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OIG Audit Report DS-07-01

Appeal Brief Appeal Letter Appeal Analysis

Appeal Brief

DisasterFEMA-1361-DR
ApplicantWashington State Department of General Administration
Appeal TypeSecond
PA ID#000-U5P35-00
PW ID#Multiple Project Worksheets
Date Signed2010-09-14T04:00:00

Citation:          FEMA-1361-DR-WA, Washington State Department of General Administration, Office of Inspector General (OIG) Audit Report DS-07-01, Multiple Project Worksheets (PWs)

Cross-

Reference:      Reasonable Cost, Improved Project, Pre-Existing  Condition

 

Summary:        Several facilities under the authority of the State of Washington Department of General Administration (Applicant), including the Washington State Legislative Building, sustained damages as a result of the Nisqually Earthquake.  FEMA obligated three versions of PW 1567, for a total of $11,171,098 for the design and construction of repairs and hazard mitigation for the Legislative Building, based on cost estimates prepared using the Cost Estimating Format (CEF).  The Applicant requested and FEMA approved an Improved Project for PW 1567.  The OIG conducted an audit of the Applicant’s grant and presented the findings in Audit Report DS-07-01.  The OIG questioned $4,899,578 claimed by the Applicant; the majority of the questioned costs ($4,792,035; Findings A–D) were associated with the Legislative Building repairs (PW 1567).  Findings A through D were related to the improper use of the CEF, repair costs that were not earthquake related, hazard mitigation measures on undamaged elements of the facility, and claimed costs that exceeded the improved project cap.  The Applicant submitted a first appeal of FEMA’s intent to de-obligate the costs questioned by the OIG.  The Acting Regional Administrator denied the Applicant’s appeal, concluding that the documentation on file was not sufficient to support the Applicant’s position.  The Applicant submitted a second appeal, requesting FEMA not de-obligate $4,476,413 in costs questioned by the OIG.  The Applicant addressed each finding in detail and submitted voluminous documentation in support of the appeal.

 

Issues:              1.   Is the approved cost estimate reasonable with no errors or omissions?

 2.      Did the approved scope of work include repair of non-disaster related damage?

 3.      Did the approved hazard mitigation measures address undamaged elements of the facility?

 

Findings:           1.   No.  FEMA used inappropriate factors in the CEF and made inaccurate conclusions regarding the project timeline. 

 2.      No.

 3.      No.

 

Rationale:      Office of Management and Budget Circular A-87; 44 CFR §202.203(d)(1); Response and Recovery Policy 9526.1, Hazard Mitigation Funding Under Section 406 (Stafford Act)

Appeal Letter

September 14, 2010

 

 

Mr. Gerard Urbas

Deputy State Coordinating Officer

State of Washington Military Department

Emergency Management Division

MS: TA-20, Building 20

Camp Murray, WA 98430-5122

 

Re:   Second Appeal–Washington State Department of General Administration,
PA ID 000-U5P35-00, Office of Inspector General (OIG) Audit Report DS-07-01,
FEMA-1361-DR-WA, Multiple Project Worksheets (PWs)

Dear Mr. Urbas:

This letter is in response to your letter dated October 30, 2009, which transmitted the referenced second appeal on behalf of the Washington State Department of General Administration (Applicant).  The Applicant is appealing the Department of Homeland Security’s Federal Emergency Management Agency’s (FEMA) intent to de-obligate $4,476,413 of costs questioned in the OIG Audit Report DS-07-01, the majority of which is related to PW 1567 for the repair to the Legislative Building. 

As explained in the enclosed analysis, I have determined that only $1,205,077 of $4,476,413 that the OIG questioned should be de-obligated. Accordingly, I am partially granting the second appeal.  By copy of this letter, I am requesting the Regional Administrator to de-obligate $1,205,077 from the appropriate PWs.  I have determined that there is no basis for de-obligating the remaining amount that the OIG questioned.

Please inform the Applicant of my decision.  This determination is the final decision on this matter pursuant to 44 CFR §206.206, Appeals.

