OIG Audit – Insurance – Procurement

Appeal Brief

Appeal Letter

Appeal Analysis

Background

In September 2004, Hurricanes Jeanne (DR-1561) and Frances (DR-1545) caused damage throughout the City of Vero Beach (Applicant), Florida.  Following Hurricanes Frances and Jeanne, FEMA prepared many Project Worksheets (PWs) to reimburse the Applicant for costs to repair damages it incurred.  Two Audit Reports, DA-11-18[1] and DA-11-19,[2] documented the Department of Homeland Security’s (DHS) Office of Inspector General (OIG) review of 87 PWs associated with the Applicant and included six findings with recommendations to deobligate Federal funding. 

The OIG addressed Hurricane Jeanne in DA-11-18.  In the report, the OIG recommended deobligating $1,406,760.00 in PA funding because it found that the Applicant: (1) commingled disaster expenditures and revenues with Hurricane Frances funds; (2) did not provide FEMA with a statement of loss to identify disaster damages and did not have an adequate accounting of insurance proceeds received and paid directly to contractors; (3) did not provide adequate source documentation to substantiate a portion of contract labor and equipment charges; (4) did not complete its small projects within 48 months or receive a time extension; (5) did not perform a cost or price analysis to determine reasonableness of the contractor’s proposed prices although required to do so because its time and materials (T&M) contracts extended beyond the allowable 70-hour period; and (6) failed to apply a credit for proceeds received from the sale of scrap metal that were disaster related as required by Federal regulations.  The OIG addressed Hurricane Frances in DA-11-19 and offered the same findings and associated recommendations, with the exception of the unapplied credit.  In that report, the OIG recommended deobligating $2,592,824.00 in PA funding.  FEMA agreed with all of the OIG’s recommendations and deobligated a total of $3,999,584.00 from the PWs questioned in the two reports. 

First Appeals

In separate first appeals dated May 7, 2012, the Applicant requested reimbursement of $3,893,902.05 of the total deobligated amount.  The Applicant contested three findings from the two OIG reports pertaining to: 1) losses covered by insurance, 2) the lack of supporting documentation, and 3) the T&M contract charges.  The Applicant asserted that the Florida Municipal Insurance Trust (FMIT), administered by the Florida League of Cities, Inc. (FLC), was reviewing insurance statements of loss for each project and requested an additional 90 days to continue resolution of insurance issues.  Regarding supporting documentation, the Applicant argued that it provided invoices, mutual aid agreements, cancelled checks, and proof of payment for all costs incurred.  Moreover, during closeout, FEMA reviewed and verified this documentation without issue.  In the first appeals, the Applicant resubmitted the original documentation for additional review by FEMA and also argued that, due to the critical nature of debris work resulting from both disasters, the contract rates were reasonable. 

In a letter dated May 24, 2013, the FEMA Region IV Regional Administrator (RA) denied the appeals because the Applicant failed to provide information to refute the OIG’s recommendations regarding anticipated insurance proceeds, a lack of supporting documentation for contract labor and equipment charges, and issues with its T&M contracts regarding Hurricanes Frances and Jeanne recovery efforts.  Specifically, the RA found that the Applicant had not submitted to FEMA its insurance carrier’s final determination of coverage and statements of loss.  In addition, the RA stated that the Applicant did not provide sufficient supporting documentation to reinstate funding for labor and equipment charges.  Finally, the RA found that the Applicant did not comply with Federal grant procurement regulations when securing its T&M contracts. 

