Procurement, Reasonable Costs

Appeal Brief

Appeal Letter

Appeal Analysis

Background

From November 8, 2011 through November 13, 2011, blizzard conditions and a major storm surge damaged the Cape Nome Jetty and Dock (Facility).  The City of Nome (Applicant) owns the Facility, but the primary user, Cape Nome Quarry,[1] a private, for-profit entity, transports gravel out of Nome from it.

On March 19, 2012, FEMA prepared Project Worksheet (PW) 17 as a zero dollar Category G PW, noting that an inspection would need to occur in the spring when the Facility was not covered in ice and snow.[2]  On June 28, 2012, when damages were completely visible, the Applicant had PND Engineers, Inc. (PND) prepare a “preliminary report” to repair the Facility.  The same day, Knik Construction (Knik), the owner of the Cape Nome Quarry, started repair work that it completed on July 2, 2012.  This work included: surveying the Facility’s piers for submerged rocks and then removing them; cleaning the open jetty surface of materials moved by the storm; straightening cell sheet piles; and backfilling the outer cell with bedding material.[3]  Knik did not perform this work pursuant to a written contract but rather a verbal agreement with the Applicant.[4]  On June 28, 2012, the same day as work began, the Alaska Department of Homeland Security and Emergency Management (Grantee) sent an e-mail to the Applicant explaining that competitive bidding was required for work performed to carry out the repairs.[5]  On that day, the Applicant requested that the Grantee approve non-competitive procurement pursuant to Title 44 Code of Federal Regulation (44 C.F.R.) § 13.36(d)(4)(1)(c).  The request was denied a month later.[6]  Following completion of the work, the Applicant requested reimbursement for the work and provided FEMA with a copy of an invoice from Knik for $170,791.48.[7] 

On November 27, 2012, FEMA prepared Version 1 of the PW.  Of relevance to this second appeal, FEMA determined that the work performed by Knik was ineligible because the Applicant performed the work without providing a damage description to the Grantee or FEMA, and the Applicant performed the work without approval for single source bidding.  FEMA also made a determination that the work could not be characterized as emergency repair work.[8]    

First Appeal

In a letter dated April 22, 2013, the Applicant submitted its first appeal requesting $170,791.48 in Public Assistance (PA) funding for the work performed by Knik.[9]  While the appeal did not address procurement issues, it asserted that a June 28, 2012 letter from Knik construction served as a damage description for the work.[10]   

After sending two Requests for Information (RFIs),[11] the Region X Regional Administrator (RA) denied the Applicant’s request because the Applicant failed to comply with federal procurement requirements.  The RA determined: the Applicant must follow the procurement requirements outlined in 44 CFR § 13.36 regardless of whether the work is categorized as an emergency protective measure (Category B) or permanent restoration (Category G); the Applicant could have started a competitive bidding process prior to beginning the work; and FEMA and the Grantee had both denied requests for noncompetitive bidding proposals.[12]

Second Appeal

On December 4, 2014, the Applicant submitted its second appeal to the Grantee requesting $170,791.48 in PA funding for the work performed by Knik.  Citing, 44 C.F.R. §13.36(d)(4)(1)(B), the Applicant argues that an exigency existed, necessitating the use of a non-competitive bid process.  The Applicant contends the work was necessary because a competitive bidding process would have delayed repairs until August or September 2012, and if repairs were delayed longer, the entire 2012 construction season could have passed.  In furtherance of this position, the Applicant states the work was needed to restore Cape Nome Quarry’s gravel operation, a prime economic concern for the city; gravel transport is a significant industry in Nome, and any loss of revenue would hurt economic activity; and that increased gravel costs caused by a delay would increase public work project costs throughout the state of Alaska.[13] 

The Applicant maintains the work was only reasonably available from Knik due to a pre-existing legal relationship between Knik and the Cape Nome Quarry.  As a result of this relationship with Knik, which the Applicant characterizes as a partnership, it asserts competitive bidding requirements did not apply.  Lastly, the Applicant points to 44 C.F.R. § 13.43, FEMA’s enforcement regulation, and insists this allows FEMA to provide funding even if competitive bidding procedures are not followed.

Discussion

As a condition of receiving PA funding, local governments, such as the Applicant, must comply with federal procurement regulations[14] when carrying out emergency work or permanent work.[15]  All procurement actions must be conducted in a manner that provides full and open competition.[16]  Procuring by non-competitive proposal is permitted in limited circumstances.  An applicant must first demonstrate that the award of a contract is not feasible under small purchase procedures, sealed bids, or competitive proposals.[17]  In addition, one of the following circumstances must also apply: (1) the item is only available from a single source; (2) there is an emergency requirement that will not permit a delay resulting from competitive solicitation; (3) the Awarding Agency authorizes a non-competitive proposal; or (4) solicitation from a number of sources has been attempted, and competition has been determined to be inadequate.[18] 

Feasibility of Sealed Bidding                 

Generally, sealed bids are the typical and preferred procurement method for a construction project.[19]  To determine if procurement by this method is feasible, all three of these conditions must exist: (1) a complete, adequate, and realistic specification or purchase description is available; (2) two or more responsible bidders are willing and able to compete effectively for business; and (3) the procurement lends itself to a firm fixed price contract and the selection of the successful bidder can be made principally on the basis of cost.[20]

In regard to the first condition, a complete, adequate, and realistic specification or purchase description was available on June 28, 2012 when the Applicant acquired PND’s preliminary report, a report that estimated the cost to repair the Facility to its pre-storm condition.[21]  Knik began work on June 28, 2012.  By July 2, 2012, Knik had completed the work and provided an invoice.  The Applicant, by its own admission, had an adequate description of the work on June 28, 2012.[22] 

As for the second condition, the Applicant argues that Knik had equipment on site, knowledge of the Facility, and a vested interest in performing the work well.  Nevertheless, the fact that Knik may have been well suited to perform is different from demonstrating that it was the only responsible bidder that was willing and able to complete the work.  The Applicant did not provide any documentation establishing Knik as the only source for the work.

