Government property management is one of the six mandatory business systems for contractors required by the Department of Defense (DOD). In theory, contractors should perform periodic self-assessments on these business systems, but they are not mandatory. However, this might change soon. DOD may be on the verge of imposing on contractors mandatory self-certification requirements for business systems.
This article provides some basic information about the Federal Acquisition Regulation (FAR)/Defense FAR Supplement (DFARS) requirements on the government property management system, along with some best practices and common challenges. Hopefully, contract managers can use this information to assess how well their companies’ government property management system meets the FAR/DFARS requirements so they can determine their strategy for managing specific contracts and proposals.
Mandatory Self-Certification on Contractors’ Government Property Management Systems May Happen Soon
As we know, DOD established, through the “Business Systems Rule,”1 mandatory requirements for six contractor business systems:
- Accounting and billing,
- Material management,
- Government property, and
- Earned value management.
For contract management professionals, a significant portion of their job responsibility is to ensure the company’s business systems meet the requirements, whether through self-assessment or responding to Defense Contract Audit Agency (DCAA)/Defense Contract Management Agency (DCMA) audits. Because the Business Systems Rule would permit DOD to withhold payments for significant deficiencies in any contractor business system, that’s where contract management professionals add significant value to the company—they help reduce the financial risks for the company while improving the practices in financial management and physical asset management.
In theory, contractors should perform periodic self-assessments on these business systems, but they are not mandatory…yet. DOD may soon impose mandatory self-certification requirements on contractors for business systems. While the actual requirements of DOD’s upcoming business systems update are currently unknown, such a requirement will impose greater burdens and costs on contractors in an era of declining revenues.
According to a Government Contracts Advisory Board report published by the law firm McKenna Long & Aldridge,2 DOD is preparing a proposed update to the DFARS Business Systems Rule, DFARS Case 2012-D042. According to the most recent version of the DFARS case report:
This update will revise the existing DFARS business systems clauses to include contractor reporting and documentation requirements regarding contractor compliance with DFARS business systems criteria.3
The report also added that “DOD may view this self-reporting requirement as potentially helping DCMA and DCAA clear their considerable backlog.”4
DOD’s increasing focus on business systems is driven by its strategic priorities. The Government Accountability Office (GAO) has identified DOD’s financial management as “high risk” since 1995 because of “pervasive deficiencies in its financial and related business management systems, processes, and controls.”5 DOD has taken important steps in establishing sustained top-level support and in improving its strategic planning in this area. It refined its strategic plan to focus on two important departmental priority areas:
- Budgetary information, and
- Accountability for its mission-critical assets.
Since mission-critical assets are a large percentage of DOD’s budget, that’s why we are seeing increased enforcement on contractors implementing a compliant government property management business system. Having contractors properly accounting for the government property in their custody is a critical piece for DOD to deliver its strategic plan in the priority areas.
All signs indicate that DOD is increasingly putting pressure on contractors to have a compliant government property management system. Perhaps it’s time to prepare for some basics in case you need to go through the mandatory self-certification soon.
When a contract requires the management of government property (i.e., government-furnished equipment, government-furnished property, and contractor-acquired property), usually, the languages in the request for information or request for proposals will refer to clauses in the FAR/DFARS:
- Material: FAR 45.101, 52.245-1(a);
- Equipment: FAR 45.101, 52.245-1(a);
- Special test equipment: FAR 2.101;
- Special tooling: FAR 2.101;
- Sensitive property and real property: FAR 45.101, 52.245-1(a);
- Contractor property management system compliance: DFARS 245.105, 252.245-7003;
- Material management and accounting system: DFARS 252.242-7004; and
- Unique identification marking and reporting: DFARS 252.211-700X series.
Overall, 10 performance outcomes from the government property management system are required:
- Physical inventory,
- Subcontract control,
- Relief of stewardship,
- Maintenance, and
- Property closeout.
The “10 outcomes” is a good place for contractors to start when preparing for the self-certification of the government property management system. By understanding the best practices and common challenges in these 10 outcome areas, you can quickly get a picture of the health of your company’s government property management system.
