Change in Scope of Work; Mold Remediation; Direct Administrative Costs and Management Costs; Project Documentation and Closeout; Procurement and Contracting Requirements

Appeal Brief Appeal Letter Appeal Analysis

Appeal Brief

Disaster	1791
Applicant	City of Houston
Appeal Type	Second
PA ID#	201-35000-00
PW ID#	PW 12981
Date Signed	2021-05-26T16:00:00

Summary Paragraph:

On September 8, 2008, Hurricane Ike damaged the roof and interior of the Applicant’s Facility, which was undergoing renovations.  FEMA prepared and obligated Project Worksheet (PW) 12981 for repairs and direct administrative costs (DAC).  The Applicant amended its existing renovation contract to include disaster related repairs and invited bids to award a contract for DAC.  On August 30, 2010, the Applicant discovered mold damage, contracted for completion of mold remediation work without notifying or submitting a scope of work (SOW) change request to FEMA.  The Texas Division of Emergency Management (Grantee) conducted a compliance review and  recommended partial approval of the supported costs, additional money for the approved SOW, and  deobligation of the overage.  FEMA concurred and amended the PW to deobligate funding.  The Applicant appealed and argued the compliance review overstated the amount of cost overruns and work outside the SOW.  FEMA Region VI Regional Administrator partially granted the appeal, determining the Applicant provided documentation to support reimbursement for some subcontractor costs but denying the remainder of the appeal, as the Applicant did not provide documentation to show proper procurement , support additional DAC, or show work outside the SOW as disaster-related.  On second appeal, the Applicant argues increased costs of work are consistent with the SOW, an exigent circumstances exception applies to the contract procurements, and deobligation violates Section 705(c) of the Stafford Act.

 

Authorities and Second Appeals

• Stafford Act § 705 (c).
• 44 C.F.R. §§ 13.30(b, c, d, f), 13.36(b, c, d), 13.43(a), 206.204(e), 206.206(a), 206.223(a, e).
• PA Guide, at 29, 31-33, 95-96, 139-140; RP 9580.100; DAP 9525.9; FP-205-081-2.
• Bossier Par., FEMA-4228-DR-LA; City of Pierre, FEMA-1984-DR-SD, at 11; Pt. Arthur Indep. Sch., FEMA-1791-DR-TX; Columbus Reg’l. Hosp., FEMA-1766-DR-IN; City of Columbia, FEMA-4241-DR-SC.

Headnotes

• An applicant is responsible for identifying all disaster related work, requesting inspections and changes in PWs, and obtaining FEMA’s prior approval for any SOW revision.
  • FEMA had no opportunity to inspect and no SOW change request was submitted prior to  completion of work, which exceeded the approved SOW and is thus ineligible for PA funds.
• DAC must be tracked, charged, and accounted for directly to a specific project.
  • The submitted documentation shows ineligible indirect costs incurred benefitting other objectives and projects.
• The applicant must meet Federal procurement and contracting standards to obtain PA funding.
  • The Applicant did not meet federal procurement standards nor did it demonstrate exigent or emergency circumstances to excuse its noncompliance.
• FEMA is barred from deobligating funds if the payment was authorized by an approved agreement specifying costs, the costs were reasonable, and the purpose of the grant was accomplished.  

The purpose of the grant was not accomplished, due to the Applicant’s failure to properly procure, document the work, and obtain prior FEMA approval for work exceeding the SOW.

Conclusion

The additional requested funding is ineligible because the Applicant failed to properly procure and document the work, establish the additional repairs and mold remediation work was the result of the disaster, and obtain prior approval from FEMA for work exceeding the approved SOW.  Further, Section 705(c) does not preclude FEMA from deobligating funds, because the purpose of the grant is not accomplished when procurement violations occur or completed work exceeds the SOW.  Therefore, this appeal is denied. 

