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Second Appeal Analysis
PA ID# 047-29700-00; City of Gulfport
PW ID# Project Worksheet 11277; Procurement, Reasonable Costs, 705(c)
Between August 29 and October 14, 2005, Hurricane Katrina severely damaged the potable water, sanitary sewer, and storm water collection/drainage systems in the City of Gulfport, Mississippi (Applicant). The Mississippi Emergency Management Agency (Grantee) prepared a Technical Report (Technical Report) to address the Applicant’s request for review and funding. FEMA prepared Project Worksheet (PW) 11277 to document the costs to acquire the construction easements and permanent easements required for the restoration of its water infrastructure systems. The initial version of PW 11277 was obligated in the amount of $655,349.60 to cover appraisal costs, appraisal review costs, costs to purchase the easements, and recordation fees. The Applicant submitted a total claim of $677,151.89 at closeout. FEMA reduced this amount to $544,026.89 (PW 11277, Version 1). FEMA disallowed a total of $133,125.00 as follows: (1) $77,700.00 in appraisal and appraisal review costs for easements that the Applicant decided not to purchase; (2) $18,075.00 in appraisal and appraisal review costs charged above the maximum contract price; and (3) $37,350.00 claimed for appraisal reviews performed by the appraiser’s father, which FEMA found created a conflict of interest in violation of procurement standards under Title 44 of the Code of Federal Regulations (44 C.F.R.) § 13.36.
On first appeal, the Applicant disputes: 1) FEMA’s deobligation of appraisal review costs for easements the Applicant did not purchase; and 2) FEMA’s finding of a conflict of interest with the appraisal reviews.
The Applicant argues, after obtaining appraisals, it chose not to purchase certain properties, saving approximately $680,000.00 in property acquisition costs and more in construction costs. The Applicant argues that they sought to save money whenever possible and all appraisal and appraisal review costs were reasonable and necessary to determine cost effectiveness. The Grantee concurred, stating the appraisal and appraisal review costs supported the purpose of the PW and allowed for cost-effective decisions. The Grantee noted the scope of the project was very broad, the course of work and the need to move it forward expeditiously occasionally required lines to be re-routed, and the Applicant could not know or predict exactly which parcels would be needed until after the appraisals.
Addressing the conflict of interest issue, the Applicant asserts it complied with Title 44 of the Code of Federal Regulations (44 C.F.R.) § 13.36 in procurement of appraisal review services. The Applicant also relied on the Uniform Standards of Professional Appraisal Practice (USPAP) and the Mississippi Real Estate Appraiser Licensing and Certification Act, whose rules govern appraisers in the state, which do not prohibit familial relationships between appraisers and appraisal reviewers. The Grantee further asserts §13.36 does not apply to relationships between two vendors contracted by an applicant, and there was no interest in each other’s firms.
On April 12, 2016, FEMA sent a Request for Information (RFI) to the Grantee and Applicant for: (1) an explanation regarding the selection of the appraisal reviewer, specifically requesting any documentation to show the contracting method and selection criteria used, and actions taken to mitigate any conflict of interest; and (2) any correspondence showing the Applicant contacted either the Grantee or FEMA regarding easement appraisals performed outside the approved scope of work (SOW) prior to final inspection.
In the Applicant’s RFI response, a copy of the appraisal reviewer’s contract was provided and the Applicant argued: (1) applicable procurement statutes in Mississippi allowed for services to be contracted without bid or proposals; (2) the appraisal reviewer was selected based on competence and a long-standing working relationship with the Applicant; (3) under the contract, the appraisal reviewer was required to reject any work that created a conflict of interest; and, (4) there was a limited market for appraisers in the area when services were needed. Regarding appraisals performed outside the approved SOW, the Applicant noted all parcels were within the SOW at the time they were appraised, and that it was only after appraisals were completed that a determination was made not to acquire the property interests. Lastly, the Applicant submitted documentation showing it purchased property interests in seven properties that it alleged FEMA designated as unpurchased, and requested reimbursement for those appraisal costs. The Grantee supported the Applicant’s arguments and reiterated that USPAP did not prohibit familial relationships between appraisers and appraisal reviewers.