Second Appeal

The Applicant again contests the three findings within the two OIG Audit Reports and the RA’s determinations in its August 1, 2013 second appeal.  The Applicant asserts that $1,133,911.37 for Hurricane Frances and $56,289.05 for Hurricane Jeanne was not covered by insurance and should be reinstated as eligible for PA funding.  The Applicant provides a breakdown for each PW and supporting documentation from FMIT to substantiate its claim.  Regarding inadequate supporting documentation related to PW 4123 for Disaster 1545 and PWs 1863 and 2293 for Disaster 1561, the Applicant requests FEMA reinstate $834,706.00 in funding.  The Applicant states the OIG did not specify which costs for each PW were questioned.  Therefore, the Applicant provides scanned copies of all checks, invoices, timesheets and daily activity logs, and other documentation for FEMA’s review.  Regarding T&M contract charges, the Applicant requests FEMA reinstate $142,887.00[3] in funding.  The Applicant asserts that restoring power to 34,000 customers qualifies as a “public exigency or emergency” pursuant to 44 C.F.R. § 13.36.  In addition, the Applicant argues that its contractor charged rates that were normal for the type of work performed; thus, the rates were reasonable.  Finally, the Applicant states that restoring electrical power to all customers following both hurricanes had to extend beyond the standard 70-hour timeframe for T&M contracts.

Discussion

Insurance Proceeds

Robert T. Stafford Disaster Relief and Emergency Act (Stafford Act) § 312 states, “… no such person, business concern, or other entity will receive such assistance with respect to any part of such loss as to which he has received financial assistance under any other program or from insurance or any other source.”^[4]  Reflective of such, FEMA Response and Recovery Policy (RRP) 9525.3, Duplication of Benefits – Non-Governmental Funds, states that FEMA Public Assistance (PA) funding is intended to supplement assistance from other sources.[5]  Consequently, FEMA does not provide PA funding for damages covered by insurance.[6]  Moreover, FEMA adjusts the eligible amount of funding based on the amount that should be received by insurance coverage regardless of whether the Applicant has completed negotiations with the insurer.[7] 

At the time of the first appeal decision, the Applicant had not submitted to FEMA the required documentation to verify the insurance proceeds it received.  Accompanying the second appeal, the Applicant provides a table that breaks down by Disaster, PW, and deobligated amounts, the costs it argues are eligible for reinstatement based on its supporting documentation.  In addition, the Applicant submits a Memorandum of Understanding (MOU) between it and FMIT, invoices for insurance proceeds, a breakdown of additional proceeds still owed by FMIT, FEMA insurance reviews, and FMIT Coverage Denial Descriptions.  The FLC provided the Insurance Statement of Loss demonstrating that adjustments were made to include additional anticipated insurance proceeds.  FEMA used these documents to complete a comprehensive review of the questioned PWs.  As a result, FEMA found that there was not a duplication of benefits for funding obligated in the questioned PWs because, either, the associated facility was not covered under either the FMIT insurance policy or the National Flood Insurance Program (NFIP), or FEMA deobligated more than the percentage of coverage allowed by the FMIT policy.  Based on the information submitted, the Applicant has substantiated its assertion that $1,190,200.42 in previous deobligations should be reinstated as eligible for PA funding. 

Table 1: Eligible Costs Substantiated on Second Appeal

Time and Materials Contract

Pursuant to 44 C.F.R. § 13.36, procurement transactions must provide full and open competition.[8]  Federal regulations allow for noncompetitive procurement methods to be used in limited circumstances.[9]  If the award of a contract is infeasible under small purchase procedures, sealed bids, or competitive proposals and “the public exigency or emergency for the requirement will not permit a delay resulting from competitive solicitation,” then an applicant may use a noncompetitive proposal.^[10]  Generally, FEMA discourages T&M contracts, but they may be allowed for work that is necessary immediately following a disaster and when a clear scope of work cannot be developed.^[11]  For T&M contracts, FEMA provides funding up to 70 hours following a disaster.^[12]  Applicants must carefully monitor and document contractor expenses, and must include a cost ceiling or “not to exceed” provision in the contract.^[13]  Even when exigent circumstances are present, applicants must still perform a cost or price analysis to determine the reasonableness of the contractor’s proposed prices.^[14]

The Applicant does not deny that its T&M contract went beyond 70 hours.  In fact, the OIG recommended allowing costs incurred during the first 70 hours based on the rates in the T&M contract and disallowing those incurred beyond that period because the exceptions under 44 C.F.R. § 13.36(d) were not applicable.  Regardless, the Applicant asserts that exigent circumstances were present because 34,000 utility customers were without power following these disasters.  Even if FEMA assumed such a situation constitutes exigent circumstances for purposes of federal procurement requirements, the Applicant has not satisfied other regulatory or policy requirements.  For instance, the Applicant has not demonstrated that the award of a contract under small purchase orders, sealed bids, or competitive proposals was infeasible, performed a cost analysis to determine whether the contractor’s prices were reasonable nor included a cost ceiling or “do not exceed” provision in its T&M contract.  While the Applicant asserts that the rates charged were in accordance with the contractor’s normal billing practices for emergency debris work, it does not substantiate this claim. 

