50 Percent Rule and Procurement

Appeal Brief

Summary Paragraph

Heavy rainfall from Tropical Storm Fay caused the Capital Circle roadway sewer force main to rupture.  The City of Tallahassee (Applicant) performed emergency point repairs, which resulted in additional ruptures to the force main.  The Applicant concluded that the integrity of the force main had been so compromised that point repairs would not be sufficient to restore the pipeline; therefore, it requested funding for replacement.  FEMA determined that the cost of repairs would be less than 50 percent of the cost of replacement and that replacement was not eligible for funding.  FEMA approved funding for the repairs in Project Worksheet (PW) 2149 and for draining and inspecting the pipeline under contract in PW 2150.  FEMA found $186,964.18 in requested funding for work performed under contract ineligible, because the Applicant did not competitively bid the contracts.  FEMA developed cost estimates for the work and approved funding based on them. With its second appeal, the Applicant provided supplemental information demonstrating that it was not feasible to repair the pipeline.  The Applicant also asserted that the cost estimates do not address the complexity and emergency nature of the work.

Authorities and Second Appeals

• 44 C.F.R. § 206.226(f)(1).
• 44 C.F.R. §§ 13.36, 13.43.
• OMB Circular A-87
•  PA Guide, at 53.

Headnotes

• Under 44 C.F.R. § 206.226(f)(1), a facility is considered repairable when disaster damages do not exceed 50 percent of the cost of replacing a facility to its pre-disaster condition, and it is feasible to repair the facility.

• It was not feasible to restore the pipeline through point repairs.

• According to 44 C.F.R. § 13.36(c), all procurement transactions have to provide full and open competition.  If an Applicant uses noncompetitive proposals to procure services, 44 C.F.R. § 13.36(d)(4)(ii), requires a cost analysis.

• The Applicant did not competitively bid the contract services and did not complete a cost analysis.

• 44 C.F.R. § 13.43(a) permits FEMA to disallow all or part of the costs incurred through noncompliant procurement procedures.
• OMB Circular A-87 considers a cost reasonable if, in its nature and amount, it does not exceed that which would be incurred by a prudent person under circumstances prevailing at the time.

• PA Guide, at 53 allows reimbursement of costs FEMA finds fair and reasonable.
• FEMA followed policy in determining reasonable, eligible costs for work procured non-competitively.

Appeal Letter

Appeal Analysis

First Appeal

The Applicant appealed FEMA’s determination in a letter dated November 24, 2010. As to PW 2149, the Applicant argued that FEMA erroneously applied the 50 Percent Rule by failing to consider the infeasibility of repairing only the point breaks. As to PW 2150, the Applicant requested an additional $117,721.46 stating that FEMA underestimated the eligible costs because it did not consider the cost impacts of the complexity, time constraints, and work conditions associated with the work of draining, transporting, and disposing of the sewage from the pipeline and performing an internal assessment using robotics. The Applicant did not appeal PW 2071.

The Florida Division of Emergency Management (Grantee) transmitted the Applicant’s appeal to FEMA Region IV in a letter dated March 14, 2011. The Grantee asserted that, for PW 2149, FEMA’s cost estimate for the repair of each break was too low.  According to the Grantee, if a more reasonable estimate was used, the total repair cost would exceed 50 percent of the replacement cost. For PW 2150, the Grantee noted that actual costs were higher than FEMA’s estimate and should be used to prepare the PW.

The FEMA Region IV Regional Administrator denied the first appeal in a letter dated September 28, 2012. As to PW 2149, the Regional Administrator reaffirmed that the repair cost was less than 50 percent of the replacement cost and, therefore, determined that replacement was not eligible in accordance with 44 C.F.R. § 206.226(f)(1). The Regional Administrator stated that the Applicant did not submit any additional data to dispute the accuracy of FEMA’s scope of work, estimate, or conclusion that repair costs exceeded 50 percent of replacement costs.  Additionally, the Regional Administrator stated that the $5,700,000.00 in actual costs claimed by the Applicant included costs to relocate the force main and did not solely consist of the costs of repairing and restoring it to its pre-disaster condition.  The Regional Administrator noted that, in accordance with 44 C.F.R. §206.226(g)(1), relocation is not eligible because the facility was not destroyed.

