OIG Audit Report DS-11-04

Appeal Brief

Citation:  FEMA-1577-DR-CA, Santa Barbara County, Road Work, Multiple Project Worksheets (PW)

Cross-Reference:  Procurement, Office of the Inspector General (OIG) Audit, Scope of Work

Summary:  Severe storms with flooding and mudflows that occurred from December 27, 2004, through January 11, 2005, caused sloughing of saturated hillsides, filling of debris basins, washout of local roads, and various other damages to the Applicant’s public infrastructure.  FEMA approved 150 PWs, totaling $14.6 million, to fund debris removal, emergency protective measures, and the permanent repair of facilities damaged by the event.  On January 13, 2011, the Office of Inspector General (OIG) Western Regional Office issued Audit Report Number DS-11-04.  The OIG reviewed 18 of the Applicant’s projects, totaling $6.9 million, and recommended that FEMA deobligate a total of $1,916,663 from 17 PWs based on six findings (Findings A-F).  Finding A was that the Applicant used “a prohibited non-competitive time and materials contract without documentation describing the work completed or the composition of rates charged.” 

On September 9, 2011, FEMA responded to the OIG’s Audit Report with a determination that $1,734,042 of costs questioned by the OIG warranted deobligation.  Related to Finding A, FEMA deobligated the recommended amount of $1,243,850 from eleven PWs.  In its second appeal, the Applicant requested reobligation of $1,063,952 related to Finding A.

Issues:   1.  Did the Applicant’s procurement practices comply with Federal procurement regulations?

                2.  Is FEMA able to evaluate the claimed costs for reasonableness?                   

Findings:  1.  No.

                  2.  No.

Rationale: 44 CFR §13.36(b)(10); 44 CFR §13.43; Office of Management and Budget Circular A-87, Attachment A.C.2; FEMA 322, Public Assistance Guide, June 2007, page 53.

Appeal Letter

Appeal Analysis

Background

Severe storms with flooding and mudflows that occurred from December 27, 2004, through January 11, 2005, caused sloughing of saturated hillsides, filling of debris basins, washouts of local roads, and various other damages in Santa Barbara County’s (Applicant’s).  FEMA approved 150 PWs, totaling $14.6 million, to fund debris removal, emergency protective measures, and the permanent repair of the Applicant’s facilities damaged by the event.  On January 13, 2011, the Department of Homeland Security’s Office of Inspector General (OIG) issued Audit Report Number DS-11-04.  The OIG reviewed 18 of the Applicant’s projects, totaling $6.9 million, and recommended that FEMA deobligate a total of $1,916,663 from 17 PWs based on six findings (Findings A-F).  The OIG questioned costs related to contract procurement practices, non-disaster related debris removal costs, reasonableness of costs claimed, lack of source documentation to support costs, and accounting errors.  Specifically, OIG Finding A was that the Applicant used “a prohibited non-competitive time and materials contract without documentation describing the work completed or the composition of rates charged.”  For Finding A, the OIG recommended deobligation of $1,243,850 from eleven PWs.

On September 9, 2011, FEMA responded to the OIG’s Audit Report with a determination that $1,734,042 of costs questioned by the OIG warranted deobligation.  As a result, FEMA deobligated the recommended amount of $1,243,850 from eleven PWs.  The California Emergency Management Agency (Cal EMA) notified the Applicant on November 14, 2011.

Only Finding A is at issue in this second appeal.  The work performed related to Finding A was performed by two contractors, and consisted of debris removal and road repairs.  The Applicant considers all work in question to be emergency work.  Of the eleven PWs associated with Finding A, FEMA considered eight to be Category C (permanent work) and three to be Category A. 

The OIG determined that the Applicant did not comply with Federal procurement regulations in ensuring full and open competition, as well as reasonable and non-duplicative prices.  The Applicant hired the two contractors without formal written contracts, under an emergency resolution that the Applicant’s Board of Supervisors passed, allowing them to waive a competitive bidding process in favor of time and materials (T&M) contracts for a pre-selected list of contractors.  Labor rates were based on invoices, and equipment rates were based on standard California Department of Transportation (Caltrans) rates that are set annually by the California Industrial Labor Relations Board.  The Applicant stated that it was authorized to utilize T&M contracts pursuant to its own authorities under emergency situations.  The OIG determined that the Applicant did not perform any cost or price analysis, and did not negotiate any not-to-exceed contract provisions.  The OIG stated that there was no documentation to identify the composition of the rates charged, such as profit or overhead.  The OIG also stated that the T&M contracts exceeded the 70-hour time period allowed under FEMA policy.

First Appeal

The Applicant submitted its first appeal in a letter dated December 8, 2011, only addressing Findings A and B related to contract procurement practices and non-disaster related debris removal costs.  The Applicant requested reobligation of $1,063,952 associated with only Finding A of the OIG Audit (see table below).  The Applicant argued that the use of a T&M contract was allowable under the situation, and that the cost was reasonable.  The Applicant stated that it only awarded T&M contracts for emergency road work for debris removal and emergency measures.  The Applicant stated that its Board of Supervisors adopted a resolution which authorized the waiver of the competitive bidding process for the repair and replacement of public facilities damaged by the emergency conditions.  The Applicant argued that it procured the contracts on an emergency time and materials basis because it felt that if the work was not completed immediately, it would further jeopardize roads and that homes were in danger.  Additionally, the Applicant stated that debris blocked major routes in Santa Barbara County necessary for emergency response and recovery. 