Sincerely,

/s/

Elizabeth A. Zimmerman

Assistant Administrator

Recovery Directorate

Enclosure

cc:  Ken Murphy

      Regional Administrator

      FEMA Region X 

Appeal Analysis

BACKGROUND

Several facilities under the authority of the State of Washington Department of General Administration (Applicant) sustained damages as a result of the February 28, 2001, Nisqually Earthquake
(FEMA-1361-DR-WA).  The Applicant requested assistance from the U.S. Department of Homeland Security’s Federal Emergency Management Agency (FEMA) for the repair of various facilities, including the Washington State Legislative Building.

The Legislative Building, constructed in 1926, is a four-story, 235,500-square-foot, steel, un-reinforced masonry and stone structure.  The structure is listed on the National Register of Historic Places.  It is occupied by the Washington State Legislature and four executive offices, including the Office of the Governor.
Exterior damage from the earthquake included displaced column capitals, out-of-plumb segmented stones of column shafts, cracked mortar joints, and spalled colonnade column bases of the building colonnade system. The earthquake also caused cracks and damage to mortar joints around the entire exterior of the building and grout and mortar damage at the north stairs.
Interior damage included cracked plaster shell on the inner colonnade, cracked plaster, and chipped molding and soffits to the interior drum wall. Fine ornate molding and plaster walls were cracked throughout the Senate and House chambers and other floors of the building. The State Reception Room sustained a cracked ceiling, soffit, frieze, and cornice. There were also cracked concrete walls in the sub-basement level. Additionally, the earthquake damaged some mechanical systems and electrical fixtures.
Between March 2002 and January 2004, FEMA obligated three versions of PW 1567, for a total of $11,171,098 for the design and construction of repairs and hazard mitigation for the Legislative Building.  The Applicant planned to complete the disaster-related repairs and hazard mitigation in conjunction with a much larger, approximately $100-million renovation and rehabilitation project.  The Applicant requested and FEMA approved an Improved Project for PW 1567.

FEMA obligated Version 0 of PW 1567 on March 19, 2002, for $5,169,403.  During the repair work, additional damages were identified.  These damages were similar to the damages identified in the original PW, but included additional portions of the building and hidden damages in portions where the repairs had begun.  As a result, FEMA prepared two versions of PW 1567 to provide additional funding: FEMA obligated Version 1 on March 3, 2003, for $5,210,867; FEMA obligated Version 2 on
January 16, 2004, for $790,820.  FEMA determined the approved funding amount for each of the three versions using estimates prepared using the Cost Estimating Format (CEF).

Eleven of the remaining PWs at issue under this appeal cover repairs to 11 additional buildings and one PW (PW 1855) covers emergency protective measures at the Legislative Building.

Office of Inspector General (OIG) Audit

The OIG conducted an audit of the Applicant’s grant and presented the findings in Audit Report
DS-07-01 (Audit Report), dated August 2007.  The OIG questioned $4,899,578 claimed by the Applicant.  The majority of the questioned costs ($4,792,035; Findings A–D) are associated with the Legislative Building repairs (PW 1567).  Table 1 summarizes the audit findings and questioned costs and is followed by a discussion of each finding.

 

TABLE 1

 

Finding

Summary of Finding

Questioned Costs

A

Improper use of the CEF

$3,246,685

B

Claim for repairs that were not disaster related

$603,165

C

Claim for ineligible hazard mitigation and renovation costs

$526,649

D

Claim for costs that exceeded the Improved Project funding cap

$415,536

E

Claim for ineligible straight-time labor costs (multiple PWs)

$35,992

F

Administrative costs included as project costs (multiple PWs)

$71,101

G

Claim for repair of pre-disaster damage

$450

 

                                                                                           Total

$4,899,578

 

 Finding A.  The $3,246,685 questioned under Finding A is broken down as follows:

·         $1,996,545 – the use of percentages inconsistent with those specified in FEMA’s CEF Guide in Parts B.1, C.1, C.2, and E of the CEF;

·         $1,235,535 – the application of percentages to ineligible and excess project costs discussed in other findings; and

·         $14,605 – mathematical errors on CEF forms.

