LIABILITY FOR LOSS, DAMAGE, DESTRUCTION OR THEFT OF GOVERNMENT PROPERTY Presented by Dr. Douglas N. Goetz, CPPM, CF Professor of Contract Management Retired.

LIABILITY FOR LOSS,

DAMAGE, DESTRUCTION OR THEFT OF GOVERNMENT

PROPERTY

LIABILITY FOR LOSS,

DAMAGE, DESTRUCTION OR THEFT OF GOVERNMENT

PROPERTY Presented byDr. Douglas N. Goetz, CPPM, CFDr. Douglas N. Goetz, CPPM, CFProfessor of Contract Management Retired – Now IntermittentDefense Acquisition UniversityPresident, GP Consultants LLC

LOSS, THEFT DAMAGE and DESTRUCTION OF

GOVERNMENT PROPERTY DOES HAPPEN!

$500 MillionSatellite!

$139 MillionDamage!

• 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.

LDD&T

GOVERNMENT OVERARCHING POLICY

45.104• GenerallyGenerally, contractors are NOT held

liable for loss, damage, destruction or theft of Government Property under the following types of contracts:– COST REIMBURSEMENT contractsCOST REIMBURSEMENT contracts– TIME AND MATERIAL contractsTIME AND MATERIAL contracts– LABOR HOUR contractsLABOR HOUR contracts– Fixed Price contracts awarded on the basis Fixed Price contracts awarded on the basis

of submission of cost or pricing data.of submission of cost or pricing data.

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 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&TLIABILITY FOR L,D,D&T

• SO, in ESSENCE there are TWO FORMS of LIABILITY:– LIMITED RISK OF LOSS PROVISIONSLIMITED RISK OF LOSS PROVISIONS

• Found at 52.245-1(h) Found at 52.245-1(h)

And the And the

– FULL RISK OF LOSS PROVISIONSFULL RISK OF LOSS PROVISIONS• Found at 52.245-1 (Alternate I)

FULL RISK OF LOSSFULL 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…IN ENGLISH…

• CONTRACTOR IS LIABLE CONTRACTOR IS LIABLE FOR

“ANY” LOSS DAMAGE OR DESTRUCTION

EXCEPT FOR:– REASONABLE WEAR AND TEAR OR

– REASONABLE AND PROPER CONSUMPTION

FULL RISK OF LOSSFULL 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&TLIABILITY FOR LDD&T

• QUANTUM–ACQUISITION COST

–APPRECIATED COST

–DEPRECIATED COST

–SCRAP VALUE

–REPLACEMENT COST

CASE LAWCASE LAW

• QUANTUMQUANTUM 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 Intrinsic ValueValue”” To define QUANTUM

– The QUANTUM may range from• ReplacementReplacement cost where the G has need has need --either current or

probable future• RepairRepair cost for DAMAGED GP where the G has a current of has a current of

future need for the GPfuture need for the GP• SalvageSalvage value for DAMAGED GP where the Government has no has no

need for the GPneed for the GP• ScrapScrap value for LOST GP where the Government has no need has no need

for the GPfor 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

Could beBig $!

ProbablyLittle Pennies!

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

NOTNOT be liable for loss, damage,

destruction or theft to the Government property

EXCEPT…


• 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 Generally INSURANCE on GP is NOT an

ALLOWABLE expense (See FAR Part 31)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 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 ALLALL OR SUBSTANTIALLY ALL of the 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 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….


• 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 LOSSLIMITED RISK OF LOSS• Contractor may be granted relief if if clear clear

and convincing evidenceand convincing evidence is presented is presented that shows: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 NOTE: The burden of proof rests with the

contractorcontractor

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 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, CFOLD 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 AveFairborn, OH 45324

[email protected] 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 promptlypromptly 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!!!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&TMAJOR CONCERN!!!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


• InvestigationInvestigation– Must reach a valid and supportable

conclusion! • Interface with other Government

representatives (where appropriate)• See DoD 4161.2-M Chapter 2

• Request Corrective actions Request Corrective actions – where necessary to Property Control

System


• 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


• RELIEF OF RESPONSIBILITY– PA has the AUTHORITYAUTHORITY to Grant “Relief of

Responsibility,” where appropriate• FAR 45.105FAR 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.


• 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 where contractor is held liableheld liable

• ACO may make a contract price adjustment or withhold financingwithhold financing,

• ACO SHALL request corrective request corrective action action for contractor’s property control system (45.105)

OTHER LIABILITY CONCERNSOTHER 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.


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!


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. 52.247-29 - F.o.b. - Origin. – 52.247-30 - F.o.b. - Origin, Contractors Facility. 52.247-30 - F.o.b. - Origin, Contractors Facility. – 52.247-34 - F.o.b. - Destination. 52.247-34 - F.o.b. - Destination. – 52.247-35 - F.o.b. - Destination, Within Consignees 52.247-35 - F.o.b. - Destination, Within Consignees

Premises. Premises. – 52.247-37 - F.o.b. -- Vessel, Port of Shipment.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)

LIABILITY FOR LOSS, DAMAGE, DESTRUCTION OR THEFT OF GOVERNMENT PROPERTY Presented by Dr. Douglas N. Goetz, CPPM, CF Professor of Contract Management Retired.

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