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Second Appeal Analysis
PA ID# 000-UV3S5-00; University of Texas Medical Branch
PW ID# 435; Reasonable Costs - Procurement
The University of Texas Medical Branch (Applicant) owns and maintains a healthcare, research, and educational campus consisting of over 100 inter-related facilities in Galveston, Texas. On August 1, 2007, before the declared event, the Applicant entered into a non-exclusive disaster restoration and recovery services contract (Contract) with a third party vendor. The contracted services included project management, water damage recovery, moisture control, heating, ventilating and air conditioning decontamination and cleaning, document and equipment recovery, and other remediation services.
On September 12 and 13, 2008, storm surge and flooding from Hurricane Ike inundated the basements and first levels of many buildings across the Applicant’s campus. In response, the Applicant activated the Contract and extensive emergency protective measures were performed. FEMA prepared Project Worksheet (PW) 435 to provide Public Assistance (PA) funding for the cost of this work. The Applicant completed the emergency protective measures on December 31, 2009, and FEMA obligated funding for $102,890,992.00 in eligible costs.
In July 2011, the Texas Department of Public Safety, Division of Emergency Management (Grantee) audited PW 435 reimbursement requests and identified a cost overrun in the amount of $5,403,295.70. FEMA awarded funding for this additional amount, increasing total eligible PA costs to $108,294,287.70. This left a difference of $14,835,080.30 between the $123,129,368.00 actual costs incurred by the Applicant and the amount awarded. The Applicant’s subsequent cost analysis found the deficiency to be $12,220,830.92, comprised of $3,408,379.16 for contracted work and $8,812,451.76 for force account labor compensatory time. The contract work was for rented generator and related equipment expenses, and for fuel and water delivery costs.
The Applicant submitted its first appeal in a letter to the Grantee on January 18, 2012, appealing the denial of costs totaling $12,220,830.92. The Grantee forwarded the appeal to FEMA on June 18, 2012, supporting the additional contract cost request but not supporting the request for force account labor compensatory time.
In the appeal, the Applicant challenged FEMA’s cost analysis for generator and associated equipment expenses totaling $969,393.86. The Applicant also requested $2,426,610.00 for additional reimbursement for water and fuel delivery costs due to an increased supply rate that occurred while the work was being completed.
On October 22, 2012, FEMA’s Region VI Regional Administrator (RA) sent a request for information (RFI) to the Grantee, requesting substantiation of the claims for increased equipment expenses following the disaster, shift rate differential costs, and specific equipment costs. The Grantee responded on December 14, 2012, forwarding a memorandum from the Applicant that included invoices and other documentation. A second RFI was issued on December 19, 2012. The response included invoices indicating that shift rate differentials may apply; however, those shift rates were not applied to actual invoices.
On June 18, 2014, the RA issued a first appeal decision and determined that the Applicant acted prudently during the initial procurement and rental of the generators. However, after an initial period, the Applicant had ample opportunity to rent the generators at a lower monthly rate rather than more costly daily ones and did not do so. The RA determined that the Applicant’s failure to pursue the lower rates was not prudent. Consequently, the RA performed a cost reasonableness analysis and further reduced eligible funding by $1,351,167.00 to account for the monthly versus daily rate differential. The RA also denied the Applicant’s first appeal request for additional generator funding, finding those costs could not be validated.
The RA reviewed the Applicant’s RFI responses and determined that the information provided did not adequately identify the necessary support equipment and its $290,498.24 cost. Accordingly, the RA denied the request for those funds.
The RA determined that the transport and delivery of potable water by large supply trucks was eligible at actual costs for an initial procurement period of 27 days, until the Galveston boil water notice was lifted and city water could be purchased. The RA also found that the smaller trucks were eligible at actual costs for an initial procurement period of two billing cycles (56 days), until they could have been filled from metered fire hydrants. These small trucks were eligible at a reasonable non-emergency rate after the initial period. As such, FEMA awarded an additional $1,266,492.00.
The first appeal produced the following results.
Contracted Service Costs
Force Account Compensatory Time
Total Increase or (Reduction)
The Applicant submitted a second appeal letter to the Grantee dated August 18, 2014. The Grantee forwarded the appeal to FEMA on August 25, 2014. The Applicant requests the following amounts.
