Direct Administrative Costs

Appeal Brief Appeal Letter Appeal Analysis

Appeal Brief

Disaster4069-DR-MN
ApplicantCity of Duluth
Appeal TypeSecond
PA ID#137-17000-00
PW ID#Multiple PWs
Date Signed2015-06-15T00:00:00

Conclusion:  The Applicant’s claimed DAC constituted indirect costs because they were not assigned to specific projects as required by DAP9525.9.  The claimed costs were divided evenly across multiple PWs, pertained to sites subject to multiple PWs, or constituted expenses that did not correspond to any one specific project.  Therefore, funding for DAC is denied. 

Summary Paragraph

Between June 14 and June 21, 2012, severe storms and resulting flooding caused damage to buildings, public works facilities, and equipment owned and operated by the City of Duluth (Applicant).  Dozens of facilities sustained flood-related damage.  The Applicant retained a contractor, Adjusters International, Inc. (AI) to assist with the disaster recovery process.  FEMA, the State of Minnesota Homeland Security and Emergency Management (Grantee), the Applicant, and AI agreed that the direct administrative costs (DAC) incurred would be managed separately from the project formulation process in order to avoid delaying project obligation.  The Applicant provided FEMA with an invoice of the contractor’s claimed costs that included expenses that could not be charged directly to a particular project as required by DAP9525.9,  Section 324 Management Costs and Direct Administrative Costs.  FEMA therefore disallowed those indirect expenses from the amount of DAC claimed by the Applicant.  The Applicant appealed, arguing that the claimed DAC represented work that corresponded to specific projects and that its allocation of the total amount of claimed travel expenses across all sites was a reasonable approach.  The Regional Administrator denied the appeal, explaining that claimed costs that simply were divided evenly across multiple PWs or that applied to a specific flood-damage site that later was subject to multiple PWs constituted indirect costs, and travel expenses supporting all of the Applicant’s PWs are not direct costs.  On second appeal, the Applicant again asserts that the claimed DAC was not divided across multiple PWs and that its costs, including travel expenses, correlate with specific projects.

Authorities and Second Appeals

  • 44 C.F.R. § 207
  • Disaster Assistance Policy DAP9525.9, Section 324 Management Costs and Direct Administrative Costs
  • Memorandum from Elizabeth A. Zimmerman, Assistant Administrator, Disaster Assistance Directorate, to Regional Administrators, Acting Regional Administrators, Transitional Recovery Office Directors, Federal Coordinating Officers, and Disaster Assistance Division Directors (Sept. 8, 2009)
  • Public Assistance Guide, FEMA 322 at 63 (June 2007)

Headnotes

  • Under 44 C.F.R. § 207, grantees and applicants have the opportunity to obtain reimbursement for management costs—indirect costs, administrative expenses, and any other expenses that a grantee or subgrantee reasonably incurs in administering and managing the PA grant that are not directly chargeable to a specific project.
  • Under Disaster Assistance Policy DAP9525.9, Section 324 Management Costs and Direct Administrative Costs, applicants may be reimbursed for direct administrative costs— costs that can be identified separately and assigned to a specific project.
    • The Applicant’s claimed DAC constituted indirect costs because they could not be assigned to specific projects; claimed costs were divided evenly across multiple PWs, pertained to sites subject to multiple PWs, or constituted expenses that did not correspond to any one specific project.

Appeal Letter

06/15/2015

Joe Kelly
Director
Minnesota Homeland Security and Emergency Management
445 Minnesota Street - Suite 223
Saint Paul, Minnesota  55101-6223

Re: City of Duluth, PA ID 137-17000-00, FEMA-4069-DR-MN, Multiple Project Worksheets (PWs) – Direct Administrative Costs

Dear Mr. Kelly:

This is in response to a letter from your office dated March 27, 2014, which transmitted the referenced second appeal on behalf of the City of Duluth (Applicant).  The Applicant is appealing the Department of Homeland Security’s Federal Emergency Management Agency (FEMA) denial of certain claimed direct administrative costs associated with recovery from 2012 flood damage.

As explained in the enclosed analysis, the Applicant retained a contractor to assist in the recovery process, and claimed direct administrative costs (DAC) incurred by the contractor separately from project formulation.   The documentation that Applicant provided FEMA summarizing the contractor’s claimed costs, however, included numerous expenses that could not be charged directly to a particular project in accordance with Disaster Assistance Policy 9525.9, Section 324 Management Costs and Direct Administrative Costs.  FEMA properly disallowed those indirect expenses from the amount of DAC claimed by the Applicant. Therefore, I am denying the appeal.

Please inform the Applicant of my decision.  This determination constitutes the final decision on this matter pursuant to 44 C.F.R. § 206.206, Appeals.
 

