Is this an example of defective workmanship and the contractor is liable? If so, what determines if any or all damage to GP is defective workmanship and thus hold the contractor liable?
No and no.
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It appears that this is a contract or a “master agreement” for repair and alteration of a vessel since you cite that inclusion of DFARS 252.217-7012 based upon the DFARS prescription at:
DFARS Subpart 217.7104 - Contract clauses.
(a) Use the following clauses in solicitations for, and in, master agreements for repair and alteration of vessels:
(10) 252.217-7012, Liability and Insurance.
Also included in this contract or “master agreement” is the Government Property clause, FAR 52.245-1.
Pertinent to your query, it requires the contractor to have a property management system (PMS) which includes the requirement to report instances of loss in accordance with 52.245-1(f)(1)(vii). Importantly it provides the contractor with limited risk of loss as described in paragraph (h) as follows:
(h) Contractor Liability for Government Property.
(1) Unless otherwise provided for in the contract, the Contractor shall not be liable for loss of Government property furnished or acquired under this contract, except when any one of the following applies—
When overhaul is performed, the contractor removes items and must control them as individual items of Government property until re-installed into the higher level assembly or appropriately dispositioned under the Government property clause or as otherwise directed in the contract/master agreement.
It appears that this item (TV) when removed was in working order but upon reinstallation following the overhaul work was no longer in working order. The contractor then submitted this as a loss case (due to damage) as required by FAR 52.245-1(f)(1)(vii)(B) for which they almost assuredly were appropriately relieved of liability by the property administrator in accordance with FAR 52.245-1(f)(1)(vii)(C)(2) owing to the limited risk of loss provision at FAR 52.245-1(h)(1).
The concept of “defective workmanship” noted in DFARS 252.217-7012(b)(3)(i)(A) (see below) involves the “quality or mode of execution” of the work performed.
(3) The Government does not assume risk of and will not pay for any costs of the following:
(i) Inspection, repair, replacement, or renewal of any defects in the vessel(s) or material and equipment due to—
(A) Defective workmanship performed by the Contractor or its subcontractors;
Damage to the TV (resulting in loss) does not constitute defective workmanship. Therefore this clause does not apply.