Appeal Letter

Appeal Analysis

Background

Between September 7 and October 2, 2008, Hurricane Ike impacted the City of Houston (Applicant) damaging its Hobby Airport (Facility) which was undergoing renovation at the time of the disaster.  FEMA prepared Project Worksheet (PW) 12981 and obligated $2,174,540.12 to fund repairs and direct administrative costs (DAC).[1]  The scope of work (SOW) consisted of roof and interior repairs, and mold work for one wall.  On August 30, 2010, when mold was discovered during demolition work in other areas within the Facility, the Applicant contracted for completion of mold remediation work.[2]  The Applicant did not notify FEMA of the newly discovered mold damage, nor did it request a change in SOW prior to completion of this work.[3]

Prior to the disaster, in 2006, the Applicant awarded a competitively bid contract to renovate the Facility.  After the disaster, the Applicant amended this previously awarded contract to include $2,500,000.00 for disaster-related repairs, without soliciting additional proposals or preparing a cost or price analysis.[4]  The Applicant, after receiving six invited bids, also contracted for administrative services related to the SOW and later submitted a claim for direct administrative costs (DAC).[5]  The Texas Division of Emergency Management’s (Grantee) auditor conducted a financial compliance review of the PW, which revealed: 1) procurement violations; 2) work performed outside the SOW; 3) costs unsubstantiated by underlying documentation; and 4) a claimed cost overrun.[6]  The Applicant did not respond to the auditor’s compliance review prior to submission to the Grantee.[7]  Consistent with the compliance review, the Grantee requested project closeout and recommended partial approval of the supported contract costs and additional money for the approved SOW work.  However, because the total recommended amount was less than the amount FEMA originally obligated, the Grantee requested deobligation of the overage, resulting in a net deobligation of $391,818.41.[8]  FEMA concurred with the Grantee’s recommendation and, on November 18, 2019, notified the Grantee that $391,818.41 in funding had been deobligated and the PW was closed.[9]

 

First Appeal

On December 20, 2019, the Applicant appealed FEMA’s deobligation of $391,818.41 and requested $771,603.36 in additional funds.[10]  The Grantee transmitted the appeal to FEMA on January 2, 2020.  On January 22, 2020, FEMA sent a Request for Information (RFI) requesting: (1) the Grantee’s justification for its appeal support, in light of its audit and recommended deobligation; (2) written Grantee certification of substantiated costs in excess of the amount currently approved, along with certification that the work was completed; and (3) documentation demonstrating the work related to the Applicant’s cost overrun claim was within the approved SOW.[11]  The Applicant responded to the RFI by providing a claim summary narrative, closeout cost summary, invoices, and proofs of payments.[12]  The Grantee, in its response, provided a summary spreadsheet listing all amounts invoiced and as claimed by the Applicant and certified $2,818,009.25, an amount in excess of the amount previously approved by FEMA, but less than the Applicant’s reduced request for $2,829,833.84 in claimed costs.[13]  

On April 28, 2020, FEMA Region VI Regional Administrator partially granted the appeal in the amount of $45,466.57 for costs that were documented and reasonable, despite multiple procurement violations, but denied the remaining amount in dispute.[14]  FEMA determined that the Applicant did not distinguish predisaster renovation from post disaster repairs, demonstrate that mold resulted from the disaster-caused damage instead of negligence, or tie the additional DAC to this PW.  FEMA also found that the Applicant exceeded the approved SOW and incurred cost overruns without FEMA’s prior approval and that the Grantee’s certified amount, in its RFI response, included costs claimed by multiple vendors for other PWs and claimed by its contractors for all mold work, roof repairs, roof panel removal, and investigation.  

 

Second Appeal

On August 28, 2020, the Applicant submitted its second appeal requesting $1,117,955.20 for actual increased costs incurred to restore the Facility to its predisaster design, function, and capacity, consistent with the SOW.[15]  The Applicant contended that FEMA did not clearly identify which of the costs it denied were applied to other PWs and that FEMA could exercise its discretion to award costs for work completed before FEMA had the opportunity to inspect, due to post disaster emergency or exigent circumstances affecting the Facility’s restoration.  Further, the Applicant stated that FEMA reviewed and approved its amended pre-disaster contract without expressing any eligibility or procurement concerns, and that documentation provided support for the incurred DAC was tied to this project.  Lastly, the Applicant asserted FEMA’s deobligation violated section 705(c) of the Robert T. Stafford Disaster Relief and Emergency Assistance (Stafford) Act.