Sincerely,

/s/

William W. Roche
Director
Public Assistance Division

Enclosure

cc: Andrew Velasquez III
     Regional Administrator
     FEMA Region V

Appeal Analysis

Background

Between June 14 and June 21, 2012, severe storms and resulting flooding caused damage to buildings, public works facilities, and equipment owned and operated by the City of Duluth (Applicant).  Dozens of facilities sustained flood-related damage.

On July 6, 2012, the president declared a major disaster for the state (FEMA-4069-DR-MN).  The Applicant retained a consulting firm to assist with the disaster recovery process.  FEMA, the State of Minnesota Homeland Security and Emergency Management (Grantee), and the Applicant agreed that the direct administrative costs (DAC) incurred would be managed separately from the project formulation process in order to avoid delaying project obligation.  An August 30, 2012 concept of operations plan agreed to by the parties memorialized this plan and noted that “[d]etermining the eligibility of DAC[] for an applicant[-]hired contractor… is complicated” because FEMA requires “proper documentation of hours and work, demonstration of the skills and knowledge of the individuals hired, identification of eligible work, and the determination of cost reasonableness.”  The plan explained that by handling DAC separately from project formulation, unnecessary delay could be avoided and proper documentation collected.

The consulting firm discontinued its work for the Applicant while the recovery effort was ongoing.  The Applicant submitted a final invoice dated December 14, 2012, for claimed direct administrative costs incurred by the consulting firm.  The Applicant claimed a total of $297,276.22 in DAC.  On March 14, 2013, FEMA informed the Grantee that $270,341.11 of the claimed amount was not eligible for reimbursement as DAC.  FEMA explained that it removed over 80 indirect tasks that had their costs evenly divided across multiple PWs. FEMA also removed tasks not tied to a specific PW, together with travel expenses allocated to every task on every PW in proportion to the hours worked. 

First Appeal

The Applicant submitted a first appeal to the Grantee in a letter dated May 15, 2013.  As to costs determined ineligible as DAC, the Applicant asserted that its claimed DAC “was not randomly divided among PWs” but, instead, was incurred by the consulting firm on numerous sites on any given day and that submitted invoice costs represented actual time worked on tasks specifically tied to PWs on the specified day.  The Applicant also stated that, prior to the firm’s departure during the recovery process (at a point where PWs had not been written and damaged sites were referenced by flood damage site numbers), the Applicant did not know which sites related to specific PWs.  The Applicant asserted that, in many cases, PWs were written after the DAC in question was incurred, and the Applicant later added PW numbers in place of flood damage site numbers on the firm’s summary invoice.  As to the expense costs, the Applicant asserted that firm travel expenses “were allocated to all work performed, whether eligible or ineligible, based upon total hours incurred,” and that allocating the total amount of expenses across all sites was a reasonable approach, given that such expenses would be expected from an out-of-state contractor.

The Grantee transmitted the first appeal to FEMA Region V in a letter dated June 12, 2013.  The Grantee stated that it supported “only the Direct Administrative Costs as applied to each specific project worksheet” and that it had stressed to the consulting firm that it review every project worksheet at closeout and that eligible reimbursable costs (including DAC) must be documented specifically to each PW.

On September 3, 2013, while reviewing the first appeal, FEMA Region V submitted a request for information (RFI) to the Grantee seeking (1) information that clearly correlated claimed DAC and specific PWs, and (2) the total dollar amount in dispute.  The Applicant responded to the RFI on September 20, 2013, providing a revised claimed DAC invoice summary that eliminated costs associated with ineligible flood damage sites and identified specific PWs for each listed task, and stating that it was seeking $103,097.07 in denied claimed DAC across 113 PWs.

On December 20, 2013, the Regional Administrator (RA) issued a response denying the first appeal.  As to costs deemed ineligible because they were divided evenly across multiple PWs, the RA reiterated that the Applicant’s claimed DAC were ineligible because they were not incurred for specific PWs.  The RA noted that the firm’s summary invoice divided hours and costs worked on a single task for multiple PWs evenly across multiple PWs.  As an example, it was noted that on the original summary invoice, the firm indicated that it spent .02 hours on a task described as “City project listing update” for 225 PWs.  The RA reasonably concluded that the firm simply divided the total time spent on “City project listing update” across those PWs, rather than actually spending exactly 1.2 minutes on that task on each of the 225 PWs.  According to the Regional Administrator, the even division across multiple PWs indicated that an actual cost on each PW was unknown.

