Should You Insure Government Property in Your Possession?

Continuing on with our discussion of insurance costs and the allowability of such, we move now form our discussion of self-insurance to a few other types of insurance that have conditions upon whether associated costs are allowable.

Many Government contractors have Government property in their possessions for various reasons - usually temporary. The question often arises over whether the risks of loss of Government property should be insured and then if insured, whether the costs are allowable. FAR 31.205-19(e)(2)(iv) answers that question. FAR states that the cost of insurance for the risk of loss, damage, destruction, or theft to Government property are allowable only when three conditions are met:

1. the contractor is liable for such loss, damage, destruction or theft
2. the contracting officer has not revoked the Government's assumption of risk (in accordance with FAR 45.104(b). The contracting officer can revoke the Government's assumption of risk when the property administrator determines that the contractor's property management practices are noncompliant with contract requirements, and
3. such insurance does not cover loss, damage or destruction which results form willful misconduct or lack of good faith on the part of any of the contractor's management personnel. Contractor's managerial personnel are defined in FAR 52.245-1(a) as directors, officers, managers, superintendents, or equivalent representatives who have supervision or direction of the company's business, plant, or separate location.

DFARS (Defense FAR Supplement) adds one other consideration to the allowability question. DFARS 231.205-19(e)(7) states that in addition to the FAR limitations listed above, the allowability of insurance costs are also subject to other limitations. These limitations are listed in DFARS 252.217-7012 and essentially related to contractor negligence.

The key to ensuring the allowability of insurance costs related to Government property is to maintain close coordination with your contracting officer as to what is insurable and to make sure your internal controls over Government property in your possession are adequate.

Government Property - Cannibalizing is Generally Prohibited

When Government property is furnished to contractors for use on or incorporation into a Government contract or contract deliverables, the contract clause at FAR (Federal Acquisition Regulations) 52.245-1 - Government Property, applies. This clause requires, among many other things, that contractors develop and maintain a system of internal controls to manage, control, use, preserve, protect, repair, and maintain Government property in their possession. This required internal control system is rather extensive in scope and you can read more details here.

Within the FAR clause, Part (c) tells what contractors can and cannot do with Government property. First, and fundamentally, contractors may use Government property, either furnished or acquired under this contract, only for performing this contract, unless otherwise provided for in this contract or approved by the Contracting Officer.

Second, the contractor cannot make modifications or alterations to Government property unless reasonable and necessary due to the scope of work under the contract, required for normal maintenance, or, again, authorized by the contracting officer.

Third, contractors cannot cannibalize Government property unless otherwise provided for in the contract or approved by the contracting officer.

What is meant by cannibalizing? FAR defines the term at FAR 52.245-1(a)). "Cannibalize" means to remove parts from Government property for use or for installation on other Government property.

Cannibalizing should be no big deal, right? As long as the part is replaced, that is. Wrong. According to the Department of Defense, "Should a contractor cannibalize parts from Government property without contractual authorization or approval from the contracting officer, the contractor is subjecting its property management system to being found noncompliant with FAR 52.245-1(f)(1)." A non-compliant Government property management system, if you're a DoD contractor, could ultimately lead to payment withholds. Payment withholds can be nasty because they disrupt contractors' cash-flows (i.e. working capital) needed to perform the contract. While billing withholds are ultimately paid, interim shortfalls in working capital could cause contractors to have to borrow. Interest on borrowings is not allowable under Government contracts.

Government Property - Risk of Loss

DoD is proposing to extend its self-insurance policy for loss of Government property to more types of contracts. Currently, the responsibility and liability for Government property furnished to contractors to perform their contracts rests with the Government for

• cost-reimbursable,
• time and materials,
• labor-hour, and
• fixed price contracts award on the basis of submission of cost or pricing data.

The new proposal, if adopted, will add "fixed-price contracts awarded on a basis other than submission of certified cost or pricing data" to that list. This method and type of contracting is becoming more prevalent as it is now officially "preferred" over contracts awarded based on cost or pricing datas.

The impact of this change for small businesses is likely to be beneficial. DoD has approximately three thousand contractors where some form of Government property has been furnished in connection with performing contracts. More than 80 percent of the property (in terms of costs) has been furnished to large businesses. Large businesses however are often in a financial position that enables them to select a high insurance deductible in order to garner lower premiums. Losses under the deductible amount are effectively self-insured for potential property loss.

