTRACTOR

Being awarded a NEGOTIATED subcontract

Exceeding $700,000 AND

Containing 52.215-12*AND

Providing Government Property +

GP MANAGEMENT REQUIREMENTS

FIXED PRICESUBCONTRACTOR

Being awarded a NEGOTIATED subcontract

Exceeding $700,000 AND

Containing 52.215-12*AND

Providing Government Property +


Automatically Flow Down theLimited Risk of Loss

GP Provision

SECOND FAR APPLICATION

* NOTE: There are exceptions at 15.403-1 where this clause is NOT required.

1. COST REIMBURSEMENT NEGOTIATED or2. FIXED PRICE NEGOTIATED

PRIME CONTRACT/CONTRACTOREXCEEDING $700,000

(Requiring a Cert of Current Cost and Pricing Data)AND FAR 52.215-12* or

AND (For all above)WITH GOVERNMENT PROPERTY CLAUSE


FIXED PRICESUBCONTRACTOR

Being awarded a COMPETITIVE subcontract

Regardless of $ ValueAND

Providing Government Property + GP MANAGEMENT REQUIREMENTS

Flow DownThe FULL Risk of Loss

GP Provision to a

THIRD FAR APPLICATION

* NOTE: There are exceptions at 15.403-1 where this clause is NOT required.

1. COST REIMBURSEMENT NEGOTIATEDPRIME CONTRACT/CONTRACTOR UNDER $700,000(NOT Requiring a Cert of Current Cost and Pricing Data)

AND WITH GOVERNMENT PROPERTY CLAUSEOf FAR 52.245-1


FOURTH FAR APPLICATION

In Awarding a FIXED PRICE NEGOTIATED Contract, PRIME MAY* FLOW DOWN LIMITED RISK OF LOSS

TO ITS SUBs and VENDORS WHEN GP IS PROVIDED TO SUB

+ GP MANAGEMENT REQUIREMENTSNOTE: FAR 31.2 Incorporated by Reference

In Awarding a FIXED PRICE COMPETITIVE Contract, PRIME WOULD FLOW DOWN FULL RISK OF LOSS

TO ITS SUBs and VENDORS WHEN GP IS PROVIDED TO SUB

+ GP MANAGEMENT REQUIREMENTS.

* Prime MAY flow down Limited Risk Of Loss if… Prime requires sub to exclude insurance for GP. See 31.205-19 for allowability of Insurance costs. If Subktr is unable/unwilling to exclude insurance then Prime would flow down full!

In Awarding a COST REIMBURSEMENT NEGOTIATED Contract,

PRIME MAY* FLOW DOWN LIMITED RISK OF LOSS TO ITS SUBs and VENDORS WHEN GP

IS PROVIDED TO SUB + GP MANAGEMENT REQUIREMENTS

NOTE: FAR 31.2 Incorporated by Reference

1. FIXED PRICE NEGOTIATEDPRIME CONTRACT/CONTRACTOR

(NOT REQUIRING a Cert of Current Cost and Pricing DataUNDER $700,000)

SEE DFARS 245.107 for Policy[(6) For negotiated fixed-price contracts awarded on a basis other than submission of

certified cost or pricing data for which Government property is provided, use the clause at FAR 52.245-1, Government Property, without its Alternate I.]

AND WITH GOVERNMENT PROPERTY CLAUSE


In Awarding a FIXED PRICE NEGOTIATED

Contract, PRIME MAY*FLOW DOWN

LIMITED RISK OF LOSSTO ITS

SUBs and VENDORSWHEN



FIFTH APPLICATION FOR DOD ONLY

In Awarding a FIXED PRICE COMPETITIVE

Contract, PRIME WOULDFLOW DOWN THE

FULL RISK OF LOSSTO ITS

SUBs and VENDORSWHEN


GP MANAGEMENT REQUIREMENTS.

* Prime MAY flow down Limited Risk Of Loss if… Prime requires sub to exclude insurance for GP. See 31.205-19 for allowabilityof Insurance costs. If Subktr is unable/unwilling to exclude insurance then Prime would flow down full!


• BOTTOM LINE:–CONTRACTORS ‐‐ You need to speak with you SUBCONTRACTS PEOPLE to ensure that the RULES your company establishes are:• KNOWN and• APPLIED!!!

–CPSR ELEMENT OF REVIEW


THANK YOU!

Dr. Douglas N. Goetz, CPPM, CFPRESIDENT, GP CONSULTANTSOLD AFIT/DAU PROFESSORHopefully a Good Instructor.

233 N. Maple AveFairborn, OH 45324

[email protected]

1‐937‐754‐18111‐937‐878‐6680

© 2013 GP Consultants LLC

SOME OTHER LIABILITY STUFF!


CONTRACTOR REPORTS


• RELATIVELY NEW DOD REQUIREMENT– DFARS 252.245‐7002– (a) Definitions. As used in this clause—

• “Government property” is defined in the clause at FAR 52.245‐1, Government Property. • “Loss of Government property” means 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 does not include purposeful destructive testing, obsolescence, normal wear and tear, or manufacturing defects. Loss of Government property includes, but is not limited to—

– (1) Items that cannot be found after a reasonable search; – (2) Theft; – (3) Damage resulting in unexpected harm to property requiring repair to restore the item to usable condition;

or– (4) Destruction resulting from incidents that render the item useless for its intended purpose or beyond

economical repair.

• “Unit acquisition cost” means—– (1) For Government‐furnished property, the dollar value assigned by the Government and identified in the

contract; and – (2) For Contractor‐acquired property, the cost derived from the Contractor’s records that reflect consistently

applied, generally acceptable accounting principles.

CONTRACTOR REPORTS


– (b) Reporting loss of Government property.• (1) The Contractor shall use the Defense Contract Management Agency (DCMA) eTools software application for reporting loss of Government property. Reporting value shall be at unit acquisition cost. The eTools “LTDD of Government Property” toolset can be accessed from the DCMA home page External Web Access Management application at http://www.dcma.mil/aboutetools.cfm .

CONTRACTOR REPORTS• (2) Unless otherwise provided for in this contract, the requirements

of paragraph (b)(1) of this clause do not apply to normal and reasonable inventory adjustments, i.e., losses of low‐risk consumable material such as common hardware, as agreed to by the Contractor and the Government Property Administrator. Such losses are typically a product of normal process variation. The Contractor shall ensure that its property management system provides adequate management control measures, e.g., statistical process controls, as a means of managing such variation.

• (3) The Contractor shall report losses of Government property outside normal process variation, e.g., losses due to—

– (i) Theft; – (ii) Inadequate storage; – (iii) Lack of physical security; or – (iv) “Acts of God.”


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 responsibilityin 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.


CONTRACTING OFFICER’SRESPONSIBILITIES

• 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)


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 PONDERINGSif you think you know it all about Liability!

Out the Progress Payments Clause 52.232‐16

Out the Loss of Delivered End Items 52.247‐19

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)


THANK YOU!

Dr. Douglas N. Goetz, CPPM, CFPRESIDENT, GP CONSULTANTSOLD AFIT/DAU PROFESSORHopefully a Good Instructor.

233 N. Maple AveFairborn, OH 45324

[email protected]

1‐937‐754‐18111‐937‐878‐6680

© 2013 GP Consultants LLC

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