Procurement

Background

High winds from Hurricane Rita resulted in downed tree limbs, which severely damaged the electric system throughout the Town of Vinton (Applicant).  The Applicant obtained contract services, using a verbal time and material contract, to assist with the removal tree limbs from electric utility power lines.  FEMA obligated $319,976 in Project Worksheet (PW) 564 for the collection, removal and disposal of approximately 20,000 cubic yards (CY) of debris. 

The Office of Inspector General (OIG) performed an audit of the Town of Vinton’s Public Assistance subgrants and outlined its findings in a report dated March 24, 2010.  The OIG recommended de-obligation of $119,934 in contractor costs because the Applicant “piggybacked” on a written contract between Asplundh Tree Expert Company (Contractor) and the Lafayette Consolidated Government (Lafayette) for trimming limbs around electric power lines, and paid the contractor higher rates than stated in the Lafayette written contract.  In a memorandum dated December 19, 2011, FEMA agreed with the OIG finding and de-obligated $119,934 from PW 564, the difference between the contract rates in Lafayette’s contract and the higher rates charged to the Applicant. 

First Appeal

The Applicant submitted a first appeal to the Louisiana Governor’s Office of Homeland Security and Emergency Preparedness (Grantee) on February 20, 2012.  With the appeal, the Applicant requested reimbursement of $119,934 for the funding that FEMA de-obligated as the result of the OIG audit and recommendation.  The Applicant asserted that Louisiana law permits and encourages “piggybacking” to ensure efficiency.  However, the Applicant also asserted that the contract it entered into with the Contractor is not a “piggyback” contract because the terms that the Applicant agreed to were different than those in the contract between Lafayette and the Contractor.  The Applicant contended that it had a verbal agreement with the Contractor that provided debris removal services at the Contractor’s disaster rates.  Finally, the Applicant asserted that the rates that the Contractor charged were reasonable for the disaster-related work. 

On August 15, 2012, the FEMA Region VI Regional Administrator denied the first appeal explaining that the Applicant chose to enter into a verbal agreement rather than follow federal procurement guidelines consistent with Title 44 of the Code of Federal Regulations (44 C.F.R.) § 13.36.  The Regional Administrator’s first appeal determination also indicated that the Applicant did not document agreed upon rates to be charged with a signed contract for services; no information was provided to show that the Contractor had a disaster condition contract with Lafayette predicated on disaster conditions that charged higher rates; and FEMA does not normally recognize “piggybacked” contracts because they do not reflect competition in the market place.  Accordingly, the Regional Administrator concluded that the eligible amount of PW 564 remained $200,042, the amount originally allocated in PW 564 less the higher rates charged in the disaster.  

Second Appeal

The Applicant submitted a second appeal on October 26, 2012, which the Grantee transmitted to FEMA on December 28, 2012.  In the second appeal, the Applicant again asserts that its contract is not a “piggyback” contract because the terms of its verbal contract with the Contractor are different from those in the written contract with Lafayette.  Further, the Applicant asserts that it entered into a verbal contract based on the emergency nature of the situation and the rates charged by the Contractor were reasonable and consistent with the verbal agreement.

Discussion

Procurement Method

Pursuant to 44 C.F.R. § 13.36(b), Procurement Standards, when procuring services under a federal grant, subgrantees use their own procurement procedures which reflect applicable state and local laws and regulations, provided that the procurements conform to applicable Federal law and the standards identified in section 13.36.  Consistent with 44 C.F.R. § 13.36(b), Grantees and subgrantees must maintain records sufficient to detail the significant history of a procurement.[1]  These records must include the rationale for the method of procurement, selection of contract type, contractor selection or rejection, and the basis for the contract price.[2]  In addition, all procurement transactions have to be conducted in a way that provides “full and open competition.”[3]

However, 44 C.F.R. § 13.36(d)(4), Procurement by Noncompetitive Proposals, allows for noncompetitive procurement methods to be used in limited circumstances.  If “there is an emergency requirement that will not permit a delay for competition,” a subgrantee may use a noncompetitive proposal.[4]