 

Discussion

Mold Remediation

Mold remediation may be eligible under the PA Program, including as part of emergency protective measures and permanent repair work.  For mold remediation to be eligible, the mold must not be a result of poor facility maintenance or failure to take protective measures in a reasonable time after the event.[16]  Work that results from a cause other than the designated event, such as a pre-disaster damaging event, post-disaster damaging event, or work to correct inadequacies that existed prior to the disaster, normal deterioration, hidden damage or aging of a facility is not eligible.[17]  FEMA is guided by various factors including, if ceiling tiles have evidence of leakage, water intrusion may have occurred before the disaster event and caused mold growth.[18]  It is an applicant’s responsibility to show that the damage is disaster related.[19]

The SOW for PW 12981 identified the extent and location of mold contamination observed by FEMA inspectors.  Here, the Applicant claims mold contamination with associated remediation in other areas of the facility, which was not identified to, or observed by, the site inspectors, in the damage description, or in the SOW, and was not discovered until demolition work commenced two years after the disaster event.  In this case, the Applicant expanded the scope of the project to include the mold remediation work in other areas of the Facility without notifying the Grantee or FEMA.

The Applicant has not provided documentation to justify its delay in reporting the discovery of additional mold contamination or its failure to request a change in SOW.  Further, the Applicant has not submitted documentation that permits FEMA to determine the extent, nature, and cause of the mold contamination or whether the subsequent mold remediation measures were necessary to address immediate threats from disaster-caused damages to public health, safety, or property.  

The mold remediation work was not within any approved SOW, FEMA was prevented from inspecting the newly discovered damages prior to the Applicant completing repairs, and no documentation ties the mold remediation work to the performance of eligible work stemming directly from the disaster. As such, the work is ineligible for PA funding.

 

Change in Scope of Work

During the execution of approved work an applicant may find that the actual project costs exceed the approved PW estimates due to a change in the scope of eligible work, thus creating a cost overrun.[20]  The Applicant must evaluate each cost overrun and, when justified, submit a request for additional funding through the Grantee to the RA for a final determination.[21]  All requests for approval must include the Grantee’s written recommendation and contain sufficient documentation to support the eligibility of all claimed work and costs.[22]  The timing of the request should be such that the damaged element can be inspected before it is covered up or repaired.[23]  Applicants must therefore obtain FEMA’s prior approval for any SOW revision or PW objectives regardless of the reason necessitating the change.[24]  Generally, when an applicant makes improvements or changes to the SOW without obtaining prior approval or allowing FEMA the opportunity to complete required reviews, those changes are ineligible for PA funding and FEMA may disallow all or part of the grant awards.[25]

The Applicant seeks funding for all mold remediation work, increased costs incurred for work within the SOW, and for work excluded from the approved SOW.  The record establishes the Applicant did not request a revised SOW or otherwise notify the Grantee or FEMA that certain costs incurred were higher than those used to make the original estimate, or above what was initially approved and obligated by FEMA.  In addition, information provided by the Applicant and Grantee, together with other available documentation in the record, does not provide details to demonstrate that the work was necessary as a result of the declared disaster or was within the approved SOW.  Therefore, because the Applicant has not supported through documentation its claim that the work is consistent with the approved SOW or that damages were as a result of the disaster and has not obtained FEMA’s prior approval for any SOW revision or cost increase, the additional work and costs are ineligible for PA funding.

 

Direct Administrative Costs and Management Costs

FEMA provides funding for DAC associated with eligible PA work.[26]  DAC includes actual reasonable costs that can be tracked, charged, and accounted for directly to a specific project.[27]

Although the Applicant has provided a Witt Associates’ letter dated October 31, 2011 verifying DAC and a cost spreadsheet in response to the RFI, neither provides a description tying the additional DAC sought to eligible work within the PW 12981 SOW.  Without documentation tying the additional DAC to eligible work, FEMA cannot determine which costs are reasonable and can be tracked, charged, and accounted for directly to this PW.  Therefore, the Applicant’s DAC claim is ineligible for PA funding.