You can find some general best practices and key performance metrics for government property management from industry associations, such as the Aerospace Industries Association and the National Property Management Association and there are some high-impact practices contractors should adopt to implement the government property management system. These practices will streamline activities, save labor hours, reduce errors, and ensure compliance. Adopting these high-impact practices will help to avoid some common mistakes in implementing the government property management business system. These perspectives are summarized in FIGURE 1.
Challenges in Implementing the Government Property Management System
Among the six mandatory business systems for contractors, the government property management system perhaps has received the least amount of executive attention and corporate investment so far. In contrast, the rest of the six mandatory business systems, which are more focused on financial management, have received a fair amount of attention.
This is not surprising. If you look at the organizational structure of average mid-sized government contractors, with revenue between $50 million to $500 million, the finance department is responsible for procurement, billing, and accounting. The finance department, led by the CFO, has the personnel and system to support them, but it’s rare that this mid-sized government contractor has a government property management department. Rarely does it have a designated C-level executive responsible for managing assets—both government property and company owned assets.
Lack of senior executive attention is one of the challenges in implementing the government property management system. Overall, the potential for leveraging enterprise asset management to gain competitive advantages has been overlooked by many businesses. If managing company owned assets is rarely a review topic in senior executive meetings, how does government property management stack up in terms of priority?
The other challenge in implementing the government property management system is lack of internal expertise. Most government contractors start their business by offering differentiated services or technologies that have nothing to do with managing government property. Over time, they get into contracts with government property management requirements. They tend to let the existing team absorb the added requirements without giving them the proper tools and training. They start with a few hundred items of government property, using Excel sheets. As the business grows, they find themselves managing thousands of government property items, still using Excel sheets, without a defined business process or trained professionals.
As a matter of fact, today, the majority of government contractors are managing government property with Excel sheets. Often, the teams that are responsible for managing government property are understaffed and underappreciated. Their petitions for more resources often get ignored, until the company is audited by DCMA. After they receive the notice for the DCMA audit on their government property management business systems, companies find themselves spending on average three to six months digging through different versions of Excel sheets and purchase records in order to verify the data and reconcile the differences.
But all these hassles can be avoided if these government contractors have proactively established the business processes for managing government property. Besides, being proactive about the business processes for managing physical assets, whether company owned or government property, is a fundamental good practice for running a business, so it’s worthwhile either way.
Conduct Contractor Self-Assessments to Improve the Government Property Management System
In order to proactively establish the business processes for managing government property in compliance with FAR/DFARS requirements, the most impactful thing you can do is to regularly conduct contractor self-assessments. The contractor self-assessments will allow the business to proactively identify weaknesses and deficiencies in the business processes and systems and take corrective actions. These assessments will not only prepare you well for government audits, but they are also the necessary steps to fulfill the new requirements in case DOD imposes mandatory self-certification of the business systems.
The contractor self-assessments can only be impactful if they meet the following success factors:
- The person or the team conducting the contractor self-assessments need to be trained and objective. Contractors should hire external experts. It’s a high-return investment.
- Use metrics and measurements. Objective and quantifiable standards are key to monitoring performance. These standards should be established in the government property management plan. You can find references to metrics and measurements, as well as their ideal goal values, in professional organizations like the Aerospace Industries Association and the National Property Management Association.
- There should be follow-up actions to address the gaps and deficiencies identified in these contractor self-assessments.
This article has provided some useful information and practical guides for contract managers to assess the state of their company’s government property management system. The pressure for contractors to strengthen this business system is real. This is a good time to be proactive. Good luck.
ABOUT THE AUTHOR
JACKIE LUO is the CEO of E-ISG Asset Intelligence (www.e-isg.com), which provides commercial-off-the-shelf enterprise asset management software and services to businesses and government agencies. She is a thought leader on enterprise asset management business processes and technologies. You can read more of her thoughts on these topics in her company’s blog (www.blog.e-isg.com) or follow her on LinkedIn (www.linkedin.com/in/equipteam1). She can be reached at Jackie.Luo@e-isg.com.
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1. DFARS 242.70; see also 76 Fed. Reg. 28,856 (May 18, 2011).