One portion of the percentage applied in Part B.1 of the CEF is for safety and security.  The OIG determined that estimates for non-permanent safety costs were included in Part A (base construction cost estimate) and duplicated in Part B.1.  Accordingly, the OIG questioned the percentage used in Part B.1 (5 percent) and identified $190,007 in duplicated costs for safety and security.

Parts C.1 and C.2 of the CEF allow adjustments to the base cost estimate for Design Phase Scope Contingencies and Facility or Project Constructability, respectively.  The OIG concluded that the Applicant claimed $981,998 in excessive costs related to the factors used in these two parts.  The factor used in Part C.1 is based on the level of design work completed at the time the CEF is prepared.  FEMA used 15 percent in Part C.1; however, the OIG states that applying a factor of 5 percent would be more appropriate because the Applicant had completed the disaster-related preliminary design work. 

The factor used in Part C.2 relates to the complexity of the project.  The OIG concluded that construction and repair complexities were considered and estimated in Part A and that the use of the maximum percentage allowed in Part C.2 (7 percent) is not appropriate.  The OIG determined that a more reasonable factor to address additional complexities would be the mid-point of the allowable range, or 3.5 percent.

Part E of the CEF allows adjustments to the base cost estimate to account for inflation during the design and construction phase.  The project timeline mid-point and the Building Cost Index (BCI) or the Construction Cost Index (CCI) are used to calculate the factor used in Part E.1.  The CEFs prepared for both Versions 0 and 1 include a factor in Part E calculated using a mid-point of 31 months.  The OIG concluded that the mid-point was calculated incorrectly and a more appropriate mid-point for Version 0 would be 7 months and for Version 1 would be 1 month.  The OIG also concluded that the BCI used in the CEFs was based on a 3-year average rather than the 2-year average required by the CEF Guide.  The OIG questioned a total of $824,540 associated with the incorrect calculation of the escalation factor in Part E.1.

The OIG also questioned $1,235,535 in excess costs calculated by applying CEF factors to costs related to Findings B, C, and D discussed below and $14,605 associated with mathematical errors.  The Audit Report does not include a breakdown of the mathematical errors.

Finding B.  The OIG concluded that the repair of the columns supporting the Legislative Building’s dome was not required as the result of the disaster.  The OIG stated that documentation the Applicant provided in support of the claim that the misalignment of the columns was caused by the Nisqually earthquake “lacked convincing evidence that the dome, columns, or the gutter ornamental stone were damaged by the disaster.”  Therefore, the OIG questioned $603,165 related to the repair of the columns and scaffolding used for the repair.

Finding C.  The OIG questioned $506,218 in hazard mitigation costs and $20,431 in renovation costs for components of the Legislative Building not damaged by the event.  The scope of work approved under Version 1 of PW 1567 includes two hazard mitigation proposals to reinforce the dome drum assembly: the placement of shotcrete on fin walls to strengthen the masonry walls and the placement of steel angles, plates, and anchors along the buttresses.  The OIG stated that the records did not include evidence that the fin walls, columns, or buttresses (other than buttress 7) had been damaged by the earthquake; therefore, the mitigation measures are not eligible for funding.

Further, the OIG concluded that the removal of deteriorated, loose grout from marble panels and refilling of joints with grout, which were included in the approved scope of work, were not required as the result of the event.  The OIG considered the costs associated with this work ($20,431) to be renovation costs and ineligible for funding.

Finding D.  The OIG concluded that the Applicant was reimbursed $415,536 more than the Improved Project funding cap of $828,919 for five items of work in PW 1567, including $7,460 that was duplicated in the approved cost estimate for Version 1.  The OIG stated in the Audit Report that FEMA did not have the authority to approve additional funding for costs not identified in Version 0 of PW 1567 obligated on March 19, 2002, because Federal regulations cap funding for Improved Projects.

Finding E.  The OIG concluded that the Applicant’s claim associated with 11 Category E PWs, including PW 1567, included $35,992 for straight-time force account labor for emergency work.  The OIG questioned these costs, because the emergency work was not included in the eligible scope of work of the PWs and because straight-time force account labor is not eligible for emergency work.