 

Procurement and Contracting Requirements

All procurement transactions must be conducted in a manner providing full and open competition.[28]  Noncompetitive procurement may be allowed when the award of a contract is infeasible under small purchase procedures, sealed bids, or competitive proposals and one of the following circumstances applies: the item is only available from a sole source; a public exigency or emergency does not allow for delay; the awarding agency allows for noncompetitive bids; or, after solicitation from a number of sources, competition is deemed inadequate.[29]  For noncompetitive procurement, an applicant is required to conduct a cost analysis.[30]  It also requires an applicant to justify the procurement with documentation and limit the use of the contract to the period of actual exigent or emergency circumstances.[31]  FEMA’s enforcement remedies in noncompliant procurement transactions are discretionary and include disallowing all or part of the cost of the activity or action not in compliance.[32]

The Applicant’s documentation shows that it did not conduct full and open competition in awarding the repair contracts and demonstrates that the Applicant used a pre-selected list of contractors when it invited bids to procure the contract for DAC and other management services.  The Applicant did not submit a cost analysis for any disaster-related repair contract it awarded and did not provide documentation to show either exigent or emergency circumstances existed, that there would be a substantial duplication of costs, or that the most cost-effective contractor was selected at the time it awarded these contracts.  Further, the costs associated with PW 12981 work performed were incurred over a 5-year period following the disaster and do not qualify for an emergency or exigency exception.[33]  

Despite the federal procurement and contracting standards violations, the first appeal addressed the reasonableness of eligible costs supported by invoices and documentation, wherein FEMA exercised appropriate discretion by awarding partial costs as an enforcement measure.  On this second appeal, FEMA finds that the Applicant has not presented documentation to enable FEMA to determine whether any additional costs sought are reasonable and a direct result of the disaster, and thus eligible for funding.  Accordingly, FEMA’s disallowance of associated costs for the claimed work was proper under these circumstances.

 

Project Documentation and Closeout

FEMA is prevented from recovering funds from a local or state government for any payment made under the Stafford Act when an applicant has met three criteria: 1) the payment was authorized by an approved agreement specifying costs; 2) the costs were reasonable; and 3) the purpose of the grant was accomplished.[34]  For an applicant to accomplish the purpose of the grant, the scope of work 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.[35]  Moreover, federal regulations require the costs to be associated with work within the SOW and adequately documented.[36]  The burden to substantiate an appeal with documented justification falls exclusively on the applicant and hinges on the applicant’s ability to produce not only its own records but to clearly explain how those records are relevant to the appeal.[37]  

The procurement violations as well as the work completed outside of the approved SOW, as described elsewhere in this analysis, show that the Applicant did not comply with the terms and conditions of the grant.  Accordingly, the purpose of the grant, the third prong of Section 705(c), is not accomplished, and FEMA is not prohibited from recovering payments as a remedy.

 

Conclusion

The Applicant has not demonstrated that the work at issue in the appeal was within the approved SOW, that the mold damage discovered was the result of the disaster, or that the additional DAC requested was tied to eligible work.  In addition, the Applicant did not comply with federal procurement requirements nor did it document that its contracting fell within any of the exceptions to federal procurement regulations.  Finally, Section 705(c) does not preclude FEMA from deobligating funds, because work at issue did not accomplish the purpose of the grant.  Therefore, this appeal is denied.

 

[1]  FEMA PW 12981 workflow history entered in Emergency Management Mission Integrated Environment (EMMIE) system. FEMA obligated PW 12981 for $2,129,099.00 ($2,101,424.00 for uncompleted work, $22,674.00 for completed work, $61,204.00 for plan and permit fees, $138,380.00 for management and design costs, and $5,000.00 for DAC plus an additional $45,441.12 with an amended SOW for soffit flashing repairs). 

[2]  Project 630, Document 00680, Work Change Directive #17 (Aug. 30, 2010) and Project 630, Document 00680, Work Change Directive #18 (Aug. 30, 2010).

[3] PW 12981.

[4] Report from Ernst & Young, to TDEM, Report on Evaluation Performed related to Federal Emergency Management Agency Public Assistance Grants, at 1 (June 5, 2018) [hereinafter Compliance Review].

[5] Id., at 6.

[6] Id., at 1-10.

[7] Id., at 4,5,6,7,8,9,10 (The auditor noted throughout the review that the Applicant “did not provide a response to [each] observation prior to submission of this report”).

[8]  Letter from Acting Section Adm’r, SE. Tex. Region, TDEM, to Recovery Div. Dir., FEMA Region VI

(Apr. 2, 2019).

