Inventory Verification Risk Assessments Presented By: Marjorie Cunningham April 27-29, 2004

Inventory Verification Risk Assessments oInventory verification is the process that the PLCO uses to verify that items reported excess are properly reported on the inventory schedules. Results of the inventory verification are recorded on SF Form 1423 – Inventory Verification Survey (FAR (b)(1)). oIn October 2000, the DCMA Directive 1 guidance on inventory verifications was changed to require inventory verifications to be risk based. oPrior to this time, an inventory verification was required for every plant clearance case regardless of the contractor’s history or the type of property being reported excess.

Inventory Verification Risk Assessments oInventory Verification Risk Assessment begins with an annual rating for a contractor  Annual risk ratings should be performed each year in January for all contractors that submit inventory schedules on a regular basis  An annual risk rating for new contractors or contractors who do not submit schedules on a regular basis should be performed when the first inventory schedule is received during the year oThe Annual Risk Assessment worksheet should be completed and placed in a file along with all applicable backup data used to perform the risk assessment

Inventory Verification Risk Assessments Annual Inventory Verification Risk RatingDate_________________ Contractor________________________________________________ Total number of cases opened during the previous year - _________ Evaluation Criteria: New Contractor (if yes, rate high) - yes___ no___ PCSA performed within the past three years (if no, rate moderate) – yes____ no____ PCSA Rating (if withdrawn or unsat in disposition, rate high – unsat in any other functions, rate moderate) Sat____ Unsat (Disposition)____ Unsat (Other Functions)_____ Withdrawn_____ Summary of Inventory Verification discrepancies – Discrepancies on 2% or less of schedules verified in the previous year ____ (low) Discrepancies on 3-5% of schedules verified in the previous year ____ (moderate) Discrepancies on more than 5% of schedules verified in the pervious year ____ (high) Other Factors Impacting Inventory Verification Risk (give details under Rationale) - yes___ no___ Overall Rating:High____ Moderate____ Low____ Rationale:

Inventory Verification Risk Assessments oSteps to complete the annual risk assessment –  Enter Date, Contractor Name and the total number of in house cases opened during the previous year  Answer questions under Evaluation Criteria – New contractor answer yes or no. A new contractor will be automatically be rated high. Property Control System Analysis performed within the past three years answer yes or no. If no PCSA performed in the past three years, rate moderate. PCSA Rating = Sat, Unsat or Withdrawn. Obtain this information from the PA or from MOCAS. A rating of Unsat in Disposition or a Withdrawn system will automatically be rated high. A rating of Unsat in any Function other than Disposition will be rated moderate.

Inventory Verification Risk Assessments Summary of previous inventory verification discrepancies. –Discrepancies on 2% or less of schedules verified during the previous year = low rating –Discrepancies on 3-5% of schedules verified during the previous year = moderate –Discrepancies on more than 5% of schedules verified during the previous year = high PLCO should keep track of inventory verification discrepancies throughout the year to use for next year’s risk assessment.

Inventory Verification Risk Assessments Other Factors Impacting Inventory Verification Risk. If there are any unusual circumstances at the contractor that would impact the overall risk, the PLCO should give the details under Rationale and use this information in determining the contractor’s overall risk rating. These other factors may be used to either raise or lower the contractor’s annual risk rating. Examples of other factors would be a change in personnel at the contractor, movement of significant amounts of property to new locations or a significant increase in the amount of excess generated by the contractor.

Inventory Verification Risk Assessments  After answering all of the questions, determine the contractor’s annual risk rating. If the contractor’s property control system is rated satisfactory (overall and in disposition), the answer to all questions on the form is no and the contractor had discrepancies on less than 2% of their inventory verifications during the previous year they would be rated low. If the contractor is rated unsat in any functions other than disposition (must be sat in disposition) or they had discrepancies on 3-5% of their inventory verifications during the previous year or their property control system has not been reviewed within the past three years, they would be rated moderate. If the contractor is new or their property control system is withdrawn or they are unsat in disposition or they had discrepancies on more than 5% of their inventory verifications during the previous year, they would be rated high

Inventory Verification Risk Assessments oA contractor with a low risk rating will need to have an inventory verification completed for 10 percent of their cases (1 of every 10) oA contractor with a moderate risk rating will need to have an inventory verification completed for 25 percent of their cases (1 of every 4) oIn addition to the above requirements, cases containing certain types of property must always be verified regardless of the annual rating. As a result, it will be necessary to perform an individual case risk rating for each case when a contractor’s annual rating is either moderate or low in order to identify cases containing items that must be verified

Inventory Verification Risk Assessments oIf a contractor’s annual risk rating is low or moderate, it will be necessary to prepare a case risk rating worksheet for each case opened during the year. Individual cases will be rated either high or low. oIf a contractor’s annual risk rating is high, all inventory schedules must be verified and it is not necessary to prepare individual case risk assessments.

Inventory Verification Risk Assessments Case Level Inventory Verification Risk RatingDate_________ Contractor’s Annual Rating - ________ Case Number - ___________________ Schedule Reference Number(s) – __________________________________________________________________________________ Does this case contain – Items with assigned demil codes which require demil yes____* no_____ Classified items yes____* no_____ Environmentally regulated items yes____* no_____ Termination inventory yes____* no_____ *If any of these blocks are checked, risk rating is high regardless of contractor’s annual rating The following criteria may be used at the PLCO’s discretion to waive individual case verifications regardless of the contractor’s annual risk rating - Property stored at location requiring TDY to perform verification – yes___ no___ Does value of property justify TDY expense - yes___ no___ Dollar value of property on the case is so low that it does not justify The expense of conducting a verification (with or without TDY costs) yes___ no___ Risk rating assigned to case - ________________ Rationale: If rated low, is this case selected to be verified? yes_____ no_____

Inventory Verification Risk Assessments oSteps to complete the Case Risk Rating –  Enter the Date, Contractor’s annual risk rating, Case Number and Schedule Reference Number(s).  Answer yes or no to the following questions – Does the case contain items in Demil codes C, D, E, F, G or P or does it not have Demil codes assigned but PLCO suspects demil required? If yes, case is rated high Does the case contain classified items? If yes, case is rated high

Inventory Verification Risk Assessments Does the case contain environmentally regulated items? If yes, the case is rated high. Does the case contain termination inventory? If yes, the case is rated high.  If TDY is required to conduct the inventory verification, the inventory verification can be waived if the value of the property does not justify TDY expense. This exception applies mainly to property located outside the U.S. where TDY expense would be high and there is no on-site government representative to accomplish the verification.

Inventory Verification Risk Assessments  If the dollar value of the property on the case is so low that it does not warrant the expense of sending someone to the contractor’s facility to verify the items, the verification can be waived regardless of the contractor’s annual rating.  Verification should not be waived based on dollar value if the items require demil, are classified, environmentally regulated or are termination inventory.

Inventory Verification Risk Assessments oAfter completing the Case Risk Rating worksheet, determine the individual case rating. Cases that are rated high must have an inventory verification. Cases that are rated low do not require an inventory verification. The PLCO may still select a case with a low rating for verification to satisfy the requirement to verify 10% of cases on low rated contractors and 25% of cases on moderate rated contractors if they don’t have enough cases rated high to meet these percentages. PLCOs should use dollar value, condition code and type of property as criteria when selecting the cases to meet the 10% or 25% requirements.

Inventory Verification Risk Assessments oThe completed Case Risk Assessment worksheets should be filed in the plant clearance file in the Inventory Verification section.