Finding F.  The OIG concluded that the Applicant claimed $71,101 under PWs 1855, 1368, 193, and 1565 for work that was funded under the administrative allowance.  The costs claimed were for, among other things, attending meetings with FEMA representatives, analyzing earthquake damages for the purposes of preparing PWs, negotiating with FEMA regarding reimbursement, and developing a method to document earthquake repair work and building conditions to ensure future FEMA reimbursement.  These activities are not directly related to the projects funded under PWs 1855, 1368, 193, and 1565, but are considered administrative activities necessary to request and obtain Federal assistance.  As such, the costs for these activities are covered by the Applicant’s administrative allowance.

Finding G.  The OIG concluded that the Applicant claimed $450 for tunnel repairs under PW 1363 that FEMA had previously determined to be ineligible, because the damage existed prior to the earthquake.

The Regional Administrator did not object to the OIG’s recommendations with the exception of $271,729 for the complexity factor used in the CEF (see discussion on Finding A above) and also identified $2,400 in duplicated costs not included in the total amount questioned by the OIG under Finding F.  The Regional Administrator agreed to deobligate $4,630,249 and informed the State of Washington Emergency Management Division (State) of that decision by letter dated April 29, 2008.

First Appeal

On July 22, 2008, the Applicant submitted an appeal of FEMA’s intent to de-obligate $4,578,152 in response to the OIG Audit.  The Applicant did not contest the remaining $52,097 because it was not cost effective to do so.  The Applicant provided a detailed response to each of the OIG’s findings in its appeal.  In summary, the Applicant stated that the OIG’s conclusions and recommendations regarding PW 1567 were not consistent with the documentation on file that supports the eligibility of the repair of the damage and reasonableness of the cost estimates developed for the repairs.  The State partially supported the Applicant’s position “based on the policies in place at the time of the disaster and the level of scrutiny given to the projects through the development of the PWs.”  The State supported one portion of the OIG Audit related to the calculation of the project timeline mid-point addressed in Finding A and recommended partial approval of the appeal in the amount of $4,466,997.  The Acting Regional Administrator denied the Applicant’s appeal on June 9, 2009. 

Second Appeal

The Applicant submitted a second appeal on August 31, 2009, of FEMA’s intent to de-obligate $4,476,413 as recommended in the Audit Report. 

The Applicant did not contest a portion of the questioned costs and concurred with the OIG that there was an error in the calculation of the project timeline mid-point addressed in Finding A.  The Applicant provided a detailed discussion of its position related to each of the OIG’s findings.  The Applicant’s position is described and analyzed in the Discussion section below. 

The State supported the Applicant’s second appeal and recommended approval of the appeal for the amount of $4,531,432.  Both the Applicant and the State reference math errors in the Audit Report and support their positions in the appeal with calculations of their own.  It is unclear why the Applicant’s requested funding amount differs from that recommended by the State.

DISCUSSION

Finding A

The OIG questioned $1,996,545 related to the use of percentages that it claimed were inconsistent with those specified in FEMA’s CEF Guide for Parts B.1, C.1, C.2, and E for PW 1567.  The Regional Administrator did not concur with the OIG’s findings regarding Part C.2 ($271,729).  Therefore, Part C.2 is not at issue in this appeal.  A discussion of the issues related to Parts B.1, C.1, and E is included below.  A construction cost estimator with significant experience developing cost estimates for FEMA using the CEF (CEF Specialist) reviewed the CEF factors applied to all three Versions of PW 1567 and provided input to the discussion below.

The Applicant stated that it is FEMA’s responsibility to develop an estimate using the CEF despite the fact that the Audit Report repeatedly states that the Applicant is responsible for completing the CEF, including determining the factors used.  While the overarching responsibility of developing a CEF is FEMA’s responsibility, the Applicant has the responsibility to provide input necessary for FEMA to make determinations regarding the applicability of the CEF factors.  In this case, FEMA developed the CEFs with input from the Applicant.  Based on the review of the three CEFs, FEMA has concluded that adjustments to factors B.1 and C.1 are appropriate. 