When an Applicant materially fails to comply with any term of an award, including procurement requirements, FEMA may disallow all or part of the grant award.[15]  In the instant appeals, FEMA agreed with the OIG’s recommendation to disallow a portion of the awarded amount and found that, for both disasters, the Applicant paid one contractor significantly more than others for similar work.[16]  As provided in OMB Circular A-87, allowable contract costs must be reasonable and necessary in consideration of sound business practices, federal regulations and guidelines, and the market rate for comparable work.[17]  The excessive rates went beyond those charged by other contractors for similar work, and thus, were not reasonable.  Because they were not properly procured, FEMA was within its discretion to deobligate costs that were not reasonable.  The methodology Region IV applied involved allowing the contractors’ rates for the first 70 hours following the disasters, but adjusting the remaining billing hours to reflect the billing method used by the contractor who provided the lesser rate.^[18]  This methodology for determining rates was appropriate and within the RA’s purview to decide.  As such, FEMA concurs with the RA’s first appeal decision on this matter. 

Lack of Documentation

Pursuant to Title 44 of the Code of Federal Regulations (44 C.F.R.) § 13.22, only allowable costs are eligible for Public Assistance funding.[19]  According to OMB Circular A-87, all allowable procurement cost must be reasonable, necessary and adequately documented.[20]  Moreover, to be eligible for PA reimbursement, the costs must be shown to be directly related to the performance of eligible work.[21]

While the OIG did not specify which costs were being questioned, it did specify the PWs affected and that the funding in question involved contract labor charges.  The Applicant asserts that it submitted with its second appeal all the supporting documentation related to PWs 4123, 1863, and 2293.  FEMA conducted a comprehensive review of the provided documentation and finds that the Applicant has not provided documentation to support reimbursement for contracted labor, equipment and material resources identified in the OIG Audits.[22]

Stafford Act § 705(c) Applicability

The Stafford Act § 705(c) provides that a state or local government is not liable for reimbursement or any other penalty for any payment made pursuant to the Stafford Act if the payment was authorized in an approved agreement specifying the costs, the costs were reasonable, and the purpose of the grant was accomplished.  FEMA implemented this statutory provision through its Recovery Policy FP-205-081-2, Stafford Act Section 705, Disaster Grant Closeout Procedures [hereinafter 705 policy].[23] 

In applying the 705 policy to the facts of the appeal, FEMA finds the prohibitions of § 705(c)   do not pertain.  For the portion of funding that FEMA is re-obligating, the question of whether the Stafford Act § 705(c) applies is moot.  As it relates to the remaining portion of deobligated funding— $977,593.00—Section 705(c)’s restriction is not applicable when a violation of mandatory federal procurement requirement occurs because the purpose of the grant is not fulfilled in such instances. Similarly, the purpose of the grant is not fulfilled if the Applicant fails to provide supporting documentation for its claims. Finally, the Applicant’s failure to conduct a cost analysis for the period of time of the T&M contract beyond 70 hours precludes a cost reasonableness determination.  Therefore, Section 705(c) does not apply.

Conclusion

The Applicant has substantiated its assertion that $1,190,200.42 that was previously deobligated is eligible for PA funding and should be reinstated.  However, the Applicant failed to demonstrate that FEMA incorrectly deobligated funding based on procurement violations and insufficient supporting documentation.  Therefore, the appeal is partially granted.  FEMA will prepare versions to the PWs listed in Table 1 of this document to obligate the additional eligible amounts.