[9] Letter from Recovery Div. Dir., FEMA Region VI, to Chief, TDEM (Nov. 18, 2019).

[10] Letter from Div. Manager, Fin. Dep’t, City of Houston, to Chief, Tex. Div. of Emergency Mgmt. (TDEM), at 2, 5 (Dec. 20, 2019) [hereinafter First Appeal Letter].

[11] Letter from FEMA Region VI Appeals Team, to Chief, TDEM, at 2 (Jan. 22, 2020).

[12] Letter from Chief, TDEM, to FEMA Region VI Appeals Team (Feb. 21, 2020) [hereinafter RFI response].

[13] Email from CohnReznick Advisory to R6-PA Appeals Team (Feb.  20, 2020 with an attached cost summary.  The Grantee’s certification excluded unsupported costs of $9,368.98 for Pyramid General conditions and $31,673.54 for engineering design performed by Concept Engineering and Mc Donough Engineering Services.

[14] FEMA First Appeal Analysis, City of Houston, FEMA-1791-DR-TX (April 28, 2020). 

[15] Letter from Div. Manager, Fin. Dep’t., City of Houston, to Chief, TDEM, at 2 (Aug. 28, 2020) [hereinafter Second Appeal Letter].  The Applicant sought $1,117,955.20 ($391,818.41 in deobligated costs including DAC, plus $771,603.36 in denied costs including DAC after allowance for $45,466.57 awarded on First Appeal).

[16]  Public Assistance Guide, FEMA 322, at 32 (June 2007) [hereinafter PA Guide].

[17] FEMA Second Analysis, Bossier Par., FEMA-4228-DR-LA, at 3 (Nov. 28, 2017); PA Guide, at 29.

[18] Id., at 32.

[19] PA Guide, at 33.

[20] Title 44 Code of Federal Regulations (44 C.F.R.) § 206.204(e)(1).

[21]44 C.F.R.§ 206.204(e)(2).

[22] Id.

[23]  PA Guide, at 33.

[24] 44 C.F.R. § 13.30(c)(2), (d)(1), (f); PA Guide, at 139.

[25] FEMA Second Appeal Analysis, City of Columbia, FEMA-4241-DR-SC, at 3 (Sept. 16, 2020); see also

44 C.F.R. § 13.43(a) (listing enforcement remedies for noncompliance).

[26] FEMA Disaster Assistance Policy 9525.9 – Section 324, Management Costs and Direct Administrative Costs (DAP 9525.9), at 1 (Mar. 12, 2008).

[27] Id., at 5.

[28] 44 C.F.R. § 13.36(c).

[29] 44 C.F.R. § 13.36(d)(4).

[30] 44 C.F.R. § 13.36 (d)(4)(ii).

[31] 44 C.F.R. §13.36 (b)(9); FEMA Second Appeal Analysis, City of Pierre, FEMA-1984-DR-SD, at 12

 (May 27, 2015) (noting that “while it may be infeasible in the short-term to pursue a competitive procurement process in light of an emergency that does not permit delay[,] it may be possible and practicable for the local government to proceed with a competitive procurement to transition the work into a contract that meets the full and open competition requirements of 44 C.F.R. § 13.36”).

[32] 44 C.F.R. §13.43(1).

[33] Submitted contractor invoices were dated from October 17, 2008 - June 12, 2013 for repairs; from May 14, 2010 – August 13, 2010 for mold remediation; and December 1, 2008 – September 30, 2011 for DAC.

[34] Robert T. Stafford Disaster Relief and Emergency Assistance Act § 705(c), 42 U.S.C. § 5205(c) (2006).

[35] FEMA Recovery Policy FP-205-081-2, Stafford Act Section 705, Disaster Grant Closeout Procedures, at 5

(Mar. 31, 2016); FEMA Second Appeal Analysis, Columbus Reg’l. Hosp., FEMA-1766-DR-IN, at 10- 11

(Dec. 27, 2017).

[36] 44 C.F.R. § 13.30(d)(1).

[37] 44 C.F.R. § 206.206(a); FEMA Second Appeal Analysis, Port Arthur Indep. Sch. Dist., FEMA-1791-DR-TX, at 3 (June 21, 2018).