Deobligated Generator Costs
Unaddressed Generator Costs
Actual Generator Costs
Water Supply Trucks
Water Delivery Trucks
Fuel Delivery Trucks
The Applicant argues that the reduction for generator costs constitutes a new issue subject to a new first appeal. The Applicant also argues that Section 705(c) of the Robert T. Stafford Disaster Relief and Emergency Assistance Act of 1988 prohibits FEMA from deobligating a portion of this funding.
The Applicant also challenges the RA’s determination that $678,896.00 for generator rental costs could not be validated by the provided documentation as well as the methodology of the RA’s cost reasonableness analysis. According to the Applicant, it has adequately documented the generator rental costs and they were both reasonable in view of post-disaster prices and acknowledged as such by FEMA staff during project formulation. The Applicant further argues that FEMA’s cost analysis improperly relied on inadequate vendor quotes received 5 years after the storm and did not include various necessary cost elements. In addition to claiming the $1,351,167.00 deobligation for improper daily generator rates requires a new first appeal, the Applicant contests FEMA’s determination that lower monthly rates were available following the initial procurement period, arguing FEMA did its analysis 5 years too late.
With regard to other rented equipment, the Applicant contends that all of the costs were reasonable and properly documented. The Applicant asserts the RFI response included sufficient information to allow full validation of the requested amount. Based upon such, the Applicant renewed its request for $290,498.24.
Finally, the Applicant contests the RA’s determination tying actual costs for water delivery to the reopening of the John Sealey Hospital, claiming that the facility’s opening did not signal a substantive change in overall campus conditions. Further, it questions FEMA’s assumption that less expensive water from the City of Galveston could have been purchased after November 24, 2008, based upon the diminished condition of two pump stations and increased citizen water consumption. Relative to funding fuel delivery, the Applicant argues that – FEMA made incorrect cost assumptions; randomly limited the actual cost reimbursement to three billing cycles; more trucks not fewer were required after the initial procurement period; and the actual costs serve as real world confirmation of price reasonableness.
During adjudication of the Applicant’s second appeal, FEMA identified new issues related to procurement that were not identified by the region on first appeal. For purposes of fundamental fairness and to facilitate an Applicant’s ability to appeal a determination, potentially new issues identified on second appeal are remanded to the region to ensure applicants receive two levels of appeal. Accordingly, this appeal is remanded to Region VI to consider the procurement issues below.
The federal grant procurement statutes of higher education are set forth in 2 C.F.R. §§ 215.41 to 215.48. These procurement standards are intended to “ensure that such materials and services are obtained in an effective manner and in compliance with the provisions of applicable Federal statutes and executive orders.” The procurement standards for institutions of higher learning are similar to, but not the same as, the standards for local and Indian tribal governments under 44 C.F.R. § 13.36. The Applicant’s Contract presents procurement compliance issues that were not addressed on first appeal and must be examined further by Region VI.
Time and Materials
Applicants should avoid using time and materials contracts. FEMA may provide assistance for work completed under such contracts for a limited period (generally not more than 70 hours) for work that is necessary immediately after the disaster has occurred when a clear scope of work cannot be developed. Monitoring is critical and a competitive process should be used for labor and equipment rates.
Appendix 3 to the Contract identifies several labor categories at fixed hourly prices (presumably including wages, overhead, profit, etc.), as well as provides hourly rates for equipment rental or use. There is no language concerning the formulation of unit or lump sum prices for the services performed. These are strong indications that this is a time and materials contract.
The procurement regulations for institutes of higher learning do not contain a specific requirement for the use of time and materials contracts. However, FEMA must analyze the Contract to insure it is “appropriate for the particular procurement” and “promotes the best interest” of the Public Assistance (PA). To that end, the Office of Inspector General, (OIG), has issued audit findings that apply the local and Indian tribal government regulations and FEMA policy standards to private nonprofit projects. Consequently, FEMA Region VI must analyze the Contract in light of the overall guidance provided by 2 C.F.R. § 215.44(c), taking into consideration FEMA policy and OIG guidance.
