What recourse will be the Army responsible officer have if a employee of the contractor looses or damages a tool and negligence has been determined? Will the DoD agency's KO/COR be able to assess liability to the contractor. Are there other courses of action that might be recommended to address this issue?
If the exchange of tools is conducted pursuant to a contract, then contractor liability for Government Furnished Property is determined under the contract clauses. Your next step is to read the clause contained in the contract. Then read FAR Part 45 and AFARS Part 5145 for the policy and procedures for assessing liability.
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If the exchange of tools is not conducted pursuant to a contract, then contractor liability is determined through DoD and Army regulations. Determining contractor liability in that instance is outside the scope of the Ask the Professor program. As you've already reviewed the applicable regulations, your next step is to contact the OPRs identified within those regulations.