Overview of Govt. Property Liability

1. Overview of Govt. Property Liability Presented By: Henry Pielaet, Property Group, DCMA-AQBYE April 3, 2014

2. Purpose of Today’s Briefing Provide an overview of: • Policy related to Government property (as defined in FAR part 52.245-1, April 2012 &DFARS 245) • What is Government property loss • Contractor, Property Administrator and Contracting Officer responsibilities • The Ground and Flight Risk Clause (GFRC)

3. Regulatory Guidance • Federal Acquisition Regulation (Part 45-Policy) • Main clause at 52.245-1 (April 2012) • Specific contract terms and conditions • DFARS (245-Policy) • 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 Mgmt. System Admin.) • 252.245-7004 (Reporting, Reutilization, and Disposal) • ILPs, Procedures, Guidance & Information

4. Federal Acquisition Regulation 52.245-1(f)(1) • (vi) Reports. The Contractor shall have a process to create and provide reports of discrepancies, loss of Government property, physical inventory results, audits and self-assessments, corrective actions, and other property-related reports as directed by the Contracting Officer. • (vii) Relief of stewardship responsibility and liability. The Contractor shall have a process to enable the prompt recognition, investigation, disclosure and reporting of loss of Government property, including losses that occur at subcontractor or alternate site locations. (A) This process shall include the corrective actions necessary to prevent recurrence.

5. Federal Acquisition Regulation 52.245-1(Cont.) (B) Unless otherwise directed by the Property Administrator, the Contractor shall investigate and report to the Government all incidents of property loss as soon as the facts become known. Such reports shall, at a minimum, contain the following information [FAR 52.245-1(f)(1)(vii)(B)(1) Through (12)]: (1) Date of incident (if known). (2) The data elements required under (f)(1)(iii)(A). (3) Quantity. (4) Accountable contract number.

6. Federal Acquisition Regulation 52.245-1(Cont.) (5) A statement indicating current or future need. (6) Unit acquisition cost, or if applicable, estimated sales proceeds, estimated repair or replacement costs. (7) All known interests in commingled material of which includes Government material. (8) Cause and corrective action taken or to be taken to prevent recurrence.

7. Federal Acquisition Regulation 52.245-1(Cont.) (9) A statement that the Government will receive compensation covering the loss of Government property, in the event the Contractor was or will be reimbursed or compensated. (10) Copies of all supporting documentation. (11) Last known location. (12) A statement that the property did or did not contain sensitive, export controlled, hazardous, or toxic material, and that the appropriate agencies and authorities were notified.

8. What If the Loss Occurred at a Sub? • It does not matter 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. • What matters is who signed the contract. • 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”).

9. When is a loss a “loss”? Now in the FAR! • All losses are not the same. Depends upon: • Type of property (equipment or material) • Facts: “What happened?” • Context (inventory adjustment or loss?) • Circumstances (due to inadequate storage? Lack of physical security?) • Losses are: “Unintended, unforeseen, or accidental loss, damage, destruction of GP that reduces the Government’s expected economic benefits.” [DFARs clause 252.245-7002]

10. When is a loss a “loss”? (cont.) • Property loss includes : • Property that can’t be found after a reasonable search, theft. • Damage/destruction from unexpected incidents—rendering the item useless for its intended purpose. • Losses are not: • Reasonable inventory adjustments [non-sensitive material, common hardware] • Destructive testing • Obsolescence • Normal wear and tear • Manufacturing defects

11. When is a loss…etc. This is also a loss “Act of Nature” (DFARS 252.245-7002)

12. When is a loss…etc. ? This is probably not a loss “…reasonable inventory adjustments of material typically a result of normal variation.” (DFARS 252.245-7002)

13. Contractor Reporting Requirements • Report property loss to the Property Administrator: • As soon as facts are known or • Requested by the Government • Data requirements: name, quantity, contract number, etc. • Facts surrounding the loss • Prevent Loss from Reoccurrence, How? Use of DCMA Property Loss 3.0 eTOOL is required per DFARS 252.245-7002

14. PA Responsibilities • Review: • Contract terms and conditions. Note: the Gov’t typically self-insures (assumption of risk/FAR 45.104) except for willful misconduct or lack of good faith (by managerial personnel). • Examine facts and circumstances • Determine: • Context/type of loss; causality & link to the property management system. • Appropriateness and effectiveness of any required corrective actions. • Relieve contractor of responsibility and liability, or • Recommend the CO hold contractor responsible: • Financially liable • Repair or replace • Obtain other consideration from the contractor • REMINDER: • If the contractor’s submittal is not complete, the PA should reject the case in eTOOLS

15. 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 • Update DCMA Loss eTOOL

16. GP is Lost or destroyed. GP is Lost or destroyed. Government has NO Government STILL has a current or probable current or probable Future need. Future need. LIABILITY VALUATION: LIABILITY VALUATION: SCRAP VALUE REPLACEMENT SCRAP VALUE REPLACEMENT GP is damaged GP is damaged Government has NO Government still has a current or probable current or probable Future need. Future need. VALUATION: VALUATION: SALVAGE REPAIR SALVAGE Intrinsic Value

17. It’s A Matter of Law 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)]

18. Ground Flight Risk Clause Government (GFRC) & Flight Representative(GFR) Responsibilities DFARS 228.370 • Government should self insure its aircraft through the GFRC/AFRC: 228.370 requires DFARS 252.228-7001, The Ground Flight Risk Clause (GFRC) and recommends DFARS 252.228.7005, The Aircraft Accident Reporting and Investigation clause. • GFR ensures compliance with Contractor’s Combined Instructions and Operations Procedures, and the Contractor will cooperate in mishap investigations involving Aircraft. • GFRC (2010), Indemnification • The new GFRC, dated 8 June 2010, is used in all non-commercial DoD aircraft contracts for aircraft production, modifications, maintenance, repair, or overhaul. The GFRC indemnifies contractors from absorbing mishap costs ($100,000 or 20% of contract price, deductible).

19. GFRC Definitions Aircraft to be delivered to the Government under this contract (either before or after Government acceptance), including complete aircraft and aircraft in the process of being manufactured, disassembled, or reassembled; provided that an engine, portion of a wing, or a wing is attached to the fuselage of the aircraft. (a)(6) ‘In the Open’ (APT Reference Book Volume I – TAB E) • In the Open means located wholly outside of buildings on the Contractor’s premises or other places described in the Schedule as being “in the open.” Government-furnished aircraft shall be considered to be located “in the open” at all times while in the Contractor’s possession, care, custody, or control.

20. GFRC Definitions (Cont.) • Workmanship Loss Example: During modification of a GFE aircraft, a contractor’s worker cuts a hole into the wing spar twice the appropriate diameter. The wing spar with the hole must be replaced at a cost of $200K. The contract is valued at $75M. What is the extent of the Government’s liability? How much is the contractor responsible for? -Contractor is liable for all $200,000.

21. The Ground & Flight Risk Clause/GFR Determines Loss The GFRC establishes the Government’s assumption of risk for aircraft damage, loss, or destruction while in possession of the contractor. This includes leased (contractor to the Government) and bailed aircraft. This clause also establishes GFR authority to approve contractor flights, flight crewmembers, and flight and ground operations Procedures. Only the GFR has authority determine Loss when aircraft is in flight or out in the open, not the PA. The GFRC is usually found in section H or section I of the contract.

22. Overview of Govt. Property Liability Questions and Discussion Thank You!