Small companies may not have the financial capacity or capability to select high insurance deductibles and become self-insured up to high thresholds. The probable and natural consequences of lower deductibles is higher premiums. The effect of higher premiums might negatively impact a small businesses ability to compete in full and open competition.

This new provision should provide some relief for the small entities concerning costs to acquire insurance against risk of loss.

Government Property

The idea of obtaining Government property when performing a contract is attractive to some contractors, especially if it reduces the amount of capital a company needs to invest. However, Government property does come at a cost - added administrative work mainly - and contractors need to consider those costs.

Government property as used in FAR Part 45 means all property, both real and personal. It includes facilities, material, special tooling, special test equipment, and agency-peculiar property. Government property includes both Government-furnished property and contractor-acquired property.

 

Contractors are required to establish and maintain a property system that will control, protect, preserve, and maintain all Government property because the contractor is responsible and accountable for all Government property under the provisions of the contract including property located with subcontractors. Does that sound simple? Well, here are some of the specific provisions included in FAR Part 45

 

1. FAR 45.606-1 requires a contractor to submit inventory schedules.
2. FAR 45.606-3(a) requires a contractor to correct and resubmit inventory schedules as necessary.
3. FAR 52.245-1(f)(1)(ii) requires contractors to receive, record, identify and manage Government property.
4. FAR 52.245-1(f)(1)(iii) requires contractors to create and maintain records of all Government property accountable to the contract.
5. FAR 52.245-1(f)(1)(iv) requires contractors to periodically perform, record, and report physical inventories during contract performance.
6. FAR 52.245-1(f)(1)(vi) requires contractors to have a process to create and provide reports.
7. FAR 52.245-1(f)(1)(viii) requires contractors to promptly disclose and report Government Property in its possession that is excess to contract performance.
8. FAR 52.245-1(f)(1)(ix) requires contractors to disclose and report to the Property Administrator the need for replacement and/or capital rehabilitation.
9. FAR 52.245-1(f)(1)(x) requires contractors to perform and report to the Property Administrator contract property closeout.
10. FAR 52.245-1(f)(2) requires contractors to establish and maintain source data, particularly in the areas of recognition of acquisitions and dispositions of material and equipment.
11. FAR 52.245-1(j)(4) requires contractors to submit inventory disposal schedules to the Plant Clearance Officer.
12. FAR 52.245-9(d) requires a contractor to identify the property for which rental is requested.

 

 

Business System Requirements - Government Property

The Department of Defense has propsed regulations that will allow it to withhold payments from contractors who have inadequate business systems; purchasing, accounting, estimating, MMAS, EVMS, and Government Property. Over the past few days, we have been discussing the characteristics of adequate systems. Today we discuss the sixth and final business system covered undet this regulation; Government Property.

Government property in the possession of contractors consists of property provided or leased to the contractor by the Government and property acquired by the contractor fromother sources where upon acquisition title passes to the Government under the terms of the contract. It includes property such as:

• plant equipment
• real property
• special test equipment
• special tooling
• facilities
• Government production and research property
• material
• nonseverable property
• agency-peculiar property
• industrial plan equipment

FAR 45.5 prescribes the minimum requirements contractors must meet in establishing and maintaining control over Government property. This business system is essentially a record keeping requirement at a very detailed level. Historically, many contractors have had extreme difficulty in meeting these standards although software solutions, bar coding, and RFID technology is making it easier to administer. The basic requirements for an adequate Government Property system include:

•  Receipts for Government property.
• Records of discrepancies incident to shipment
• Records and reports of Government property. The contractor shall establish and maintain adequate control records for all Government property, including property provided to and in the possession or control of a subcontractor.
• The name, description, and National Stock Number (if furnished by the Government or available in the property control system).
• Quantity received (or fabricated), issued, and on hand.
• Unit price (and unit of measure).
• Contract number or equivalent code designation.
• Location.
• Disposition.
• Posting reference and date of transaction.
• Records of pricing information.
• Records of material.
• Records of plant equipment.
• Special reports of plant equipment.
• Records of real property.
• Records of scrap or salvage.
• Records of related data and information.
• Records of completed products.
• Records of transportation and installation costs of plant equipment.
• Records of misdirected shipments.
• Records of property returned for rework.
• Reports of Government property - provide annually the total acquisition cost of Government property for which the contractor is accountable under each contract with each agency, including Government property at subcontractor plants and alternate locations.
• Segregation of Government property.
• Physical inventories.
• Care, maintenance, and use.
• Contractor’s maintenance program (including preventative maintenance).
• Use of Government property.
• Property in possession of subcontractors.