Regarding PW 2150, the Regional Administrator stated that the Applicant would receive reimbursement for the actual costs it incurred only for the performance of items within the eligible scope of work, as part of the final inspection process.

Second Appeal

The Applicant submitted a second appeal in a letter dated January 18, 2013, and submitted supplemental material in a letter dated July 19, 2013.  For PW 2149, the Applicant asserted that FEMA did not apply the requirements of 44 C.F.R. § 206.226(f)(1) correctly. Specifically, the Applicant stated that FEMA focused only on the comparison of the respective costs of repair and replacement and, instead, should have based its decision on the regulatory requirement that “a facility is considered repairable when … it is feasible to repair the facility so that it can perform the function for which it was being used as well as it did immediately prior to the disaster.” The Applicant provided information it asserted would demonstrate that the repair was not feasible and that the force main had to be replaced. The supplemental information included a March 2013 report, prepared by the engineering firm MWH Global, Inc., that:

• Provided detailed discussion of the cause of damage to the force main due to extreme surge and vacuum conditions.
• Described physical evidence of damage and weakening that was observed following excavation of portions of the force main and results of testing performed on excavated portions by the pipe’s manufacturer.
• Described the likelihood of additional, unobserved weaknesses and failures due to delamination of the pipe and occurrence of micro fractures, as well as unobserved failures in portions of the force main that could not be video inspected.
• Described requirements for certification by the engineer of record and permitting by state agencies and the reasons why the certification and permitting could not have been obtained for point repairs.

The Applicant also asserted that the Florida Department of Transportation and Florida Department of Environmental Protection, which are responsible for permitting the work, would not have given consent for point repairs because such repairs would not have met reliability requirements. The second appeal supplemental information included letters from these agencies informing the Applicant that point break repairs would not be a satisfactorily reliable approach to repairing the damage.

For PW 2150, the Applicant disagreed with the decision to address reimbursement of reasonable costs at final inspection.  The Applicant asserted that doing so would deny it of its appeal rights and relied on the documentation submitted with its first appeal to support its position that the actual contract costs are eligible.

Subsequent to submitting its second appeal, FEMA requested additional documentation from the Applicant to further support its position with respect to the eligibility of the contract costs in PW 2150.   In response to that request, the Applicant submitted a description of the scope of work of each contract and of the procurement procedures followed.  The Applicant also provided some details regarding its objection to FEMA’s cost estimates and reduced its claim to an additional $82,832.00 (from $117,721.46) for the contract work.  The comprehensive submission was designed to support the Applicant’s position that FEMA did not consider the “complexity and emergency nature of this work, combined with unique working conditions” (e.g. “being located in a six-lane heavily trafficked highway and working 24 hours per day”) when developing its cost estimates. 

Discussion

PW 2149

Under the Public Assistance Program, a facility is considered repairable when disaster damages do not exceed 50 percent of the cost of replacing a facility to its pre-disaster condition, and it is feasible to repair the facility so that it can perform the function for which it was being used as well as it had immediately prior to the disaster.[1]

The data submitted with the second appeal, which included documentation from the state permitting agency that the proposed point repair work was unreliable and would not be approved, demonstrate that it would not have been feasible to repair only the observed point breaks so that the force main could have performed as it had prior to the disaster.  As noted, the storm caused numerous intermittent pump failures and power fluctuations within the Applicant’s wastewater system, which resulted in flow variations within the force main. These flow variations produced transient pressure conditions that were large enough to damage the force main. These transient pressure conditions would have traveled throughout the force main, potentially damaging locations in addition to those that were observed through rupture or through video inspection. Moreover, as described in the 2013 MWH Global, Inc. report, excavation of the pipe during repair revealed delamination and fracturing, which indicate reductions in the wall strength of the pipe. Video inspection could not have identified this damage, and point break repairs would not have addressed it.

The observed point breaks and the evidence of damage revealed during excavation indicate the potential for widespread damage to the force main. Considering this damage and the likelihood of additional interior and exterior damage in unobserved segments of the force main, it is reasonable to conclude that the force main could not be restored only through point break repairs. This conclusion is also consistent with the determination of state permitting agencies and FEMA Headquarters technical experts who reviewed the materials provided.

