1. When is a Loss a “Loss” CLEARED FOR PUBLIC RELEASE Tom Ruckdaschel
Presented By:
Tom Ruckdaschel
June 26, 2012

2. I do not speak for the assigned Property Administrator2

3. 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.

4. Learning Objectives At the end of this session, attendees will know:
The regulatory definition of “loss of Government property” (FAR and DFARS )
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

5. 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 , APRIL 2012
But there is much more to the story…

6. What is Gov’t Property? 2017: DoD audit readiness goal! 2017 Assets
PP&E
Inventory/OM&S
Real Property
Personal Property
Repairables
Consumables
Internal Use Software
Land
2017: DoD audit readiness goal!
Facilities
Equipment
2017
Military Equipment
Buildings
Structures
General Purpose Equipment
Linear

7. Government Property (cont.)
Assets
PP&E
Inventory/OM&S
Real Property
Personal Property
Repairables
Consumables
Internal Use Software
Land
Distilled into four (4) types under the Federal Acquisition Regulation
Facilities
Equipment
Military Equipment
Buildings
Structures
General Purpose Equipment
Linear

8. 4 “Contract Property” 1. Equipment (for use or repair)
Assets
Personal Property 1
Equipment
Special Tooling
Special Test Equip.
Material 2 3 4
For Repair
1. Equipment (for use or repair)
2. Special Tooling
3. Special Test Equipment
4. Material
For “Use” 4
types of contract property

9. “Contract Property”(cont.)
Assets
Personal Property
Equipment
Special Tooling
Special Test Equip.
Material
Cost Principles
FAR
FAR
Not talking progress or advanced payment property
(yes, I know Gov’t has title during the life of the contract)
Either acquired under CR contracts, or
Furnished by the Gov’t
(regardless of contract type)

10. Current Regulatory Landscape
Federal Acquisition Regulation (FAR)
Part 45-Government’s Policy
Clause (June 2007, August 2010, April 2012)
Defense Federal Acquisition Regulation Supplement (DFARS)
Part 245—DoD Policy
DFARS clauses:
(Reporting of GFE to the DoD UID Registry)*
(Tagging, Labeling and Marking of GFP)
(Reporting Loss of Government Property)
(Contractor Property Management System Admin.)
(Reporting, Reutilization, and Disposal)
Procedure, Guidance and Information
* Under revision: DFARS case 2012-D001

11. 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 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

12. 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)

13. What does the FAR say?

14. What are contractors required to do?
Lets look at basic requirements
FAR (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.”

15. Contractor Resp (cont.)
What makes a good system?
Must be “adequate”* (satisfy the requirements of FAR )
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

16. 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

17. So then, what exactly is a Loss of Government
So then, what exactly is a Loss of Government property as opposed to a (reasonable) inventory adjustment?
Let us contrast and compare

18. 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 , APRIL 2012

19. Losses are (cont.) Includes: Does not include:
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

20. 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

21. 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 21

22. I give you...Tom’s definition:
Reasonable inventory adjustments are:
“Differences between record and actual counts that are within established ranges or tolerances.”

23. Inventory Adjustments (cont.)
Inventory adjustments must be reasonable
Inventory adjustments must be:
Reasonable (reference FAR (c) and )
Pre-defined, not upon arrival. 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.)

24. Oh, by the way… “Reasonable adjustments arising from differences
Reasonable inventory adjustments are also mentioned in FAR Part 31:
FAR :
“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

25. Lets take it a step further…
What does the DFARS say?

26. DFARS Definition of Property Loss
DFARS clause (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…

27. 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 (FEBRUARY 2011)]

28. So, as you can see, both FAR and DFARS say the same thing…but,
…the DFARS takes things a bit further!

29. Reporting Requirements
DFARS
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 non-sensitive…losses of low-risk consumable material such as common hardware, etc. Such “losses” are typically a result of normal process variation.

30. “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

31. "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 31

32. Comparison of Variation Types
DoD LSS Green Belt UNCLASSIFIED
1/8/2011
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.
Process for Identifying Special Causes
Check all the W.E. rules each time you plot a point.
Look across the entire chart.
Circle all special causes.
Investigate immediately – this especially important. Don’t lose the opportunity to learn as much as possible about the conditions that caused this special cause variability.
Take notes on the investigation
YOU must investigate and eliminate the special cause! And, remember, time is your enemy. The longer it takes, the less likely you’ll find the root cause.
Out of bounds is always a special cause on the range chart. Other special causes could be false alarms.
Record your notes on the investigation in the Notes section of the control chart so that they will be available to everyone who sees the chart.
The average chart shows variation over time; therefore, special causes on the average chart mean the process location is changing.
The range chart shows variation at a particular point in time; therefore, special causes on the range chart mean a change in process variation.
The Shewhart model decomposes this variation into either:
Common Cause Variation
This is the consistent, stable, random variability within the process
We will have to make a fundamental improvement to reduce common cause variation
Is usually hard to reduce
Special Cause Variation
This is due to a specific cause that we can isolate
Special cause variation can be detected by spotting outliers or patterns in the data
Usually easy to eliminate
Think of the best process performance as the target’s bull’s-eye. Deviations from the perfect performance can be caused by routine, common factors or by an assignable, special cause.
Common Causes
Control Charts

33. Pop Quiz Is this normal variation? Example for educational
purposes only
Is this normal variation?
Source:

34. 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

35. "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 G (March 2002)

36. 36

37. What About FAR Reporting Requirements?
FAR reporting requirements [ (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!

38. 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!

39. 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

40. 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”)

41. 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

42. 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

43. 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

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

45. 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!

46. 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

47. ANY QUESTIONS?