FAR 52.245-1 Government Property Clause: Duties, Liability, Flow-Down

The FAR 52.245-1 government property clause requirements set out what a federal contractor must do when the government furnishes property or the contractor acquires property on the government’s behalf: identify and tag it, store and maintain it, track it through a documented property management system, report losses, flow the obligations down to subcontractors, and dispose of it correctly at contract end. Getting any of that wrong can trigger payment withholding of up to 5% on a Department of Defense contract, shift the risk of loss onto you, or expose you to other contractual remedies.

When the Clause Applies to Your Contract

The contracting officer inserts FAR 52.245-1 into all cost-reimbursement and time-and-materials contracts, plus any contract where the government will furnish property or the contractor will acquire property that the government will own.¹ Fixed-price contracts generally don’t carry it unless government-furnished property is involved. If the government is handing you equipment, materials, or facilities to perform the work, assume the clause applies and check which version.

What Counts as Government Property

Government property is all tangible property the government owns or leases and either provides to you or that you acquire on its behalf during performance. It splits into two categories. Government-Furnished Property (GFP) is what the government already has and delivers to you. Contractor-Acquired Property (CAP) is what you buy or fabricate yourself, with title passing to the government upon acquisition or reimbursement.²

Coverage is broad: consumable materials, durable equipment, special tooling, special test equipment, and real property. Intellectual property and software are not covered by this clause.³

Sensitive Property Carries Extra Scrutiny

Sensitive property is anything potentially dangerous to public safety or security that requires exceptional physical security, protection, control, and accountability. Weapons, ammunition, explosives, controlled substances, radioactive materials, hazardous materials or wastes, and precious metals are the standard examples.⁴ If you hold sensitive property, expect the government to audit your property management system within six months of receipt rather than twelve, and to review key system elements every year regardless of your overall risk rating.⁵

Your Day-to-Day Stewardship Duties

From arrival until you’re formally relieved of accountability, you own the stewardship. That means maintaining internal controls to manage, use, preserve, protect, repair, and maintain every item.

Every piece must be clearly identified as government-owned through stamps, tags, marks, or other methods appropriate to the property type, keeping it visually distinct from your own assets.² Storage has to be secure and environmentally appropriate. Preventive maintenance and timely repairs keep the property usable.

Use is restricted to performance of the specific contract the property is assigned to. You cannot modify, alter, or cannibalize the property without written approval from the Contracting Officer.³ Borrowing a piece of GFP from one contract to solve a problem on another, even briefly, is a violation.

The Property Management System

You must establish and maintain a property management system that tracks government property through its entire lifecycle. The system has to achieve ten specific outcomes covering acquisition, receipt, recordkeeping, physical inventory, subcontractor control, reporting, relief of stewardship, utilization, maintenance, and property closeout.² Auditors score you against each outcome.

What Property Records Must Contain

Each record must include the item name and description, part number and National Stock Number where applicable, quantity and unit of measure, unit acquisition cost, the accountable contract number, and the physical location. Movement or transfer between locations has to be tracked. Records stay intact until you are formally relieved of accountability.³

Physical Inventory

Periodic physical inventory counts are required. Results must be recorded, reconciled against your property records, and disclosed to the government. A final physical inventory is required at contract completion or termination, though the Property Administrator can waive it in certain cases, such as when the property is transferring to a follow-on contract.²

Self-Assessment

You have to establish procedures for assessing your own property management effectiveness through periodic internal reviews, surveillances, self-assessments, or audits. Significant findings related to government property must be shared with the Property Administrator.² Finding and fixing a problem yourself is far better than having it surface during a government audit.

Which Version of the Clause Controls Your Liability

Liability under FAR 52.245-1 depends on which version your contract contains. Check the contract before you plan around it.

Basic Clause: Government Bears the Risk

Under the basic clause, used in cost-reimbursement and time-and-materials contracts, the government generally assumes the risk of loss. You are not liable for lost, damaged, destroyed, or stolen property except in three situations:

Loss is covered by insurance or you are otherwise reimbursed, to the extent of that coverage.
Loss resulted from willful misconduct or lack of good faith by your managerial personnel: directors, officers, managers, superintendents, or equivalent representatives who oversee all or substantially all of your business or operations at a plant or location.
The Contracting Officer has determined in writing that your property management practices are inadequate or present an undue risk and you failed to take timely corrective action. Even then, you can avoid liability if you prove by clear and convincing evidence that the loss occurred while your practices were adequate or that the management failure didn’t cause the loss.²

Alternate I: Contractor Bears the Risk

Alternate I flips the default. The contractor assumes the risk of and is responsible for any loss, damage, destruction, or theft from the moment property is delivered. The only exceptions are reasonable wear and tear and property properly consumed during performance.¹ This version typically appears in fixed-price contracts. Under Alternate I, your exposure to a warehouse fire or theft is dramatically higher.

