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.