What happens to the $85,000 piece of test equipment the government shipped to your facility three contracts ago? It sits on a shelf in the back warehouse. Nobody remembers which contract funded it. The property tag fell off two years ago. And nobody told the bookkeeper it needed to appear anywhere in the accounting system.
At closeout, the contracting officer asks for a complete government property inventory. The answer determines whether the contractor receives final payment or enters a liability dispute over missing, damaged, or unaccounted government assets. The accounting system has no record. The property management system (if one exists) was last updated when the equipment arrived.
Government-furnished property and contractor-acquired property create parallel accounting obligations outside the standard cost accounting framework. Government property accounting under FAR Part 45 requires contractors to establish property records, conduct physical inventories, report losses, and manage disposition for every government-owned item in their possession. The property tracking requirements, accounting entries, and audit exposure points below apply from the day government property arrives at your facility through contract closeout.
What Are the Two Categories of Government Property Under FAR 45?
Government property accounting starts with classification. FAR 45.101 defines two categories, and the accounting treatment differs for each. Government-Furnished Property (GFP) arrives from the government: equipment, materials, special tooling, or facilities provided under the contract for the contractor’s use. Contractor-Acquired Property (CAP) is property the contractor acquires, fabricates, or otherwise provides to perform the contract, and to which the government has title. Title does not pass automatically in every case. Under cost-reimbursement and time-and-material contracts, the government takes title to property the contractor is entitled to be reimbursed for. Under fixed-price contracts, FAR 45.402(a) leaves title with the contractor unless the contract carries financing provisions or its own passage-of-title terms, or the item is a deliverable end item.
GFP appears nowhere on the contractor’s balance sheet as an owned asset because the contractor does not own it. The obligation is custodial: track it, maintain it, protect it, and return or dispose of it per government direction. CAP starts as a contract cost (direct material or equipment). The cost hits the contractor’s books. Where title passes to the government, accountability passes with it and the item belongs in the property records. Where title stays with the contractor under a fixed-price award, the item is the contractor’s own asset and follows normal fixed-asset accounting.
Both categories require the same record-keeping: item description, quantity, acquisition cost, location, condition, contract number, and disposition status. The DCAA-compliant accounting system must track these items separately from contractor-owned assets.
Property Records: What FAR 45 Requires
FAR 52.245-1(f) requires contractors to establish and implement property management plans, systems, and procedures. The clause lists ten outcomes the system must enable: acquisition of property, receipt, records, physical inventory, subcontractor control, reports, relief of stewardship responsibility and liability, utilizing government property, maintenance, and property closeout. DCMA (Defense Contract Management Agency) serves as the property administrator for most DoD contracts. FAR 45.105 requires the responsible agency to analyze contractor property management policies, procedures, practices, and systems and notify the contractor in writing when the system does not meet contractual requirements.
FAR 52.245-1(f)(1)(iii)(A) sets the data elements. Unless the property administrator approves otherwise, the record for each item must carry: name, part number and description; National Stock Number where needed; quantity received or fabricated, issued, and on hand; unit acquisition cost; unique item identifier or equivalent where available and needed; unit of measure; the accountable contract number or equivalent code; location; disposition; and posting reference and transaction date.
One further element, date placed in service, applies only if the contract’s terms require it. There is no dollar threshold in the clause that switches extra fields on or off, and none in FAR Part 45 either. Your own capitalization policy governs your books; it does not change what the property record must contain.
In QuickBooks, most small contractors track government property through a dedicated memorized report or a separate register outside the general ledger. Government property does not appear as the contractor’s asset. Track it in a property log with the required fields, reconciled quarterly to the physical inventory.
Government Property Accounting Entries
The journal entries for government property accounting depend on the property category. GFP requires no cost entry at receipt because the contractor incurs no cost. Record receipt in the property management system (the tracking log) with the acquisition value, contract number, and date received. The only general ledger impact occurs if the government property is lost, damaged, or destroyed, creating a potential liability.
CAP generates a standard cost entry: debit direct materials or equipment (contract cost), credit accounts payable or cash. The cost flows through the contractor’s incurred cost submission as an allowable direct cost. Where the contract passes title to the government, record the item in the property management system at the same time, even though the contractor did the buying.
Loss or damage to government property requires notification to the contracting officer as soon as the facts become known, and a potential liability entry. The default runs in the contractor’s favor.
Under FAR 52.245-1(h)(1), unless the contract says otherwise, the contractor is not liable for loss of government property except in three situations: the risk is covered by insurance or otherwise reimbursed, the loss resulted from willful misconduct or lack of good faith by the contractor’s managerial personnel, or the contracting officer had already revoked the government’s assumption of risk in writing after inadequate property practices went uncorrected. Ordinary negligence is not on that list. Accrue a liability only where one of the three applies. Otherwise the government carries the risk and no liability entry is required.
How Often Must a Contractor Inventory Government Property?
FAR 52.245-1(f)(1)(iv) requires contractors to periodically perform, record, and disclose physical inventory results. The clause does not set a minimum frequency floor. The word used is “periodically.” Many contracts specify annual inventories, so check your contract terms for the frequency that applies. The clause does fix one date: a final physical inventory upon contract completion or termination. The property administrator has authority to waive that final inventory, for example where the system is reliable or the property transfers to a follow-on contract. The inventory must reconcile to the property records, and discrepancies require investigation and reporting.
The physical inventory is a reconciliation, not a count. For each item in the property records, verify physical existence, condition, and location. For each government-tagged item found on-site, verify it appears in the records. Discrepancies in either direction (records without property or property without records) require written explanation and submission to the property administrator.
