Can the contractor roll all applicable contracts into one set of Approved Scrap Procedures?
This is a WONDERFUL question – but it is chock full of twists and turns – so I need to cover a number of different perspectives and topics within the answer.
If you are seated – get ready for an interesting journey – here goes!
The discussion or allowance of an “Approved Scrap Procedure” is found in the Government Property clause at FAR 52.245-1(j). It states:
(1) Scrap to which the Government has obtained title under paragraph (e) of this clause.
(i) Contractor with an approved scrap procedure.
(A) The Contractor may dispose of scrap resulting from production or testing under this contract without Government approval. However, if the scrap requires demilitarization or is sensitive property, the Contractor shall submit the scrap on an inventory disposal schedule.
The FAR and DFARS are rather parsimonious in any discussion regarding what exactly is an “Approved Scrap Procedure?” An old reference, what was generically referred to as the DoD Property Manual, 4161.2-M, provided this guidance. It states,
“5. Approved Scrap Procedure. Contractors may be authorized to use an approved scrap procedure (see DFARS 245.607-1(a)(ii) for the routine disposal of production scrap and production spoilage (see DFARS 245.601) as well as for the routine disposal of worn, broken, mutilated or otherwise rejected parts excess to overhaul and repair contracts. This procedure, particularly the sales aspect thereof, shall be reviewed by the plant clearance officer prior to its approval by the PA, as part of the contractor's property control system. The plant clearance officer shall ensure that the procedure contains adequate requirements for inspection and examination of the items to be disposed of as scrap. Sensitive property, including precious metals and hazardous wastes, shall not be disposed of through the approved scrap procedure.”
Now I do not mean to confuse the issue but we need to do some comparison between CURRENT Regulations and OLD manuals:
The current reg uses the phrase, “scrap resulting from production or testing…”
The old Manual used ADDITIONAL terms, “production scrap and production spoilage (see DFARS 245.601) as well as for the routine disposal of worn, broken, mutilated or otherwise rejected parts excess to overhaul and repair contracts.
So, to start – under CURRENT REGULATIONS this process is ONLY allowed for “Scrap resulting from PRODUCTION or TESTING.” You have a statement in your question – “. Another contract calls for rework of some items and parts modifications performed in house may be necessary which generates metal shavings.” This is the EXACT situation where an Approved Scrap procedure would come into play. The Government certainly does not want to manage to the nth degree clippings, grindings and shaving from metal piece parts. As such one of the embedded and not often discussed aspects of an approved scrap procedure is that it is normal practice for the Government scrap to be commingled in the same scrap bin as contractor scrap. Such that when it is sold – both parties receive the greatest return on the investment. [Note – one warning, which I will discuss in further detail later is that the clipping, grinding and shavings CANNOT be of a sensitive nature, i.e., this process may NOT be applicable for precious metals – defined as sensitive.]
Please note that you throw in a number of other variables!
You state that the “Contractor has several contracts for reparable items. Cannibalization of these parts is authorized in one contract. Demil….”
Reparable items – we have to assume that you are asking, “Can I process parts removed during the repair process through the Approved Scrap Procedure?
Using a STRICT reading of the Current FAR Government Property clause at 52.245-1(j)(1) we see guidance for this question. It states,
“(B) For scrap from other than production or testing the Contractor may prepare scrap lists in lieu of inventory disposal schedules (provided such lists are consistent with the approved scrap procedures).”
Essentially, those parts removed would need to be listed on an Inventory Disposal Schedule – an SF 1428 or entered through the Plant Clearance Automated Screening System (PCARSS). Though the “old” regulations allowed this – and potentially future regulations may again allow this – today, under the current FAR, these items CANNOT go through the “Approved Scrap Procedure.”
You mention Cannibalization. Again, if parts are removed for REUSE – then they do not go through the disposal process, i.e., either the Approved Scrap Procedure or the normal Disposal process. Now, that may leave a CARCASS – but even here you would have to determine was this generated in the production or testing process? My simple perspective is that the carcass was generated through a repair process. Parts were removed to repair another item.