The Regional Administrator (RA) partially granted the Applicant’s appeal on August 28, 2017. The RA determined appraisal review costs were ineligible for reimbursement due to noncompliance with federal procurement regulations because the familial relationship involving the appraiser and the appraisal reviewer created a conflict of interest. The RA determined appraisal costs for one of the 34 unpurchased easements were eligible for reimbursement, as the appraisal informed the Applicant that the cost of the property exceeded other available options, and reobligated $1,500.00 for those costs. The RA, however, determined appraisals for the remaining unpurchased easements did not support decisions not to purchase and were therefore not eligible for reimbursement. Finally, the RA determined Section 705(c) of the Robert T. Stafford Disaster Relief and Emergency Assistance Act (Stafford Act) did not prohibit FEMA from deobligating funds, as the purpose of the grant was not accomplished due to the Applicant’s noncompliance with federal procurement standards, and costs for unnecessary appraisal work could not be considered reasonable in accordance with Federal regulation.
In its second appeal, the Applicant reiterates first appeal arguments that the appraisals were necessary and reasonable and that no conflict of interest existed between the appraiser and the appraisal reviewer, and again argues that § 705(c) of the Stafford Act prohibits FEMA from recovering funds. The Grantee supports this second appeal and argues delaying appraisals until after final design decisions were made would have delayed the very large infrastructure replacement work only to save minimal appraisal costs.
Conflict of Interest
Under 44 C.F.R. § 13.36, all procurement transactions using federal funds must be conducted in a manner providing for full and open competition and must avoid situations considered to be restrictive of competition. FEMA has broad discretion under 44 C.F.R. § 13.36(c)(1) in determining whether a procurement practice is restrictive of competition. Not only does this regulation emphasize that its list of practices considered to be restrictive of competition is not all-inclusive, but it also includes broad restrictions that prohibit procurement practices involving organizational conflicts of interest or any arbitrary action in the procurement process. Thus, it is incumbent upon an applicant to be able to demonstrate that its procurement transactions are free of any conflicts of interest that would compromise or give the appearance of compromising its ability to fairly and objectively administer its Public Assistance (PA) award. When an applicant violates any of the federal procurement requirements, FEMA may disallow all or part of the cost associated with the noncompliant activity.
The Applicant argues there is no factual basis for FEMA’s finding of a conflict of interest. In defining conflict of interest, the Applicant relies on USPAP and the State of Mississippi’s professional ethics rules for real estate appraisers—both of which do not prohibit a familial relationship between appraisers and appraisal reviewers. Furthermore, the Grantee asserts that the procurement requirements under 44 C.F.R. § 13.36 do not apply here because they do not prohibit conflicts of interest between separate contractors selected by an applicant.
Federal grant regulations govern procurement actions by applicants, not an applicant’s state law. The regulations provide that “organizational conflicts of interest” are one example in a non-exhaustive list of situations considered “restrictive” of competition. The text is not limited in any way to preclude it from applying to applicant-selected contractors. The Applicant claims there is limited market availability as a reason for contracting the appraisal reviewer but provides no bid documents showing there was only one response to the bid. Indeed, in a second appeal decision last year involving a similar regulation applicable to private nonprofit organizations, FEMA found a procurement violation in part based on an organizational conflict of interest on the part of the applicant’s selected contractor.
The regulation at issue does not define “organizational conflicts of interest.” It is therefore helpful in this limited circumstance to turn to the Federal Acquisition Regulation (FAR). Recognizing the FAR applies only to procurements by federal entities, it offers useful guidance on the scope and meaning of “organizational conflicts of interest.” The FAR defines that term as involving situations in which “because of other activities or relationships with other persons, a person is unable or potentially unable to render impartial assistance or advice to the government, or the person’s objectivity in performing the contract work is or might be otherwise impaired, or a person has an unfair competitive advantage.” Therefore, preventing the existence of conflicting roles that might bias a contractor’s judgment is a key procurement consideration.
Under those standards and the facts and circumstances here, the Applicant’s procurement transaction did not satisfy the standards for full and open competition. Here, the Applicant created an organizational conflict of interest, or at a minimum the appearance of one, in that the appraisal reviewer’s objectivity in evaluating the appraiser’s work could have been compromised by their familial relationship. Accordingly, the Applicant failed to adhere to full and open competition standards and FEMA appropriately exercised its discretion to deobligate the appraisal review costs for the Applicant’s noncompliance with federal procurement requirements.
Generally, costs that can be directly tied to the performance of necessary project work are eligible. Such costs must be reasonable and necessary to accomplish the work. A cost is allowable if it is “necessary and reasonable for proper and efficient performance and administration of Federal awards.”
FEMA deobligated $54,750.00 from PW 11277, Version 1, for appraisals that did not result in easement purchases. FEMA reobligated $1,500.00 for one appraisal that did not result in an easement purchase because, in that instance, the RA determined the appraisal informed the Applicant that the cost of the property exceeded other available options.
