LIABILITY FOR LOSS, DAMAGE, DESTRUCTION OR THEFT OF GOVERNMENT PROPERTY

1. LIABILITY FOR LOSS, DAMAGE, DESTRUCTION OR THEFT OF GOVERNMENT PROPERTY Presented by Dr. Douglas N. Goetz, CPPM, CF Professor of Contract Management Defense Acquisition University MidWest Campus, OH

2. Liability for Loss, Damage, Destruction or Theft of Government Property Breakout Session # 306 Name: Dr. Douglas N. Goetz, CPPM, CF Professor of Contract and Property Management Defense Acquisition University Date: Wednesday, April 8th Time: 11:30 – 1:00

3. 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

4. SIMPLY PUT… LDD&T HAPPENS!!!

5. GOVERNMENT OVERARCHING POLICY45.104 • 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 • NEGOTIATED Fixed Price contracts for which price is NOT based upon an exception at FAR 15.403-1:

6. LDD&T45.104 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 for which there IS an exception at FAR 15.403-1

7. 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)

8. FULL RISK OF LOSS • FIXED PRICE Contract • (Where there is adequate COMPETITION) • (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.”

9. 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

10. FULL RISK OF LOSS • SOME AUDIENCE PARTICIPATION!!! • SCENARIO: • CONTRACTOR HAS 1 ITEM OF ST • ACQUISITION COST - $200 • AGE - 10 Years Old • CONTRACTOR LOSES THE ST • TWO QUESTIONS: • IS THE CONTRACTOR LIABLE? • If yes, then FOR HOW MUCH IS THE CONTRACTOR LIABLE?

11. LIABILITY FOR LDD&T • QUANTUM • ACQUISITION COST? • APPRECIATED COST? • DEPRECIATED COST? • SCRAP VALUE? • REPLACEMENT COST?

12. CASE LAW • QUANTUM was Determined by a Court Case • Dynalectron Corporation vs U.S. • ASBCA No 29,831; • 85-3 BCA Para 18,320

13. LIABILITY FOR LDD&T • The Court used the term “Intrinsic Value” To define QUANTUM • The QUANTUM therefore 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 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

15. LIMITED RISK OF LOSS • WHEN IS THE LIMITED RISK OF LOSSCONCEPT APPLIED? • Cost Reimbursement Contracts • T&M Contracts • LH Contracts • FP Contracts (Non-Competitive) • USING the regular version of the GP Clause – 52.245-1 • In other words we use the regular paragraph (h) in the clause

16. 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…

17. LIMITED RISK OF LOSS • 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

18. INSURANCE • Generally we have two instances where insurance may 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)

19. INSURANCE • INSTANCE # 2 for Insurance • “In Fact” Insurance • Anyone got an example???

20. DEFINITIONS • 2nd allowance where we MAY hold the Contractor Liable: • Willful Misconduct • Lack of Good Faith • On The Part Of Managerial Personnel

21. DEFINITIONS • DEFINE: • Willful Misconduct • Lack of Good Faith

22. The Saga of the Drunken Fork Lift Operator

23. ONE MORE DEFINITION I’m the Prez! DEFINE “Managerial Personnel?”

24. 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 ALLof the contractor’s business; • ALL OR SUBSTANTIALLY ALLof the contractor’s operation at any one plant or a separate and complete major industrial operation connected with performing the contract

25. 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!

26. 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….

27. LIMITED RISK OF LOSS • When the Government “WITHDRAWS” its ASSUMPTION OF RISK for LDD&T– the contractor becomes liable for “ANY” Loss, damage, destruction or theft of Government Property, regardless of how it occurs, UNLESS…

28. 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

29. 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!)

30. SUBCONTRACTOR LIABILITY

31. CAREFUL ON FLOW DOWN!!! • 52.245-1 (f)(1)(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., extent of liability for loss, damage, destruction or theft 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.

32. CAREFUL ON FLOW DOWN!!! • LIMITED RISK OF LOSS FLOWDOWN • Simplest analysis – if you flow down the requirement for Cert of Current Cost and Pricing data – You 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

33. CAREFUL ON FLOW DOWN!!! RHETORICAL QUESTION – For Your company’s property, if they “loan” it out, what do THEY require? Full…Limited? • FULL RISK OF LOSS – 52.245-1 • Simple answer – flow down FULL R of L when ALT. I is in 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 L

34. CAREFUL ON FLOW DOWN!!! • 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

35. THE END… Or is it??? There are a whole bunch of other LIABILITY ISSUES. We just don’t have time for all!!! But, if you can’t sleep at night…

36. CHECK OUT THESE OTHER CLAUSES!!! • Progress Payments Clause • 52.232-16 • Loss of Delivered End Items • 52.247-19 • “Ground and Flight Risk Clause” in the DFARS • 252.228-7001 (Bonds & Insurance) • “Protection of Government Buildings, Equipment, and Vegetation.” • 52.237-2 (Service Contracting Provision) • “Limitation of Liability.” • 52.246.23 (Quality Assurance Provision)

37. CONTACT INFO: Dr. Douglas N. Goetz Defense Acquisition University 3100 Research Blvd Pod 3, 3rd Floor Kettering, OH 45420 937-781-1077 Douglas.Goetz@dau.mil THANK YOU!!!