Cost Plus Percentage of Cost (CPPC)
Cost plus percentage of cost contracts are expressly prohibited by 2 C.F.R. § 215.44. These types of contracts are evidenced by four criteria: (1) payment is on a predetermined percentage rate; (2) the predetermined percentage rate is applied to actual performance costs; (3) the contractor’s entitlement is uncertain at the time of contracting; and (4) the contractor’s entitlement increases commensurate with increased performance costs. The Applicant’s Contract includes indicia of a CPPC contract. For example, the cost for small tools is 2 percent of total labor billings; subcontract services are actual cost plus 10 percent; travel, lodging and per diem are actual cost plus 10 percent; and freight/transportation and other charges are cost plus 10 percent. FEMA Region VI must determine if the Contract contains prohibited CPPC provisions. Appendix 3 of the Contract also includes rates associated with the provision of certain equipment and supplies (materials). FEMA Region VI must assess these costs to determine if they are prohibited CPPC provisions.
The Contract contains very broad language in its modification clause that allows the parties to modify the contract in ways not originally anticipated or add new categories of work. FEMA considers any modification to constitute a new requirement which must “provide, to the maximum extent practical, open and free competition” and also meet the federal procurement standards at 2 C.F.R. §§ 215.40 through 48. FEMA Region VI must request, review and analyze any documentation that deals with modifications made to the contract during performance of the PW to ensure such modifications were in accordance with the C.F.R.
There are several additional contract provisions that must be included in every properly procured contract. The Contract appears to include several required provisions, such as the termination for cause and convenience provisions. However, it is not apparent that the full range of required provisions is included in the Contract. FEMA Region VI must review and analyze the contract to ensure that all necessary provisions are included.
Codes of Conduct, Competition and Procurement Procedures
The documentation lacks sufficient information to definitively determine whether a deviation from the procurement standards occurred regarding codes of conduct, competition and procurement procedure requirements. As such, FEMA Region VI should request additional information from the Applicant in order to make a determination on these matters.
Deobligation of Generator Costs
The Applicant claims that the RA’s first appeal decision to deobligate $1,351,167.00 in generator costs constitutes a new determination and should be afforded two levels of appeal. According to 44 C.F.R. § 206.206, an applicant may appeal any determination related to the application for or the provision of federal assistance. On first appeal, the Applicant requested an additional $678,896.00 for generator costs. The RA denied the request because the costs could not be validated; however, the RA performed a cost reasonableness analysis of all the generator costs and determined, for the first time, that $1,351,167.00 should be deobligated. The applicant was not informed of this decision or the rationale behind the determination in any communication prior to issuance of the first appeal decision. For this reason, this matter is remanded to Region VI to afford the Applicant with an opportunity to submit a first appeal of the determination.
Stafford Act § 705(c)
The Applicant asserts that Stafford Act Section 705(c) prohibits deobligation of the generator costs. Section 705(c) of the Stafford Act stipulates that a state or local government is not liable for reimbursement for any payment made pursuant to the Stafford Act if the payment was authorized by an approved agreement specifying costs, the costs were reasonable, and the purpose of the grant was accomplished. As mentioned in the prior section, the matter of whether generator costs incurred by the Applicant are reasonable is remanded to Region VI to afford the Applicant with an opportunity to submit a first appeal. Accordingly, Region VI must also consider the applicability of Section 705(c) to these costs.
Matters addressed in this second appeal are remanded to Region VI for further action. First, the procurement issues identified for the first time on second appeal are directed to Region VI to address and ensure the Applicant receives two levels of appeal in accordance with 44 C.F.R. § 206.206. Second, the issue of whether the generator costs incurred by the Applicant are reasonable is also remanded to afford the Applicant with an opportunity to submit a first appeal to the region on that issue. In formulating its decision, Region VI should consider the applicability of Section 705(c) of the Stafford Act as well as how potential procurement violations impact the application of Recovery Policy, FP 205-081-2, Stafford Act Section 705, Disaster Grant Closeout Procedures. The Applicant’s right to a second appeal on all issues is preserved for 60 days following receipt of a new first appeal decision.
 The University of Tex., UTS and BMS Catastrophe, Non-exclusive Disaster Restoration and Recovery Services Contract, at Appendix 2 (Effective August 1, 2007) (hereinafter Contract).