Inventory results feed the accounting system when adjustments are needed. A missing item triggers loss reporting under FAR 52.245-1(f)(1)(vii)(B). A damaged item triggers a condition reclassification and potential repair cost accrual. Both create documentation requirements the bookkeeper must coordinate with the property administrator.
Disposition and Contract Closeout
Government property disposition is the final step before contract closeout. The contractor must submit an inventory schedule listing all government property in their possession, its condition, and a recommended disposition (return to government, transfer to another contract, or request for abandonment/destruction). The contracting officer directs the disposition.
Closeout cannot complete until all government property is accounted for and dispositioned. A $500 hand tool missing from the property records halts the same closeout process as a $500,000 piece of equipment. The contract closeout guide covers the full process. Government property disposition is the step contractors delay until the last minute, creating the closeout bottleneck.
The accounting entries at disposition: if property is returned to the government, remove it from the property log with a disposition record. No general ledger entry needed because GFP was never on the books. For CAP returned to the government, the cost has already been expensed to the contract. Document the return and update the property record. For property the government abandons in place, document the abandonment authorization and remove from the tracking system.
Common Government Property Accounting Mistakes
Five mistakes recur in DCMA property system findings, and each maps to a specific requirement in FAR 52.245-1. They contract closeout delays.
- No property management system at all. The contractor receives GFP, uses it on the contract, and maintains no record of its existence. At closeout, the contracting officer asks for the inventory. The contractor starts from zero.
- Commingling government and contractor property. Government-furnished equipment mixed into the contractor’s general inventory without separate tagging, tracking, or storage. Identifying which items belong to the government becomes impossible without a physical audit of every serial number.
- Missing or incomplete property records. The tracking log exists but lacks required fields: no acquisition cost, no contract number, no condition codes. DCMA rejects incomplete records during property system reviews.
- Physical inventory not performed. The contract requires annual inventories. Three years pass without one. Discrepancies compound. Items move between facilities. Staff turnover erases institutional knowledge of where things are.
- Loss reporting delayed or omitted. An item breaks or disappears. The project team replaces it from contractor stock without telling anyone. The property records show an item that no longer exists. The loss reporting requirement under FAR 52.245-1(f)(1)(vii)(B) was never triggered.
Frequently Asked Questions
Does government-furnished property appear on the contractor’s balance sheet?
No. GFP belongs to the government and is not the contractor’s asset. Track it in a separate property management system with the required FAR 45 fields (description, quantity, cost, location, condition, contract number). The general ledger is only affected if GFP is lost or damaged and the contractor is liable for replacement or repair costs.
How often must a contractor inventory government property?
FAR 52.245-1(f)(1)(iv) requires periodic physical inventories but does not set a minimum floor. Many contracts specify annual inventories. Check your specific contract terms. The inventory is a full reconciliation: verify every recorded item physically exists and verify every government-tagged item on-site appears in the records. Report discrepancies to the property administrator with written explanations.
What is the difference between GFP and contractor-acquired property?
Government-Furnished Property (GFP) is provided by the government for the contractor’s use. Contractor-Acquired Property (CAP) is acquired or fabricated by the contractor to perform the contract. Title vests in the government under cost-reimbursement and time-and-material awards; under fixed-price awards FAR 45.402(a) leaves title with the contractor unless the contract says otherwise or the item is a deliverable end item. GFP creates no cost entry. CAP generates a direct cost charge to the contract. Government-titled property of either kind requires the same records under FAR 45.
What happens if government property is lost or damaged?
Report the loss to the contracting officer under FAR 52.245-1(f)(1)(vii)(B) as soon as the facts become known. Liability is the exception, not the rule. FAR 52.245-1(h)(1) makes the contractor liable only where the risk is insured or otherwise reimbursed, where the loss came from willful misconduct or lack of good faith by managerial personnel, or where the contracting officer had revoked the government’s assumption of risk in writing after uncorrected system deficiencies. Ordinary negligence does not by itself create liability. Document the circumstances regardless of where fault sits.
How does government property affect contract closeout?
Closeout halts until all government property is accounted for and dispositioned. The contractor submits an inventory schedule with condition and recommended disposition for every item. The contracting officer directs return, transfer, or abandonment. Missing items trigger investigations and potential liability. We recommend starting the disposition process at least 90 days before expected contract completion.
Key Takeaways
- Government property accounting under FAR 45 runs parallel to cost accounting. GFP never appears on the contractor’s balance sheet. CAP flows through contract costs, and title goes to the government on cost-type and T&M awards but stays with the contractor on fixed-price awards unless the contract provides otherwise. Both require the same property records: description, quantity, cost, location, condition, contract number, and disposition status.
- Physical inventories are reconciliations, not counts. Verify every record against physical existence, and every physical item against the records. FAR 52.245-1(f)(1)(iv) requires periodic inventories plus a final inventory at contract completion or termination, waivable by the property administrator; your contract specifies the periodic frequency. Discrepancies require written investigation and reporting to the property administrator.
- Contract closeout cannot complete until all government property is dispositioned. A $500 missing item blocks the process identically to a $500,000 item. We recommend starting disposition planning at least 90 days before contract completion. The late start is the single most common closeout delay.
- Five property system mistakes drive the majority of DCMA property system disapprovals: no tracking system, commingled property, incomplete records, skipped inventories, and unreported losses. All five are preventable with a property log maintained from contract day one.
Government property creates accounting obligations from receipt through disposition. The contractors who treat it as a warehouse problem instead of a books problem discover the gap at closeout, when it costs the most to fix. Run the Compliance Readiness Check to evaluate your property tracking against FAR 45 standards. Holding government property or starting a contract with GFP? Book a discovery call with our CPA-managed team.