Cal EMA forwarded the first appeal to FEMA in a letter dated February 3, 2012, and did not support the Applicant’s appeal, stating that the Applicant had not provided documentation to support its position.  FEMA denied the appeal in a letter dated June 13, 2012.  FEMA stated that the Applicant had not provided documentation to support that invoices submitted for reimbursement constituted a contract, and that the invoices did not contain a required cost ceiling or clear scope of work.

Second Appeal

The Applicant submitted its second appeal in a letter dated August 28, 2012, again requesting that FEMA reobligate $1,063,952 of the funding associated with Finding A.  The Applicant argued that the work it completed was emergency work and the Road Commissioner acted in accordance with applicable state statutes and County ordinances.  The Applicant further contends that the actions were performed under a public exigency and comply with Federal regulations due to the emergency conditions. The Applicant submitted County resolutions that demonstrate that the local state of emergency was affirmed by the Board of Supervisors on January 10, 2005, to have started the last week of December 2004 and extended on a bi-weekly basis through April 19, 2005.  The Applicant also submitted the state and local authorities that regulate contracting practices under emergency conditions, as well as documentation from the Santa Barbara County Counsel, Auditor, and Road Commissioner supporting that the Applicant’s contracting practices are in accordance with state and local authorities.  Finally, the Applicant refers to a FEMA appeal decision from DR-1628, which determined that under the circumstances pertaining to the Applicant in question in that appeal, the Road Commissioner’s use of a T&M contract for emergency work was reasonable.

In supplemental information submitted to support the second appeal, dated October 2, 2012, the Applicant argued that the work is eligible because: the Road Commissioner determined that an emergency existed that exceeded the force account capabilities of the Applicant; the Road Commissioner determined that it was necessary to then utilize the “Force Account” contracting method as defined by Caltrans; and that the two contractors were available and qualified.  The Applicant states that it offered the work to the two contractors at rates that are commonly referred to as “Caltrans standard rates.”  These are based on state-determined prevailing wage rates as defined by the state Director of Industrial Relations.  These rates for 2004-2005 are included with the second appeal.  Cal EMA supports the Applicant’s second appeal.

Discussion

Because the Applicant requested reobligation of only $1,063,952 associated with Finding A of the OIG Audit, only Finding A is at issue in this second appeal.  While the Applicant may have complied with its own applicable State and local regulations, including continually reaffirming the local state of emergency pursuant to its own authorities, the contracting practices at issue in this appeal do not comply with Federal procurement regulations found in 44 CFR §13.36. 44 CFR §13.36(b)(10) sets forth specific requirements for the use of T&M contracts, including the requirement for a contract cost ceiling in 44 CFR §13.36(b)(10)(ii).  FEMA expands upon limitations of T&M contracting by explaining allowable conditions for T&M contracts in the Public Assistance Guide (FEMA 322, page 53), which states that FEMA generally restricts T&M contracts to “70 hours for work immediately after a disaster when a clear scope of work cannot be determined” (emphasis added).  By the Applicant’s account, it completed the work in question from January 10, 2005, through February 26, 2005, or 47 days.  Even relying on the public exigency exception for noncompetitive proposals found in 44 CFR §13.36(d)(4)(i)(B), the Applicant has not demonstrated the existence of a public exigency that would prevent it from identifying a scope of work and competitively bidding the work for approximately 40 days beyond FEMA’s generally allowable timeframe for T&M contracts.

However, FEMA may still evaluate reasonable costs and eligibility.  44 CFR §13.43, Enforcement, sets forth options for remedies for non-compliance with Federal grant requirements.  44 CFR §13.43(a)(3) states that the awarding agency may “Wholly or partly suspend or terminate the current award for the grantee's or subgrantee's program.”  The Public Assistance Guide explains that FEMA implements this by evaluating project costs to determine reasonableness, and FEMA may reimburse eligible costs.  In accordance with OMB Circular A-87, Cost Principles for State, Local, and Indian Tribal Governments, Attachment A, Section C.2, FEMA evaluates reasonable costs based on the standard “that a cost is reasonable if, in its nature and amount, it does not exceed that which would be incurred by a prudent person under the circumstances prevailing at the time the decision was made to incur the cost.” 

The Applicant submitted contractor invoices, equipment and labor logs, daily work reports, and its engineer/foreman daily reports in support of its appeal.  However, this documentation does not sufficiently describe or quantify the scope of work performed by the Applicant’s contractors.  Therefore, FEMA is unable to evaluate the work and costs for eligibility and reasonableness.  There is no basis for funding any of the claimed costs.

Conclusion

The Applicant’s contracting practices at issue in this appeal did not comply with Federal requirements or FEMA policy relating to the use of T&M contracts.  Additionally, though the Applicant continued to reaffirm a state of emergency under its own applicable authorities, the
Applicant has not demonstrated that an exigency existed that would justify the lack of a scope of work associated with these projects.  Without an identified scope of work, FEMA is not able to evaluate the reasonableness of costs.