The Applicant asserts that it had to remove debris from its power lines to restore its electrical system and reduce immediate threats to an essential utility.  The Applicant solicited assistance from the Louisiana Energy and Power Association (LEPA) and volunteers from other local towns, Tennessee, and Oklahoma.  Even with this assistance, the Applicant notes the work to remove tree limbs from power lines was overwhelming.  Due to the high demand for debris removal in Louisiana following Hurricanes Katrina and Rita, the Applicant claims it entered into an emergency contract with the only available contractor it could procure.  The Applicant states that this contract is not a “piggybacked” contract, as stipulated in the OIG analysis and the FEMA Region VI determination letter, because the terms of the emergency contract differ from the terms of the written contract between Lafayette and the Contractor.  It appears that the interested parties in this case have used the term “piggyback contract” differently.[5]   However, the relevant fact is that regardless of the type of contract, the Applicant did not competitively procure the debris removal services.  In addition, the Applicant and Grantee both assert that the contract is oral and oral contracts are permitted in the state of Louisiana.  Although permitted in limited circumstances, the use of oral contracts violates 44 C.F.R. § 13.36(b)(9).  More importantly, there is no “exigent circumstance” exception provided in 44 C.F.R. § 13.36(b)(9), as there is for meeting the competition standards required by 44 C.F.R. § 13.36(c)(1).  Thus, although the oral contract between the Applicant and contractor may be permitted by Louisiana law, the contract must conform to applicable Federal law and the standards identified in 44 C.F.R. § 13.36, which it does not. 

The Grantee argues that the Applicant should not be denied from Federal funding based on a failure to follow the proper procurement procedure because the Grantee believes the verbal agreement between the Applicant and the Contractor meets the non-competitive procurement exemption in 44 C.F.R. § 13.36(d)(4).  Noncompetitive procurement methods may be used in an emergency that will not permit a delay for competition, as is the case here.  Two massive storms, a month apart from each other, damaged the Applicant’s electrical system.  The Applicant declared a state of emergency by which the Mayor of Vinton took the necessary measures, prescribed by state law, to protect the lives of its citizens and protect property.  The Applicant made efforts to remove debris from power lines using force account labor and volunteers, but was still overwhelmed.  In order to ensure that tree limbs and other debris would be expeditiously removed from its power lines, the Applicant entered into a verbal contract with the Contractor.  Due to the extenuating circumstances caused by Hurricanes Katrina and Rita, the widespread demand for debris removal services, and the immediate necessity to restore the Applicant’s electrical system, FEMA agrees that the 44 C.F.R. § 13.36(d)(4) applies to the Applicant’s verbal contract with its Contractor.  However, this provision requires a cost analysis of noncompetitive proposals, which the Applicant has not provided to FEMA.      

Reasonableness of Cost

As stated above, FEMA requires a cost analysis of noncompetitive proposals to determine reasonableness because FEMA policy states that “contracts must be of reasonable cost.”[6]  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.  FEMA will generally analyze cost reasonableness by use of historical documentation for similar work, average costs for similar work in the area, published unit costs from national estimating databases, and FEMA cost codes.[7]

Enforcement

Pursuant to 44 C.F.R. § 13.43(a), Remedies for Noncompliance, if an Applicant materially fails to comply with any term of an award, FEMA may temporarily withhold cash payments pending correction of the deficiency, disallow all or part of the cost of the activity or action not in compliance, wholly or partly suspend or terminate the current award for the grantee's or subgrantee's program, withhold further awards for the program, or take other remedies that may be legally available.[8]

In the first appeal decision, the Regional Administrator used the terms of the contract between Lafayette and the Contractor, which used pre-disaster rates, in determining that the rates that the Applicant used were not reasonable.  Based on FEMA’s discretionary authority in 44 C.F.R. § 13.43(a), this rationale for determining rates was appropriate because the Applicant provided no documentation to reflect what the reasonable rate for debris removal was for this disaster.  In addition, because the agreement between the Applicant and the Contractor was oral, not written, FEMA could not derive the terms of the agreement, including the agreed upon price of the contracted work.  FEMA strongly discourages verbal agreements because they prevent FEMA from writing a sufficient scope of work or determining price reasonableness in order to justify reimbursement.[9]

Nonetheless, due to the significant devastation that Hurricanes Katrina and Rita caused, contract labor for debris removal was common following these disasters, and FEMA developed a cost assessment of debris removal work in Louisiana performed as a result of these hurricanes.  According to PW 564, contract labor was used to collect, remove and dispose of approximately 20,000 CY of vegetative debris.  The Contractor charged the Applicant $319,976, or approximately $16.00 per CY to complete this project.  According to FEMA’s debris costs assessment, this rate is at the lower end of the range of market costs for debris removal in the area after Hurricane Rita.  Accordingly, the rate is reasonable, and the rates that the Contractor charged to the Applicant are eligible for reimbursement under the Public Assistance program.[10]