Part B.1

FEMA applied a value of 5 percent for costs associated with safety and security in the three CEFs used to develop the cost estimates for PW 1567 Versions 0, 1, and 2.  The Audit Report concluded the value for Part B.1 should be zero in each CEF, because the non-permanent work itemized in Part A included safety and security costs duplicated by Part B.1.  In its appeal, the Applicant states that the safety and security costs included by applying a factor in Part B.1 are separate and distinct from those claimed as “construction aids” in Part A.

The scaffolding and safety harnesses costs itemized in Part A of CEF for PW 1567 Version 0 are a portion of the costs that would be anticipated in the safety and security factor portion of Part B.1.  However, the factor also includes fire protection, temporary signage, traffic barricades, isolation of pedestrian traffic from work areas, security of tools, equipment and materials stored on site, first aid supplies, etc.  

The scaffolding, hoist, and harnesses costs itemized in Part A are unique to this project and represent costs above those incurred for most construction projects.  Including a safety and security component to the factor in Part B.1 in this case is appropriate.  The CEF Instructional Guide recommends 4 percent as a reasonable value for the safety and security component of B.1 for most construction sites, increasing to 6 percent as project complexity increases.  The complex safety issues specific to this construction project were addressed through the itemization of costs in Part A.   Therefore, there is no basis for using anything higher than 4 percent for this component.

Part C.1

FEMA applied a value of 15 percent for Part C.1 (Design – Phase Scope Contingencies) in all three of the CEFs used to develop the cost estimates for PW 1567 Versions 0, 1, and 2.  The Audit Report concluded the value for Part C.1 should be 5 percent based on the stage of the design at the time that the CEFs were prepared.  According to the Audit Report, the Applicant had completed the disaster-related preliminary design work when the first CEF was prepared.  In its appeal, the Applicant states that the preliminary design process was in progress when the first CEF was prepared and that contract-ready drawings, plans, and specifications were not ready until the spring of 2002.

The factor used in Part C.1 is based on the level of design work completed at the time the CEF is prepared.  The following is a timeline showing various design milestones reached by the Applicant’s architects involved in the design of both the disaster-related repairs to the Legislative Building and the complete renovation project.  This timeline is based on a review of the invoices provided by the Applicant in support of its second appeal.

·         June 30, 2001:                         Schematic design approximately 50 percent complete by initial architect

·         November  2001:                    New architect engaged to re-work schematic design and complete detailed design and construction drawings

  • February 2002:                        Schematic design still in progress
  • February 22, 2002                  CEF Version 0 completed
  • March 29, 2002                       Detailed design drawings 20 percent complete
  • June 2002                                Repair work began
  • June 30, 2002                          Detailed design drawings 73 percent complete
  • September/December 2002     CEF Version 1 completed

·         December 8, 2003                   CEF Version 2 completed (Note: CEF Notes say Date of Estimate is December 8, 2002.  This is a typographical error.)

The CEF includes a factor in Part C.1 to account for uncertainties and unforeseeable costs associated with executing a defined scope of work. The CEF Instructional Guide states that there are typically more unknowns and items at the schematic design stage than the final design.  Thus the CEF establishes a recommended range of 15 percent to 20 percent for the schematic design phase and 2 percent to 10 percent for the final design phase.

FEMA prepared CEF Version 0 near the end of the schematic design phase, but before meaningful final design drawings were available; therefore, the use of the lower bound schematic design phase value of 15 percent for CEF Version 0 is in conformance with the CEF Instructional Guide.

FEMA completed CEF Version 1 3–6 months after final design drawings were reportedly 73 percent complete and after construction began, thus FEMA should have used the Working Drawing range of values for CEF Version 1.  A value of 5 percent, near the mid-point of the recommended range, suggested in the OIG report is reasonable based on construction being well underway.