Finally, in addressing the third condition, the work lends itself to a fixed price contract.  Knik’s July 2, 2012 invoice, outlines the nature of the work.  The Applicant has not shown how price alone would not constitute the major decision making factor in awarding a contract involving excavation or replacement.  In fact, the type of construction work described in the invoice, by its nature, lends itself to a firm fixed price contract based on price.

The facts presented by the Applicant show that the three conditions outlined in 44 C.F.R. § 13.36(d)(2)(i) were present, making sealed bidding feasible.  Accordingly, the Applicant was required to use competitive bidding in the form of a sealed bid.  Moreover, the Applicant provided no documentation substantiating any of the three conditions were not met.  It did not show that a purchase description was unavailable, two or more bidders were not able to compete, or that the procurement did not lend itself to a firm fixed price contract.[23]  In fact, the Applicant’s arguments and documentation support the opposite conclusion.

Exigency or Emergency

An applicant may use procurement through a noncompetitive proposal when a public exigency for the requirement will not permit delay resulting from competitive solicitation.[24]  An exigency is generally defined as something that is necessary in a particular situation that requires or demands immediate aid or action.[25]   

In this case, the Applicant’s economic concerns, while important, do not rise to the level of a public exigency.  Repairing the Facility ultimately benefits Cape Nome Quarry, a private, for-profit entity, serving a private function.  To support its position, the Applicant argues that disrupting operation of the quarry would have adverse economic impact on the City of Nome and potentially could affect gravel costs for public works projects statewide.  Beyond its assertions, the Applicant provided no documentation to support its claims, nor how these concerns demanded immediate aid or action.

Finally, the work was performed in a matter of days between June 28 and July 2, 2012.  To the extent the construction season was limited to summer months, the Applicant was not facing a protracted construction project requiring it consider the limits of the construction season before beginning the project.    

For these reasons, the closure of the Facility does not constitute an exigency.  Moreover, the Applicant has provided no documentation detailing how a delay from July to, at the very latest, September could create such a severe economic impact on the City of Nome—or so greatly affect the cost of public works projects—such that it would rise to the level of an exigency immediately affecting the City or the State of Alaska.[26] 

Partnership with Knik

No employee, officer or agent of the grantee or subgrantee shall participate in selection, or in the award or administration of a contract supported by Federal funds if a conflict of interest, real or apparent, would be involved.  Such a conflict would arise when his or her partner has a financial interest in the firm selected.[27]  The Applicant has failed to explain the nature of its relationship to Knik.  To the extent the Applicant has argued it is a partner with Knik, the Applicant’s award of the project to Knik could likely constitute an impermissible conflict of interest, making the procurement impermissible.  As there are other reasons funding for this work is ineligible, further exploration of this issue is not necessary.

Oral Contract

Pursuant to 44 C.F.R. § 13.36(b)(9), an applicant is required to document its procurement process through “records sufficient to detail the significant history of procurement.”[28]  Here the Applicant admitted to using an oral agreement to secure the work.  An oral contract cannot provide the documentation required by 44 C.F.R. § 13.36(b)(9) because, by its nature, an oral contract provides no documentation of the terms of the agreement.  Without a written document memorializing the terms of the agreement, the appropriate documentation does not exist.  Moreover, the Applicant has failed to provide documentation other than a single e-mail to Knik authorizing the work.  This e-mail does not demonstrate the terms and conditions of the agreement nor the history of the procurement.

Reasonable Costs

FEMA has discretionary enforcement authority with regard to procurement requirements that it exercises on a case-by-case basis.  Its range of authorized actions include disallowing all or part of the cost of the activity or action not in compliance.[29]  While, enforcement action taken by FEMA pursuant to 44 C.F.R. § 13.43 is discretionary, the action selected must be appropriate given the circumstances.  To the extent FEMA might have allowed funding, FEMA would have to address the reasonableness of the costs.  OMB Circular A-87 specifically requires that before costs can be allowable, documentation must be provided showing costs are reasonable.[30]  Here, the Applicant has provided no information showing the costs are fair and appropriate for the type of work performed.  Such documentation might include similar work done in the past, average costs for similar work in the area, published unit costs from national cost estimating databases, or FEMA cost codes.[31]  In this instance, the Applicant provided no such documentation.  Given the other noted circumstances related to the Applicant’s noncompliance with federal grant procurement requirements, disallowance of all costs associated with the work is an appropriate enforcement action.

Conclusion

The costs associated with the work performed on the Facility are not eligible for PA funding because the Applicant did not comply with federal procurement requirements.  The Applicant failed to document the infeasibility of a competitive procurement as well as how the economic impact of the closure of the Facility could be considered a public exigency.  As such, the Applicant did not demonstrate it could employ a non-competitive proposal to complete the work.