The reobligation of the remaining appraisal costs is appropriate because restoring the damaged water systems required purchasing numerous easements in certain areas. From the outset, the Applicant had all easement properties appraised in those areas; it did not know and could not predict at the time that some easements might not be required or cost-effective. After appraisals had been conducted, the Applicant requested PW 11277 be written for 69 easement properties that had been purchased or were pending purchase, with the understanding that the remaining easement properties “may be required as field conditions dictate.” Using the appraisals on the remaining easements, the Applicant was able to compare easement parcel costs against other options, including project redesign, and it found that by prudently choosing the alternatives, it could save approximately $680,000.00. Delaying the appraisals until after all design decisions were made would have delayed the work and would have increased costs. Appraisals conducted before FEMA prepared PW 11277 were necessary to determine the least costly most feasible repair method and informed the Applicant’s easement purchasing decisions, and therefore were necessary project work.
Stafford Act, Section 705(c)
The Applicant did not demonstrate Section 705(c) prohibits FEMA from deobligating funds. Section 705(c) only applies if funding was authorized by an approved agreement specifying the costs, the costs were reasonable, and the purpose of the grant was accomplished. For an applicant to accomplish the purpose of the grant, the SOW must be completed in compliance with the terms and conditions of the award, as described in the PW, FEMA-State Agreement, and mandatory provisions of policy or law, such as the federal procurement requirements.
The Applicant’s selection of the appraiser’s father to review his son’s work created an organizational conflict of interest under applicable procurement regulations. Therefore, the Applicant did not comply with the terms and conditions of the grant and the purpose was not accomplished. Consequently, Section 705(c) does not prohibit FEMA from deobligating funds for the appraisal reviews.
The Applicant’s procurement of appraisal review services created an organizational conflict of interest and did not adhere to Federal grant procurement requirements. Accordingly, the appraiser’s review costs were properly deobligated. Regarding the deobligation of appraisal costs for unpurchased easements, it is determined that the work was necessary and eligible for reimbursement in the amount of $53,250.00.
 Miss. Emergency Mgmt. Agency (MEMA) Technical Report (Nov. 10, 2011) [hereinafter Technical Report].
 Letter from Asst. City Attorney, City of Gulfport, to Governor’s Authorized Rep., MEMA (Oct. 12, 2015).
 Letter from Governor’s Authorized Rep., MEMA, to Reg’l Adm’r, FEMA Region IV (Dec. 1, 2015).
 Letter from Recovery Division Dir., FEMA Region IV, to Exec Dir., MEMA and Asst. City Attorney, City of Gulfport (Apr. 12, 2016).
 Letter from Asst. City Attorney, City of Gulfport, to Pub. Assistance Branch Chief, FEMA Region IV (May 9, 2016).
 Letter from Governor’s Authorized Rep., MEMA to Reg’l Admin, FEMA Region IV (May 10, 2016).
 Letter from Reg’l Adm’r., FEMA Region IV, to Exec Dir., MEMA and Asst. City Attorney, City of Gulfport (Aug. 28, 2017).
 Letter from Asst. City Attorney, City of Gulfport, to Governor’s Authorized Rep., MEMA (Oct. 27, 2017).
 Letter from Governor’s Authorized Rep., MEMA, to Reg’l Adm’r., FEMA Region IV (Dec. 8, 2017).
 44 C.F.R. § 13.36(c)(1).
 44 C.F.R. § 13.43(a).
 44 C.F.R. § 13.36(c)(1).
 Second Appeal Analysis, Community Action Program Committee, Inc., FEMA-1551-DR-FL, at 5 (Feb. 27, 2018) (finding the Applicant non-compliant with Federal procurement requirements in part because it created an organizational conflict of interest in awarding its contract for construction management services and its contract for the construction work to one company).
 Public Assistance Guide, FEMA 322, at 33 (1999).
 OFFICE OF MGMT. & BUDGET, EXEC. OFFICE OF THE PRESIDENT, OMB CIRCULAR A-87, COST
PRINCIPLES FOR STATE, LOCAL, AND INDIAN TRIBAL GOVERNMENTS, at Attachment A (C)(l )(a)
(2004) (codified at 2 C.F.R. § 225 Appendix A (C)(l)(a)).
 Technical Report, at 1.
 FEMA Recovery Policy FP-205-081-2, Stafford Act Section 705, Disaster Grant Closeout Procedures, at 4-7 (Mar. 31, 2016).
 FEMA Second Appeal Analysis, City of Vero Beach, FEMA-1545/1561-DR-FL, at 6 (Nov. 21, 2016).