Audit of Government-Furnished Equipment Issued to Contractors

Strategy for Managing GFE

The CFSS recorded unit cost of loaned items varied from under $10 to over $1 million. Of the 8,500 catalogued line items on loan, 7 percent─with a CFSS recorded value greater than $100,000─accounted for 78 percent of the total recorded value (i.e., approximately $297 million). While certain line items have been recently issued to contractors, many others have been on loan for 20 to 30 years. Despite these differences, currently all GFE is managed in the same way. As a result, resources may be spent tracking items of little significance to the contractor or to the Department. By focusing efforts on higher‑risk or higher‑valued items, and by recovering or disposing of unneeded loan items, the management and oversight of GFE could be achieved more efficiently and economically.

Currently, there is no formal assessment as to whether the issuance or continued use of loaned items is necessary for the effective completion of contracts. Prior to issuance on the loan agreement, items should be reviewed to ensure the loan is in the Department’s best interest, and that other approaches, such as requiring the contractor to furnish the item, would not be more cost‑effective.

At the time of the audit, each loan account was managed separately and little consolidated information was available. As a result, it is difficult for the Department to determine the existence and total value of loaned items, and to identify best practices or areas of concern.

It is recommended that an overarching strategy or risk‑based approach be established for managing GFE, value for money be considered in the establishment of loan agreements and issuance of GFE, and monitoring mechanisms be developed to assess the management of GFE.

GFE Policies

Several key policies and guidance documents regarding GFE require updating as they refer to organizations that no longer exist and processes that are no longer current. In addition, ambiguities exist with respect to certain roles, responsibilities, and processes. These unclear requirements have contributed to inconsistent management of GFE.

It is recommended that policies be updated to reflect current requirements and to clarify roles and responsibilities. The Department should ensure that these are consistently applied.

GFE Records and Managerial Information

Four of the twelve sampled loan agreements did not include the required authorizing signatures or were expired, and over 25 percent of the items sampled during the stocktakes had discrepancies between the quantity of items recorded in DND records and number of items on the floor or in contractor records. In addition, information regarding loans of non-catalogued equipment, such as special production tooling and special test equipment (SPT‑STE) was inconsistently maintained. Interviewed contractors were uncertain as to whether SPT‑STE is included in the loan agreements and who is responsible for tracking these items.

Without valid loan agreements and accurate records, it may be difficult to establish accountability for some items. To ensure accurate and complete information is available for decision making, steps should be taken to ensure all loan agreements are current and that GFE records are accurate and complete.

GFE Processes and Controls

Loan agreements include standard terms and conditions that require GFE to be clearly identified and used only for defence purposes. They also stipulate that stocktaking is to be completed every two years, and lost, damaged or surplus items are to be reported to DND on a timely basis. However, DND’s current control processes do not easily identify situations where this is not occurring. Furthermore, there is no formal plan or strategy to ensure GFE is periodically reviewed and rationalized or to correct existing discrepancies in GFE holdings information.

It is recommended that additional risk-smart controls be implemented to support the effective management and oversight of GFE. Key controls to consider include an annual confirmation from contractors to verify compliance with the terms and conditions in the loan agreements, and a process to ensure GFE is periodically reviewed for its continued requirement and any items that are not required are returned or disposed of in a timely manner.

Nature of the GFE Population

The current requirements for managing GFE are not risk‑based, and do not consider the diverse nature or value of the items on loan. The following characteristics of the population indicate that adopting a risk‑based approach may help the Department focus its resources and efforts, resulting in more efficient management of GFE:

• Of the 8,500 catalogued line items on loan, 7 percent of the line items, with a recorded value greater than $100,000, account for 78 percent of the total CFSS recorded value;
• 24 percent of the line items and 6 percent of the CFSS GFE value are recorded as consumable;
• 6 percent of line items have been flagged as surplus in CFSS; and
• Interviews with contractors indicated that certain items have been on loan for 20 to 30 years.

Significant coverage could be achieved by focusing stocktaking and other monitoring efforts on critical or high‑value items. In addition, by increasing efforts to remove surplus, unneeded, or inappropriately loaned items, the size of the population could be reduced. This would reduce carrying and administration costs and would allow future monitoring efforts to be more appropriately directed at items of greater significance.