The RA also reiterated that for claimed DAC related to a specific flood-damaged site that later was subject to multiple PWs, tasks associated with the site could not be correlated to any one PW.  As an example, the RA pointed to the Applicant’s zoo: the zoo was designated as one flood damage site, but it sustained damage and was the subject of recovery work on multiple elements, such as bridges, animal enclosures, buildings, roads, and footpaths.  Zoo-related work was subject to multiple PWs; therefore, entries on the consulting firm invoice summary assigned to the zoo as a single flood damage site could not be tied to any specific PW written to address a specific portion of zoo-related work.  The RA further explained that the revised invoice submitted in response to the RFI simply assigned all zoo-related tasks to a single zoo-related PW (PW 854, addressing repairs to a dry stack retaining wall)—including unrelated tasks associated with animal enclosures and the preparation of improved project requests.  Thus, the RA found the allocation was not done based on DAC actually associated with the PW.

As to travel expenses, the RA explained that general travel expenses were allocated to every task for all PWs in proportion to the hours worked on the task and, therefore, those expenses could not be considered direct costs because they did not pertain to a specific project.  Under FEMA policy, the RA noted that travel and expense tasks related to general support and not tied directly to one specific project are considered indirect costs.  The RA found that FEMA had determined eligible as direct costs those travel expenses in the invoice that were directly related to a specific PW (for example, mileage for driving to a site visit).

Second Appeal

The Applicant submitted a second appeal in a letter dated March 6, 2014.  The Applicant stresses that PWs were prepared after the consulting firm had stopped its work and asserts that there is no guidance governing standards for documentation of costs where the documentation relates to activities prior to the formulation of PWs.

Specifically as to indirect costs, the Applicant asserts that references to DAC being related to a “specific project” in the FEMA policy governing management costs and DAC should not be conflated with references to a specific “PW.”  The Applicant argues that invoices and supporting documentation it provided offer enough information to track costs to single sites and that its costs were directly charged to a specific site or project.  The Applicant asserts that the claimed DAC has been properly documented, can be tracked to specific projects, and that the preparation of PWs after the work had been completed “created an appearance, not a reality, that some of its charges were indirect.”

As to travel expenses, the Applicant points to FEMA policy stating that travel and per diem costs are eligible as direct costs if they can be “attributed” to individual projects.  The Applicant asserts that, under accounting principles, “attribution is a function of allocation,” and that it reasonably allocated its travel costs to individual projects.  The Applicant states it “first allocates all expenses that can be directly allocated to a particular job to that job,” and remaining expenses are attributed based on time charged to all jobs within an expense reporting period.” Expenses for each job are allocated “based on the relative portion of direct and indirect hours incurred by all individuals providing services for that job.”

The Grantee transmitted the second appeal to the FEMA Region V RA in a letter dated March 27, 2014.  The Grantee again supports reimbursement of DAC applicable to each specific PW.

Discussion

Under the Public Assistance (PA) program, applicants for assistance have the opportunity to recover costs they incur to manage and administer PA grants they receive.  Under FEMA regulations, “indirect costs” are those a grantee or subgrantee incurs “for a common or joint purpose benefiting more than one cost objective that are not readily assignable to the cost objectives specifically benefited.”[1]  The regulations provide that “management costs” are “any indirect costs, administrative expenses, and any other expenses not directly chargeable to a specific project that are reasonably incurred by a grantee or subgrantee in administering and managing a PA or HMGP grant award.”[2]   Under the management cost regulations, “[a]ctivities and costs that can be directly charged to a project with proper documentation are not eligible for funding under this part.”[3]

However, FEMA policy affords PA applicants the ability to obtain reimbursement for such expenses as “Direct Administrative Costs,”—“costs incurred by the grantee or subgrantee that can be identified separately and assigned to a specific project.”[4] Under Disaster Assistance Policy (DAP) 9525.9, Section 324 Management Costs and Direct Administrative Costs, DAC “include costs that can be tracked, charged, and accounted for directly to a specific project, such as staff time to complete field inspection and preparation of a PW.”[5]  DAC “are limited to actual reasonable costs incurred for a specific project” and are “considered project costs.”[6]  The policy notes that DAC ‘are cost-shared at the prevailing cost-share rate for the [major disaster] or [emergency] declaration” because “they are part of a specific project.”[7]  When an applicant seeks reimbursement for DAC, the policy instructs that specified text be added to the appropriate PW’s scope of work and that a certain line item cost code be included in the PW’s project cost.[8]  Final payment of DAC for large projects is based on actual costs incurred, while final payment of DAC on small projects is paid upon approval.[9]

Additional FEMA Recovery Directorate guidance on implementing DAP 9525.9, provides a non-exhaustive list of PA administrative activities.[10]  This guidance notes that all the listed activities are eligible for reimbursement with section 324 Management Cost funding, and those marked as “Direct” may be “directly charged to projects [as DAC] if they can be fully documented as such.”[11]  Descriptions of all of the activities marked as “Direct” note that they must pertain to “one specific project.”[12]

Applying this regulatory and policy framework to the claimed DAC sought by the Applicant here, it is clear that these costs cannot be reimbursed as direct costs.  As mentioned, in order for direct costs to be eligible for reimbursement as DAC, the costs must be able to be identified and assigned to a specific project. If the costs cannot be assigned to a specific project, they will be considered indirect and eligible as management costs, subject to the Grantee’s approach under its state administrative plan for passing through such costs to applicants.