FEMA included two Part C.1 values in CEF Version 2: 2 percent for repair work and 15 percent for hazard mitigation work.  The documentation submitted with the appeal provides no useful documentation relative to the design stage of the hazard mitigation work to support the schematic design allowance.  As the project had been under construction for nearly 18 months at the time CEF Version 2 was prepared, it is reasonable to expect that the contractor had a good understanding of the work involved and that a 5-percent working drawing contingency for both types of work is reasonable.

Part E

The project timeline mid-point and the BCI or the CCI are used to calculate the factor used in Part E.1.  FEMA used 31 months for the project mid-point for CEF Versions 0 and 1 and 7 months for CEF Version 2.  FEMA also used 0.305 percent as the monthly escalation index for all three versions to calculate the final factor in Part E (Cost Escalation Factor).  The OIG concluded the correct project mid-point for CEF Versions 0 and 1 are 7 months and 1 month, respectively.  Further, the OIG concluded that FEMA calculated the monthly escalation indices incorrectly and that the correct indices for Versions 0 and 1 are 0.195 percent and 0.225 percent, respectively.  The OIG also concluded the application of Part E for Version 3 was not appropriate based on the date that FEMA prepared the estimate for Version 3. 

The Applicant states that the OIG did not account for the design phase in calculating the project mid-point.  The Applicant states that contract-ready drawings were complete in May 2002, 15 months after the event occurred.  The repairs began in June 2002 and were completed in mid-November 2004, for a total of 29.5 months.  By adding 15 months for the design phase with 15 months to the mid-point of construction, the Applicant asserts that using 31 months for the mid-point in the calculation of Factor E was appropriate.  The Applicant conceded that FEMA should have adjusted the project mid-point by 7 months for Version 1 to account for the time between the preparation of the versions.  

Part E is the forward pricing feature of the CEF.  It accounts for the escalation of material and labor costs during the project.  Because the OIG questioned the values of both variables (project mid-point and monthly escalation index) used in the calculation of the factor for Part E in all three versions, the CEF Specialist recalculated the factors based on direction provided in the CEF Instructional Guide and on project timeline information provided by the Applicant with its appeal. 

The CEF Instructional Guide states that the escalation factor is based on a 2-year average of either the BCI or the CCI published by Engineering News Record (ENR).  

As the project involves building repairs and restoration, the CEF Specialist used the BCI to calculate the escalation factor.  ENR provides national average cost index data, as well as city cost index data, for 20 cities, including Seattle, Washington.  A review of U.S. Census Bureau data indicates that Olympia, Washington is part of the Seattle – Tacoma – Olympia combined metropolitan statistical area; therefore, the CEF Specialist used BCI data for Seattle in this review.

FEMA prepared the CEFs for Versions 0 and 1 in February 2002 and September 2002, respectively.  ENR.com provides monthly factors for the previous 5 years and year-end data beyond 5 years. Therefore, the CEF Specialist used Seattle BCI data for the 2-year period of December 1999 to December 2001 for the Versions 0 and 1. 

            Seattle BCI – Dec. 2001:        3708.67

Seattle BCI – Dec. 1999:        3590.88

            2-year Change                         117.79

            Percent Change                       (117.79/3590.88)*100 = 3.28 percent

            Average Monthly Change       3.28/24 = 0.137 percent (Versions 0 and 1)

The CEF Specialist based the escalation factor for the CEF for Version 2, prepared in December 2003, on the BCI increase from 2000 to 2002.

Seattle BCI – Dec. 2002:        3740.69

            Seattle BCI – Dec. 2000:        3676.95

            2-year Change                         63.74

            Percent Change                       (63.74/3676.95)*100 = 1.73 percent

            Average Monthly Change       1.73/24 = 0.072 percent (Version 2)

As previously indicated, FEMA prepared CEF Version 0 on February 22, 2002.  The assumption used at the time was that the project had to be completed by the end of 2004, 34 months after FEMA prepared CEF Version 0.  Based on the CEF Notes the design was estimated to be completed in 6 to 12 months.  Because the schematic design phase was close to completion at that time, assuming 6 additional months for design would have been appropriate, leaving 28 months for construction.  Therefore, an appropriate time to mid-point of construction for Version 0 would have b