 Applicant force account labor, equipment and materials were also used for emergency protective measures. However, those items are not presently at issue.
 From September 13, 2008 until October 17, 2008, the Applicant activated its “Staffing During Adverse Conditions” policy that triggered $19,805.273.45 in earned employee compensatory time which was calculated by multiplying employee’s regular pay rate by a factor of 1.5. Only $8,812,451.00 was actually used because of employees’ work responsibilities and the inability to take accrued compensatory time off.
 Letter from Vice President, Fin. – Academic Enter., Univ. of Tex. Med. Branch at Galveston to Assistant Dir., Tex. Dep’t of Pub. Safety, Tex. Div. of Emergency Mgmt., at 4, (Jan. 18, 2012) [hereinafter The Applicant’s First Appeal Letter]. The Applicant requested $12,220,830.92. The Regional Administrator addressed $12,208,456.00. The $12,374.92 difference is due to the Applicant’s request of $3,408,379.16 for contracted costs, but provided supporting documentation is for $3,396,004.00. In its Second Appeal Letter the Applicant uses the $12,208,456.00 amount.
 Letter from State Coordinating Officer, Tex. Div. of Emergency Mgmt., Tex. Dep’t of Pub. Safety, to Acting Reg’l Adm’r, FEMA Region VI (Jun. 18, 2012).
 The Applicant’s First Appeal Letter, at Attachment 3, Analysis of Generator Expense Reasonableness. The Applicant explains this total includes: $131,096.61 because FEMA used differing rates for the same piece of equipment in its cost reasonableness analysis; $547,799.01 because FEMA used inadequate vendor quotes in the analysis and $290,498.24 for the cost of equipment necessary to support the generators.
 The total included $1,053,612.00 for large water trucks, $303,498.00 for smaller water trucks, $345,000.00 for the Bobtail fuel truck and $724,500.00 for the small fuel truck.
 Letter from Dir., Recovery Div., FEMA, to Assistant Dir., Tex. Dep’t of Pub. Safety, Div. of Emergency Mgmt. (Oct. 22, 2012).
 Letter from State Coordinating Officer, Tex. Dep’t of Pub. Safety, Div. of Emergency Mgmt. to Acting Reg’l Adm’r, FEMA Region VI (Jun. 18, 2012).
 FEMA First Appeal Analysis, University of Texas Medical Branch, FEMA-1791-DR-TX, at 2 (Dec. 16, 2013) [hereinafter First Appeal Analysis].
 Letter from Vice President, Fin. Accounting and Reporting, Univ. of Tex. Med. Branch to Acting Assistant Adm’r – Recovery Div., FEMA through Assistant Dir., Tex. Dep’t of Pub. Safety Chief – Tex. Dep’t of Pub. Safety, (Aug. 18, 2014) (hereinafter Applicant’s Second Appeal Letter).
 Letter from State Coordinator – Recovery Tex. Dep’t of Pub. Safety to Dir., Recovery Div., FEMA Region VI (Aug. 25, 2014).
 Applicant’s Second Appeal Letter, at 2.
 Id., at 4 (including cost elements like shift differential up charges, additional power distribution and ancillary equipment costs, fuel and filter changes, and monitoring and mobilization costs).
 Recovery Directorate Manual Public Assistance Program Appeals Procedures (Version 3), at 15 (Apr. 7, 2014).
 2 C.F.R. § 215.40 (2008).
 Public Assistance Guide, FEMA 322, at 52 (June 2007).
 Contract, at Appendix 3.
 See Memorandum from Assistant Inspector Gen., Office of Inspector Gen. to Region IV Reg’l Administrator, FEMA, FEMA Should Disallow $82.4 Million of Improper Contracting Costs Awarded to Holy Cross High School, New Orleans, La., Audit Report No. OIG-15-65-D (Apr. 14, 2015).
 Contract, at Appendix 3, Section IIA & IIIA.
 Contract, at para. 6.8, at 5.
 First Appeal Analysis, at 3.
 The Robert T. Stafford Disaster Relief and Emergency Assistance Act of 1988 § 705(c), 42 U.S.C. § 5205(c) (2008).