And you mention DEMIL! The current GP clause is QUITE clear in this matter as cited above. FAR 52.245-1(j)(1)(a) states, “However, if the scrap requires demilitarization or is sensitive property, the Contractor shall submit the scrap on an inventory disposal schedule.”
QUITE CLEARLY – ANY AND ALL ITEMS REQUIRING DEMIL MUST BE LISTED ON AN INVENTORY DISPOSAL SCHEDULE – THE SF 1428 OR THROUGH PCARSS.
O.k., some other tidbits you asked about. “Can the contractor roll all applicable contracts into one set of Approved Scrap Procedures?”
Normally, the Approved Scrap Procedure was applicable to and embedded as part of the contractor’s Written procedures which were part of their Property Management System. As such it was a SYSTEMS approach vis-à-vis a contract by contract approach. Now, with that said, it IS possible that due to the COMPLEXITY of your contractor’s PMS and Processes that you, yes – YOU, as the Property Administrator decide that it should be allowed or permitted only on a contract by contract basis. But that would be driven by your intimate knowledge of the contractor’s operations.
What is this stuff about an “Approved” Scrap Procedure? I thought that we did not approve Property Management Systems under the current FAR GP Clause? That is correct – today as we speak -- we DO NOT APPROVE nor disapprove the contractor’s PMS. Ahhhhh, but there are still certain internal components of the contractor’s PMS that we DO have the authority to approve – and the Scrap Procedure is one of them! Others items “approved” by the PA are fond at FAR 52.245-1(f)(1)(iii)(A), and 52.245-1(f)(1)(iii)(B). Now I said that the PA approves the scrap procedures. There has been some debate and dispute between the PAs and the Plant Clearance Officers (PLCOs) – both “Authorized representatives of the contracting officer” and both with a “Certificate of Appointment. So, who has that AUTHORITY. Historically, the PA had the authority to APPROVE the contractor’s PMS. And if the Approved Scrap Procedure is PART of the PMS – well, it would appear that the PA would have that authority. But, is the PA as expert in this area as a PLCO – the property disposal specialist? It appear that the PLCO can also lay claim to this authority. Neither the FAR nor DFARS to date clarifies this aspect. Ahhh, but there is a proposed rules that offers some clarification. See http://www.federalregister.gov/articles/2010/12/03/2010-30285/defense-federal-acquisition-regulation-supplement-government-property-dfars-case-2009-d008
Wait, wait – there’s more!
Where does the money go, generated through the sale of scrap through the Approved scrap procedure? The current DFARS addresses that issues under DFARS 245.610-3 states,
Proceeds of sale.
(1) Unless otherwise provided in the contract, the proceeds of any sale, purchase, or retention shall be— …
(B) For contractors with an approved scrap procedure, will ensure the proceeds are appropriately applied to an overhead account.
Great – so the proceeds get credited to the contractor’s overhead account! Right? Well, not so fast. There are areas of Property management and Property administration that overlap with other areas of Government responsibilities. The issue of crediting monies is one area where the Defense Contract Audit Agency (DCAA) may come into play. Why? Because if the contractor is a Cost Accounting Standards (CAS) covered contractor – then their DISCLOSURE STATEMENT – CASB-DS1 form – requires the contractor to identify HOW they are going to handle the proceeds realized from the sale of scrap. In the Disclosure statement at item 3.2.1 – you will find Paragraph “(c) Income from Sale of Scrap.” Pas would be wise to request the contractor’s Disclosure statement from the Administrative Contracting Officer (ACO) to ensure that the monies realized do, in fact, go to overhead – and then verify this through their Property Management System Analysis. Of course if the Disclosure Statement specifies that the proceeds go to some other account – then the PA, through the ACO, should request clarification to ensure that the Government obtains its fair share of those proceeds!
One additional point, if this is a NON-CAS covered contract – then the PA may again need to request assistance to determine where those proceeds are being applied.
Lastly, you need to be aware that regulations are constantly in a state of flux – so I urge you to be on the lookout for a PROPOSED FAR RULE to be published – that, let me say hopefully, will clarify an number of these issues!
I know that this is a lot of information – but as a Property Professional these are the types of technical issues that we need to be able to research, address and resolve!
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