Impact on cost reimbursement contract if Government revokes assumption of risk for GFP

[savoies]

Under FAR 52.245-1, Government Property, the government assumes risk of loss except under certain conditions. Para (h)of this clause states;

(h) Contractor Liability for Government Property.

(1) Unless otherwise provided for in the contract, the Contractor shall not be liable for loss, theft, damage or destruction to the Government property furnished or acquired under this contract, except when any one of the following applies—

(i) The risk is covered by insurance or the Contractor is otherwise reimbursed (to the extent of such insurance or reimbursement). The allowability of insurance costs shall be determined in accordance with 31.205-19.

(ii) The loss, theft, damage or destruction is the result of willful misconduct or lack of good faith on the part of the Contractor's managerial personnel.

(iii) The Contracting Officer has, in writing, revoked the Government's assumption of risk for loss, theft, damage or destruction, due to a determination under paragraph (g) of this clause that the Contractor's property management practices are inadequate, and/or present an undue risk to the Government, and the Contractor failed to take timely corrective action. If the Contractor can establish by clear and convincing evidence that the loss, theft, damage or destruction of Government property occurred while the Contractor had adequate property management practices or the loss, theft, damage or destruction of Government property did not result from the Contractor's failure to maintain adequate property management practices, the Contractor shall not be held liable.

What is the applicability of contractor liability provision on a cost reimbursement contract? If the contractor is found liable for loss/damage to government property under this paragraph is any cost associated with correcting the loss (through repair, repurchase, etc.) reimbursable under the contract or would this cost now be considered an unallowable cost?

We are a Prime contractor on a government R&D program. We have flowed down 52.245-1 to a subcontractor on a cost reimbursement subcontract. We often require subcontractor to insure for risk of loss for GP but do not do so for subs who have a property system that has been accepted by DCMA. Instead, require subcontractor to notify us if the government has 'revoked the assumption of risk for loss.' The subcontract has stated that this is irrelevant since this is a cost reimbursement subcontract.

[here_2_help]

Did you review 31.205-19, especially the part that reads:

Actual losses are unallowable unless expressly provided for in the contract, except—

(i) Losses incurred under the nominal deductible provisions of purchased insurance, in keeping with sound business practice, are allowable; and

(ii) Minor losses, such as spoilage, breakage, and disappearance of small hand tools that occur in the ordinary course of business and that are not covered by insurance, are allowable.

As I read the Cost Principle, costs of insuring against property loss, damage, or destruction would normally be allowable (if required by subcontract terms and conditions) but the actual costs associated with a specific instance of LDD would not be allowable. (I note the subcontractor might opt to self-insure rather than purchase insurance, but even so the actual costs associated with an individual event would still be unallowable.)

Does this help you out?