The FEMA Regional Administrator included the issue of relocation in its basis for denying the first appeal in accordance with 44 C.F.R. §206.226(g). The facility was not relocated in its entirety; rather, a portion of the force main was re-aligned for reasons of constructability and to reduce the cost of the replacement. Therefore, 44 C.F.R. §206.226(g) is not applicable to this situation and the force main replacement is eligible. 

Based on a review of documentation supporting the Applicant’s actual costs claimed, summarized in Table 1, the eligible cost for the replacement is $5,225,747.89.  As noted in Table 1, the Applicant did not competitively procure all portions of the project.  FEMA performed a review of the bids and actual costs for those portions of the work that the Applicant did not procure competitively and found the costs to be reasonable. 

TABLE 1

PW 2150

Pursuant to 44 C.F.R. § 13.36(b), Procurement Standards, when procuring services under a federal grant, subgrantees use their own procurement procedures which reflect applicable state and local laws and regulations, provided that the procurements conform to applicable Federal law and the standards identified in section 13.36.  Consistent with 44 C.F.R. § 13.36(b), grantees and subgrantees must maintain records sufficient to detail the significant history of a procurement.[2]  These records must include the rationale for the method of procurement, selection of contract type, contractor selection or rejection, and the basis for the contract price.[3]  In addition, all procurement transactions have to be conducted in a way that provides “full and open competition.”[4]

The Applicant did not competitively procure the services funded in PW 2150.  According to 44 C.F.R. § 13.36(d)(4)(i), “[p]rocurement by noncompetitive proposals may be used only when the award of a contract is infeasible under small purchase procedures, sealed bids or competitive proposals and one of the following circumstances applies: (A) The item is available only from a single source; (B) The public exigency or emergency for the requirement will not permit a delay resulting from competitive solicitation; (C) The awarding agency authorizes noncompetitive proposals; or (D) After solicitation of a number of sources, competition is determined inadequate.”[5]  Further, “[c]ost analysis, i.e., verifying the proposed cost data, the projections of the data, and the evaluation of the specific elements of costs and profits, is required.”[6]  Here, the Applicant has sufficiently supported that the emergency nature of the repair required expediency, but the Applicant did not perform cost analyses for any of the contracts awarded for the work.

Pursuant to 44 C.F.R. § 13.43(a), Remedies for Noncompliance, “if an Applicant materially fails to comply with any term of an award, whether stated in a Federal statute or regulation, an assurance, in a State plan or application, a notice of award, or elsewhere, FEMA may take a number of actions”.  FEMA’s options include: temporarily withholding cash payments pending correction of the deficiency, disallowing all or part of the cost of the activity or action not in compliance, wholly or partly suspending or terminating the current award for the grantee's or subgrantee's program, withholding further awards for the program, or taking other remedies that may be legally available.^[7]

Rather than disallow all costs incurred through noncompliant procurement procedures, FEMA policy allows reimbursement of costs it finds fair and reasonable.[8]  A cost is reasonable if, in its nature and amount, it does not exceed that which would be incurred by a prudent person under the circumstances prevailing at the time the decision was made to incur the cost.[9]  FEMA will generally analyze cost reasonableness by use of historical documentation for similar work, average costs for similar work in the area, published unit costs from national estimating databases, and FEMA cost codes.^[10]  The Regional Administrator, in denying the first appeal on this issue, determined that FEMA approved reasonable, eligible costs for the services procured non-competitively in PW 2150 in accordance with this policy. The Applicant disagreed with the regional calculated costs, stated their reasons for not agreeing, but provided no documentation to support otherwise.  FEMA used average costs for similar work in the area, in accordance with the PA Guide.

Conclusion

The data submitted with the second appeal demonstrate that it would not have been feasible to repair only the observed point breaks and return the force main to its pre-disaster function.  Accordingly, replacement of the force main is eligible. The eligible replacement includes the portion of the damaged force main that was realigned, and the eligible cost for the project is $5,225,747.89.

The Applicant has not provided sufficient documentation supporting reasonable costs associated with non-compliant procurement procedures.  Accordingly, no additional funding will be provided for the work approved in PW 2150.