In determining what requested DAC was eligible for reimbursement, FEMA regional personnel performed a detailed review of the consulting firm’s invoice provided by the Applicant.  As noted in the first appeal response, the invoice revealed numerous costs reflecting work performed on multiple sites or single sites subject to multiple PWs and, thus, those costs could not be “identified separately and assigned to a specific project” and were not costs “incurred for a specific project” as required by DAP 9525.9.  FEMA personnel reviewed each task entry and removed those reflecting indirect costs, including costs for the same task allocated in equal fractions of time across multiple sites.  For example, the invoice included approximately five and a half hours of a task described as “Proj List Devel – Data Collect & Dissemination” with the accompanying comment, “Accumulation of data for specific sites from utility data for submission of data to FEMA.”  These hours were divided across 129 sites, with .04 of the task’s hours assigned to each site.  On second appeal, the invoice summary provided by the Applicant contains the same deficiencies.  For example, under the same task, “Proj List Devel – Data Collect & Dissemination,” with the accompanying comment, “Extracting data for each site from city documents,” are allocated .10 hours across numerous PWs.  Because this work was not performed for any specific PW, the associated costs are indirect and not reimbursable as DAC.  The RA correctly determined that such costs could not be reimbursed as DAC.

As to the requested travel expenses, FEMA reimbursed those expenses that could be tied to specific projects, such as site-visit expenses.  Expenses allocated to every task for all PWs in proportion to the hours worked on the task are not eligible as DAC.  Under FEMA policy, travel and related expenses are eligible as DAC during the project listing development, project formulation, PW processing, and PW management and closeout phases if they “relate to one specific project for any of the direct administrative activities” in the respective phase.[13]  Travel expenses “related to general support and not tied directly to one specific project,” however, are not eligible as DAC and, instead, may be eligible as indirect costs.[14]  The Applicant’s description of how it submitted travel costs—allocating non-direct expenses for an individual “charged to all jobs” based on hours incurred all individuals providing the same services—clearly demonstrates that these expenses are not eligible as DAC.

As to the Applicant’s comments regarding after-the fact preparation of PWs, there is no merit to the argument that a PW cannot be prepared after a project is completed.  DAP 9525.9 recognizes that a project may be completed when a PW is written and that eligible DAC can be included in the PW.[15]  The Applicant’s assertion that DAP9525.9 does not tie DAC eligibility to specific PWs also is incorrect.  To the contrary, DAP9525.9, stresses that, in order to be eligible as DAC, requested costs must be chargeable to specific projects and specific PWs.[16]

Conclusion

To be eligible for reimbursement, claimed DAC must be able to be charged directly to a PW.  Based on FEMA’s review, the $103,097.07 in claimed DAC sought by the Applicant are not charged as such.  Therefore, they constitute indirect costs not eligible for reimbursement as DAC.

[1]  See 44 C.F.R. § 207.2 (2012).

[2]  See id.

[3]  See 44 C.F.R. § 207.6(c) (2012).

[4]  Disaster Assistance Policy (DAP) 9525.9, Section 324 Management Costs and Direct Administrative Costs at 2 (Mar. 12, 2008)

[5]  Id. at 6.

[6]  Id.

[7]  Id.; see also Public Assistance Guide, FEMA 322 at 63 (June 2007) (“[D]irect costs of managing specific projects that are completed using Public Assistance funds … are eligible as part of the grant for each project, as long as they can be specifically identified and justified as necessary to do the work.”).

[8]  See DAP 9525.9, at 7.

[9]  Id. at 7.

[10] See Memorandum from Assistant Administrator, Disaster Assistance Directorate, to Regional Administrators, Acting Regional Administrators, Transitional Recovery Office Directors, Federal Coordinating Officers, and Disaster Assistance Division Directors (Sept. 8, 2009) [hereinafter Memorandum from Assistant Administrator].

[11] Id.

[12] See attachment to Memorandum from Assistant Administrator, Public Assistance Program Indirect and Direct Administrative Activity List.

[13] See attachment to Memorandum from Assistant Administrator, Public Assistance Program Indirect and Direct Administrative Activity List.

[14]  Id.

[15] See DAP 9525.9, Section 324 Management Costs and Direct Administrative Costs at 6.  (“If a project is completed when the PW is prepared, actual direct administrative costs … will be included in the PW for the subgrantee”).

[16]  See, e.g., DAP 9525.9, Section 324 Management Costs and Direct Administrative Costs at 6 (providing as an example that costs for preparation of a PW are eligible DAC); id. at 7 (instructing what language to include in a PW when an applicant seeks DAC reimbursement).

 

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