LIABILITY FOR LOSS DAMAGE DESTRUCTION OR THEFT OF

LIABILITY FOR LOSS, DAMAGE, DESTRUCTION OR THEFT OF GOVERNMENT Presented by PROPERTY Dr. Douglas N. Goetz, CPPM, CF Professor of Contract Management Retired – Now Intermittent Defense Acquisition University President, GP Consultants LLC

LOSS, THEFT DAMAGE and DESTRUCTION OF GOVERNMENT PROPERTY DOES HAPPEN! $500 Million Satellite! $139 Million Damage!

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 – I put some of those topics at the end.

GOVERNMENT OVERARCHING POLICY 45. 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 – Fixed Price contracts awarded on the basis of submission of cost or pricing data.

LDD&T 45. 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&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)

FULL 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… • CONTRACTOR IS LIABLE FOR “ANY” LOSS DAMAGE OR DESTRUCTION EXCEPT FOR: – REASONABLE WEAR AND TEAR OR – REASONABLE AND PROPER CONSUMPTION

FULL 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&T • QUANTUM – ACQUISITION COST – APPRECIATED COST – DEPRECIATED COST – SCRAP VALUE – REPLACEMENT COST

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

LIABILITY FOR LDD&T • The Court used the term “Intrinsic Value” To define QUANTUM – The QUANTUM 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 of 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

Probably Little Pennies! Could be Big $!

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 NOT be liable for loss, damage, destruction or theft to the Government property EXCEPT…

LIMITED RISK OF LOSS • 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 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 DEFINITION • DEFINE “Managerial Personnel? ” I’m the Prez!

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

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 – Methyl-ketone & Naptha Based Solution • The court was concerned with the actions of the CONTRACTOR’S MANAGERIAL PERSONNEL. Not its lower level employees!

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….

LIMITED RISK OF LOSS • 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 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

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, CF OLD 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 Ave Fairborn, OH 45324 GPDOCTOR@ATT. NET 1 - 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 promptly 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!!! • 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&T 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 • Investigation – Must reach a valid and supportable conclusion! • Interface with other Government representatives (where appropriate) • See Do. D 4161. 2 -M Chapter 2 • Request Corrective actions – where necessary to Property Control System

PROPERTY ADMINISTRATOR’S RESPONSIBILITIES • 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

PROPERTY ADMINISTRATOR’S RESPONSIBILITIES • RELIEF OF RESPONSIBILITY – PA has the AUTHORITY to Grant “Relief of Responsibility, ” where appropriate • FAR 45. 105(d) When the property administrator 45. 105 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.

PROPERTY ADMINISTRATOR’S RESPONSIBILITIES • 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 held liable • ACO may make a contract price adjustment or withhold financing, financing • ACO SHALL request corrective action for contractor’s property control system (45. 105)

OTHER 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.

Progress & Performance Based Payments Inventory 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!

Progress & Performance Based Payments Inventory 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 -30 - F. o. b. - Origin, Contractors Facility. – 52. 247 -34 - F. o. b. - Destination. – 52. 247 -35 - F. o. b. - Destination, Within Consignees Premises. – 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 ü Out the “Ground and Flight Risk Clause” in the DFARS • 252. 228 -7001 (Bonds & Insurance) ü Out the “Protection of Government Buildings, Equipment, and Vegetation. ” • 52. 237 -2 (Service Contracting Provision) ü Out the “Limitation of Liability. ” ü 52. 246. 23 (Quality Assurance Provision)