Value for Money and Rationalization of GFE

Value for money should be a key consideration in rationalizing the loan requirements for both catalogued and non‑catalogued items. Prior to issuing GFE, DND should assess whether it would be more cost‑effective to require the contractor to provide the equipment as part of the contract, rather than incurring administrative costs to manage the loan agreement. Within the eight loan accounts reviewed in detail, 30 percent of the CFSS recorded loan items had a list price under $1,000, accounting for less than 1 percent of the total value of catalogued GFE issued. Some of these low‑dollar‑value items included commercially available goods, such as multimeters, torque wrenches, and fire extinguishers. This is inconsistent with the intent of the GFE policy and, given the cost of maintaining associated loan records, may not be cost‑effective.

While interviews with contractors, PAs and TAs indicated that typically there are valid reasons for the issuance of GFE, the rationale for providing the equipment is not recorded within the loan file. Documentation and approval of the rationale would allow the cost‑benefit of loan arrangements to be analyzed, and could mitigate potential exposure if the loan arrangement is ever challenged.

The issuance of GFE should also be reviewed when contracts are transferred between contractors. Some contractors indicated that they received GFE that they do not require, simply because the previous contractor had it on the loan agreement. A portion of GFE recorded on six of the eight reviewed loan agreements was not in use and was being held in storage at the contractor’s site.

The issuance of unneeded GFE increases departmental costs. In addition to the actual cost of the loaned asset, the Department must bear additional administration costs for recording and tracking the loaned items. By reviewing the rationale for the issuance of GFE, the Department can ensure that the decision to loan equipment considers value for money and that loans are restricted to only those assets that are necessary to support the contract. Reductions in the volume of GFE may reduce both contractor and DND administration costs.

Current Status of Policies

Several departmental policies and procedural documents must be consulted to obtain a full understanding of the roles, responsibilities and processes related to GFE. At the time of the audit, some of these policies were either out‑of‑date or were being revised. For instance, the annexes to the Canadian Forces Supply Manual (CFSM), Chapter 14 Loans were under revision and refer the user to Canadian Forces Administrative Order (CFAO) 36‑30 Loans of Materiel by and to DND.^[2] CFAO 36‑30 was last updated in 1969 and refers to organizations and processes that no longer exist. Materiel Management Instruction (MMI) 1257 – Loan Procedures also references organizations and information that are no longer relevant based on current processes.^[3]

Without current and complete policies, it is difficult for stakeholders to have a full understanding of the processes related to GFE. Consequently, key policies and documents should be updated to ensure consistency in practices related to GFE.

Roles and Responsibilities

Review of policies and interviews with key stakeholders indicated that certain roles and responsibilities required clarification. Furthermore, accountabilities need to be reviewed to ensure individuals are aware of their responsibilities and are only accountable for aspects of the process that are within their control.

According to MMI 1500 – Repair and Overhaul of Centrally Managed Materiel, DSAL is responsible for the loaned equipment and for enforcing loan terms and conditions listed in the loan agreement.^[4] Given the size of the group, the number of existing loan agreements, and the fact that DSAL does not have any physical presence at the contractor sites, this would be difficult for DSAL to fully achieve. Rather, DSAL relies on the contractors, the PAs and the NDQARs to report instances of non-compliance. As a result, the activities DSAL performs to enforce the terms and conditions are limited and adequate risk‑based monitoring may not be occurring.

MMI 1500 also indicates that the NDQARs are responsible to “provide oversight of the use and abuse of DND equipment on loan at the contractor’s site and report incidents to the PA.”^[5] The A-LM‑184 Contractor Repair and Overhaul Guide^[6] indicates that NDQARs are to review DND‑owned materiel at contractor sites. However, several interviewed NDQARs indicated that their responsibilities do not include the management and control of these assets.

DSAL is responsible for approving all loans, including temporary ones. The CFSM, however, indicates that temporary loans (with duration less than 35 days) must be processed by the bases;^[7] the CFSM does not specify whether these temporary loans must also be approved by DSAL. Consequently, responsibility for these loans is not clear. At the time of the audit, at least one wing was issuing temporary loans to contractors without obtaining DSAL approval, in some cases for durations significantly more than 35 days.

The roles and responsibilities of the PAs, TAs, and NDQARs require clarification, as there are no standard procedures amongst these groups for processing, managing and monitoring GFE. As a result, while some stakeholders appear to be exercising diligence by performing activities such as stocktakes and reviewing returns from the contractor, others have little or no involvement in the process.

It is necessary to clearly define roles and responsibilities to support an effective GFE management process. Any revisions to policies and procedures, and related roles and responsibilities should reflect the overall risk-based strategy for managing GFE.

