We have discussed recently how DoD has an increased interest in government property, especially the property that contractor’s control and maintain. RGCI has helped clients with government property issues more in the past four years than the previous ten years combined.
Common Misunderstandings and the Importance of Contract Clauses
We get this often from clients: “DCMA just emailed me about auditing our government property system, and we didn’t even know we had anything considered government property.” This is a problem and why we always need to know and understand the clauses inserted in our contracts.
So, what is government property? It can be anything the government issues for use on a contract or anything a contractor buys for use or performance on a contract. The contract clauses and contract types determine the contractor’s responsibility for reporting, tracking, and maintaining that property.
Navigating FAR: Key Sections and Their Implications on Government Property
Instruction for government property is found in both FAR Part 45 and FAR Part 52 or 52.245-1. The difference is that Part 45 gives instruction to the government personnel - contracting officers, and property administrators, while 52.245-1 gives instruction to contractors.
This is how FAR 45.107(a) gives instruction to contracting officers on when to insert the property clause for contractors – FAR 52.245-1.
- (1) Except as provided in paragraph (d) of this section, the contracting officer shall insert the clause at 245-1, Government Property, in:
- (i) All cost reimbursement and time-and-material type solicitation and contracts, and labor-hour solicitations when property is expected to be furnished for the labor-hour contracts.
- (ii) Fixed-price solicitations and contracts when the government will provide government property.
- (iii) Contracts or modifications awarded under FAR Part 12 procedures where government property that exceeds the simplified acquisition threshold, as defined in FAR 2.101, is furnished or where the contractor is directed to acquire property for use under the contract that is titled in the government.
- (2) The contracting officer shall use the clause with its Alternate I in contracts other than those identified in FAR 45.104(a), Responsibility and Liability for Government Property.
- (3) The contracting officer shall use the clause with its Alternate II when a contract for the conduct of basic or applied research at nonprofit institutions of higher education or at nonprofit organizations whose primary purpose is the conduct of scientific research (see 35.014) is contemplated.
Since this is an “introduction,” we will concentrate on (1) and the subheadings. The solicitations and contracts mentioned in that section, and primarily in (i) and (ii), form the majority of the government property that contractors acquire. Notice the term “shall” in (1), which means it is imperative and mandatory for contracting officers to insert this clause. There are times when FAR clauses are optional for inclusion and are usually based on dollar thresholds. The contracting officer “may” include some clauses based on dollar thresholds. But in this situation, where “shall” is used, there is no other option, and it is mandatory that the clause (in this case, FAR 52.245-1) is inserted.
What does all of this mean? It means we need to read AND understand our contracts and the clauses that are inserted. We should also be able to recognize any clauses that are missing. As an introduction to government property, the first and most important step is recognizing and understanding those clauses that relate to this business system.
Building and Managing an Effective Property System
FAR 52.245-1 outlines all requirements for an adequate government property management system. It is not the only clause that pertains to government property, but it is the main clause. There are two alternatives to this clause, but as this is an introduction, we will just address the main clause because it is the one that most contractors have to deal with.
FAR 52.245-1 gives instruction to contractors on exactly what government property is, what is considered loss of this property, how the title of the property passes to the government, and then lists all the outcomes that a property management system must address. The outcomes or areas that your property management system must address are listed below:
- Acquisition – how do we acquire government property? All possible areas must be covered, from obtaining property from a contract (government-furnished property - GFP) to buying property for use on a contract (contractor-acquired property – CAP). It is easy enough to issue a purchase order and buy CAP. But we also must cover how we acquire GFP.
- Receipt – how do we receive property? And from above, receiving GFP would be different than receiving CAP. What if there are damaged items? What if items are missing from shipments? We must have a process in place to cover each scenario.
- Records – the clause lists how we establish records for each piece of property. Those records must be updated and maintained throughout the life of that piece of property – from acquisition to closeout.
- Physical Inventory – we must conduct a full physical inventory each year. That means we must use our established records to find and verify each piece of Government property we have.
- Subcontractor Control – do our subs have government property? Have we issued them government property or allowed them to buy property for contract performance? If so, we must ensure each subcontractor has an adequate system. We must also ensure that the proper property clauses are flowed down to each sub.
- Reports – there are certain reports that are required to be submitted to your property administrator and contracting officer. Reports of loss and/or damage, self-assessments, and inventory results are all required to be submitted. And there may be additional reports required by individual contracts – remember, we need to read and understand all contract clauses and language.
- Relief of Stewardship – we must have a process to enable the “prompt recognition, investigation, disclosure and reporting of loss of Government property, including losses that occur at subcontractor or alternate site locations.”
- Utilization – we can only use government property, whether GFP or CAP, for the contract it was acquired for. It is fine to use government property on other contracts, but only if we get written permission from our contracting officers, usually in the form of a contract modification. This outcome also covers consumption, movement, and storage of property.
- Maintenance – we must maintain or calibrate all property in our possession if required. This can be changing the oil in a van or calibrating a piece of special tooling equipment. We must know the requirements on our property and keep records of each maintenance.
- Contract Closeout – property is just one small part of contract closeout, but we must have a process in place to ensure all property is closed out and submitted back to the government if required.
The Importance of Compliant Procedures in Audits
Most of the outcomes listed above have several other sub-areas beneath them or areas of property management that must be addressed. Building a property management system takes time and education. The first place to start is your policies and procedures for government property. This will be the first thing DCMA requests when they begin a property audit – formally called a Property Management System Analysis (PMSA). Our property procedures should be compliant but not so detailed that they can’t be followed in everyday work scenarios. We see more contractors get dinged for having overly detailed procedures they are not following more than we see contractors who do not go into enough detail as to how they perform the required outcomes. Remember the old saying in dealing with audits - it’s better to have no procedures than to have procedures you are not following.
Compliant procedures come first, and then we must deal with the requirements of conducting the annual physical inventory and the annual self-assessment or internal audit. All three are vital parts of your property management system.
RGCI helps clients every day with government property issues. Often, we get involved after a contractor has failed or performed very poorly on the PMSA. If you have property issues or questions, get us involved before that PMSA occurs so we can help out with any issues.