Alternate II: Research Property

Alternate II applies to contracts funded with research money. Items acquired with research funds costing less than $5,000 can vest in the contractor upon acquisition if the Contracting Officer approved the purchase in advance. Property costing $5,000 or more vests as the contract specifies. If title vests in you, no depreciation, amortization, or use charges for that property are allowable on any current or future government contract.

Reporting Loss, Damage, or Theft

The clause defines property loss as unintended, accidental events that reduce the government’s expected economic benefits, including theft, items that can’t be located after a reasonable search, and damage that renders property unusable or uneconomical to repair.³

When an incident occurs, investigate promptly and submit a written report to the Property Administrator. The report needs the date of the incident, a description of the property, the unit acquisition cost, and a clear account of what happened. Delayed reporting looks bad during audits and can weaken your position if liability becomes disputed.²

Flow-Down to Subcontractors

Primes must include the requirements of FAR 52.245-1 in all subcontracts under which government property is acquired or furnished for subcontract performance.² That’s more than pasting clause text into the subcontract. You must award subcontracts that clearly identify the items being provided and any restrictions on their use, spell out the extent of liability for loss, and periodically review whether the subcontractor’s property management system is adequate. Your accountability extends to government property under your subcontractors’ control, and if a subcontractor loses or damages property because of a weak system, the government looks at you first.

Government Audits and PMSA Frequency

The government has the right to access your premises and all government property at reasonable times to review, inspect, and evaluate your property management plans, systems, procedures, records, and supporting documentation. Access extends to all your site locations and, with your consent, to subcontractor premises.²

The Defense Contract Management Agency conducts these reviews through a Property Management System Analysis (PMSA). For a new contractor receiving government property for the first time, the initial PMSA occurs within 12 months of first receipt, but no sooner than 90 days after receipt. After that, frequency depends on your assessed risk level:

High risk: standard PMSA at least annually.
Moderate risk: standard PMSA at least every two years.
Low risk: limited PMSA every four years.

Every applicable element must be reviewed at least once every four years regardless of risk level, and the Property Administrator reassesses your risk rating at least annually, so your review cycle can shift as your performance changes.⁵

What Noncompliance Costs You

A property management system that doesn’t meet contractual requirements triggers a corrective action process. The Property Administrator identifies deficiencies and agrees on a schedule to fix them. If you fail to correct on schedule, the Contracting Officer notifies you in writing that continued noncompliance can result in revocation of the government’s assumption of risk and other contractual remedies.⁶

On Department of Defense contracts, DFARS 252.242-7005 adds a specific financial hit. A material weakness in your property management system can result in payment withholding of up to 5% on each progress payment, performance-based payment, or interim cost voucher. If multiple business systems have material weaknesses at the same time, the total withholding can reach 10%.⁷ On a large contract, the cash-flow disruption alone can be serious.

Revocation of the government’s assumption of risk can hurt more than the withholding. Once revoked, you’re financially responsible for any property loss occurring while the system remains deficient, even losses unrelated to the deficiency, unless you prove otherwise by clear and convincing evidence.²

Closing Out Property at Contract End

At the end of the contract, every item on your books has to be accounted for. That means a final physical inventory, resolution of outstanding property loss cases, and submission of inventory disposal schedules to the Plant Clearance Officer. Those schedules have to go out within set deadlines:

30 days after you determine property is no longer needed for contract performance.
60 days after contract completion.
120 days after contract termination.³

The Plant Clearance Officer then issues disposition instructions. Property may be returned to the government, transferred to another contract, sold as surplus, or in some cases abandoned or destroyed. If property leaves your possession as anything other than a return to the government, you must remove and destroy all markings identifying it as government-owned before it goes.³

Abandonment in Place

The Plant Clearance Officer can direct abandonment of property at your premises after reutilization screening produces no taker, provided the property has no commercial value, doesn’t require demilitarization, and poses no danger to public health or welfare. For non-sensitive property, the government can direct abandonment without your input; for sensitive property, your consent is required.⁸

Abandonment can also be authorized when the estimated cost of continued storage, advertising, and handling exceeds what the government would get from selling the property. That call requires approval from a government official at least one level above the Plant Clearance Officer.⁸ Once disposition is complete and records reconcile, the Property Administrator formally relieves your accountability, and the file is closed.

1
eCFR. 48 CFR 45.107 – Contract Clauses
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Acquisition.GOV. 52.245-1 Government Property
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eCFR. 48 CFR 52.245-1 – Government Property
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eCFR. 48 CFR 45.101 – Definitions
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DCMA. DCMA Guidebook for Government Contract Property Administration
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Acquisition.GOV. Contractors Property Management System Compliance
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eCFR. 48 CFR 252.242-7005 – Contractor Business Systems
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eCFR. 48 CFR 45.603 – Abandonment or Destruction of Personal Property