Loan Agreements

Loan agreements outline the standard terms and conditions for the use of GFE by contractors. Signed by the contractor, the PA and DSAL, these agreements establish the duration of loan─typically the life of the underlying contract─and are an essential tool for ensuring that all parties have consented to the included terms and conditions. MMI 1500 states that DSAL is responsible for ensuring that the loan agreements are in place and current.^[8]

Of the twelve reviewed loan agreements:

• Two had not been signed by the contractor or PA and therefore the terms and conditions of the loan agreement may be difficult to enforce;
• One was not signed by a DSAL representative; and
• One had expired but the loaned equipment was still on‑site.

GFE Records

Loaned items with an NSN are recorded in SLAs within the CFSS. These accounts are controlled by DSAL and are the primary mechanism for tracking subsequent adjustments to the items on the loan agreement. The SLAs are updated by DSAL as line items are removed or added or the quantities of a line item on loan are adjusted.

DND and contractor records regarding the items on loan are not always accurate. Discrepancies existed between the Department’s records, the contractor’s records, and the observed quantity on site for 25 percent of the approximately 200 sampled line items.

In particular, 84 of the sampled items were selected from CFSS SLAs in order to verify the accuracy of these records. Of these:

• 26 percent had discrepancies between the number of items that could be located on the floor and the CFSS recorded quantity; and
• 23 percent had discrepancies between the quantity recorded in the contractor’s records and the CFSS recorded quantity.

As contractor records are not reconciled to DND records on a regular basis, these discrepancies are typically outstanding until the contract has expired and the loan is closed. One interviewed contractor noted that the most recent loan close‑out process was significantly delayed as a result of such discrepancies.

Loaned items that do not have an NSN are recorded outside of the CFSS. One common example of such an item is SPT‑STE,^[9] which typically consists of manufactured jigs, moulds and fixtures. Although the standard loan agreement indicates that SPT‑STE must be maintained and tracked by the contractor, an official listing of this type of GFE is not attached to the loan agreement. In addition, during interviews, contractors did not consider SPT‑STE to be part of GFE. While DSAL has some information regarding SPT‑STE items on loan to contractors, the information is not regularly reviewed or updated. Consequently, there is no complete and accurate source of information for the SPT‑STE. Without such information, it is difficult to ensure adequate monitoring, oversight and control.

Contractor and departmental GFE records should be regularly reconciled to ensure that the Department has an accurate and complete picture of total GFE holdings. This reconciliation should consider both catalogued and non-catalogued GFE, to include SPT‑STE holdings.

Managerial Information

Consolidated information regarding GFE is difficult to obtain. CFSS SLAs only record loans of catalogued items, and reports based on this information can only be obtained on an account‑by‑account basis. DND has no official record of non‑catalogued items on loan. In addition, while there are stocktaking requirements associated with catalogued GFE, these requirements do not apply to non‑catalogued items. Furthermore, as temporary loans are currently tracked by the issuing unit, rather than by DSAL, the Department has no centralized record of any temporary loans that occur. Consequently, it is difficult to get a complete and accurate picture of total GFE issued by the Department.

CRS Recommendation

1. DND should establish a risk‑based framework for managing GFE that considers:

• Reviewing and documenting the rationale for the issuance and continued use of GFE;
• Placing emphasis on higher-risk (i.e., critical or high value) holdings and loan agreements; and
• Improving the strategy for managing non-catalogued loan items.

CRS Recommendation

2. After clarifying the approach to managing GFE, policies should be updated to reflect current requirements and to clarify roles and responsibilities. The Department must ensure these policies are consistently applied.

CRS Recommendation

3. To ensure accurate and complete information is available for decision making, steps should be taken to ensure that:

• All loan agreements are current;
• Higher‑risk holdings are accurately and completely reflected in GFE records; and
• Processes and record‑keeping requirements surrounding temporary loans and SPT‑STE are clarified and records are updated accordingly.

CRS Recommendation

4. Additional controls should be implemented to support the effective management and oversight of GFE. Key controls to consider include:

• An annual confirmation from contractors that the terms and conditions of the loan agreement were adhered to. The confirmation could be completed in conjunction with the CHI confirmation process and should include key requirements such as the appropriate use of GFE, completion of periodic stocktaking, condition of GFE, specific identification of GFE at the contractor’s site, and timely reporting of issues with respect to GFE; and
• A process to ensure GFE is periodically reviewed for its continued requirement, and the timely return or disposal of items that are not needed.