Contract Administration

Appeal Brief

Summary Paragraph

Between August 29 and October 14, 2005, storm surge and flooding from Hurricane Katrina damaged a large portion of the sewer collection system in the City of Waveland, Mississippi (Applicant).  FEMA prepared Project Worksheet (PW) 4916 for costs associated with replacing the Applicant’s sewer collection system, and PW 4917 for related architectural and engineering (A/E) costs.  As a result of a complaint received in 2011 regarding the Applicant’s project, the Office of Inspector General (OIG) for the Department of Homeland Security conducted an audit of PW 4916 and PW 4917, issuing a report on April 15, 2014.  The OIG recommended that FEMA deobligate $1,419,000.00 from PW 4916, finding that by not monitoring its contract adequately, the Applicant had allowed the contractor to bill more tanks than the contract’s two-per-dwelling limit.  FEMA concurred with the OIG’s findings, but not with the quantity of improperly billed tanks.  As a result, FEMA deobligated $1,370,215.00 from PW 4916, and $43,022.00 from PW 4917 for a proportional reduction in A/E costs.  In its first appeal, the Applicant argued that the costs were reasonable because FEMA allowed the project to proceed through closeout.  In the alternative, the Applicant argued that FEMA should grant an exception under 44 C.F.R. § 13.6 because it acted in good faith.  The Grantee forwarded the Applicant’s appeal, echoing the Applicant’s argument that FEMA should grant an exception under 44 C.F.R. § 13.6.  In addition, the Grantee argued that the OIG may have miscalculated the number of improperly billed tanks.  Region IV issued a Final Request for Information asking the Applicant to provide information showing why FEMA should grant an exception.  In its response, the Grantee stated that the exception applied to all of Part 13, and therefore, FEMA had the authority to grant an exception in this case.  Region IV issued its first appeal determination on August 18, 2017, denying the Applicant’s appeal.  The Regional Administrator (RA) found that contrary to the requirements of 44 C.F.R. § 13.30(d)(1), the Applicant had changed the scope of work without prior approval from FEMA.  In addition, the RA found that granting an exception under 44 C.F.R. § 13.6(c) was not appropriate, given that the Applicant was responsible for ensuring the costs corresponded to the contract’s terms under 44 C.F.R. § 13.36(b).  On second appeal, the Applicant renews its first appeal arguments and also contends that FEMA was aware of the changes to the scope of work.    

Authorities and Second Appeals

• 44 C.F.R. §§ 13.6, 13.36, 13.52.
   

Headnotes

• Per 44 C.F.R. § 13.36(b)(2), applicants and grantees must maintain a contract administration system to ensure that contractors adhere to the terms, conditions, and specifications of their contracts and purchase orders.
  • The RA properly determined that the Applicant did not maintain its contract administration system properly, which led to its Contractor’s overbilling and unreasonable project costs.
• FEMA may grant exceptions to procurement requirements under 44 C.F.R. § 13.6(c) on a case-by-case basis.    
  • Neither the Applicant nor the Grantee have demonstrated that FEMA should grant an exception in this case, where the Applicant did not monitor its contract appropriately, leading to deobligation of funding in an OIG audit.

Conclusion

The Applicant failed to maintain an adequate contract administration system and has not provided justification for an exception to this procurement requirement.  Accordingly, FEMA is denying the second appeal.

Appeal Letter

Appeal Analysis

Background

Between August 29 and October 14, 2005, storm surge and flooding from Hurricane Katrina damaged a large portion of the sewer collection system in the City of Waveland, Mississippi (Applicant).  FEMA prepared Project Worksheet (PW) 4916 for costs associated with replacing the Applicant’s sewer collection system.[1]  In addition, FEMA prepared PW 4917 to reimburse architectural and engineering (A/E) costs associated with PW 4916.[2]  The scope of work (SOW) in PW 4916 included replacing the sewer collection system and constructing a temporary sewer system to function in the interim.[3]  Part of the work for the temporary sewer system included installing above-ground bladder tanks at temporary dwellings.[4] 

The Applicant contracted with Hemphill Construction Co. (Contractor) for the construction of the permanent and temporary sewer systems.  In addition, Digital Engineering (Engineer) provided the A/E services for the Applicant.  The Applicant and the Contractor entered into two separate contracts to complete the project, Phase I and Phase II.  Included within the unit price of the bladder tanks in the initial bid were costs for pumps and other items associated with installation and performance of the bladder tanks.[5]  The project also limited the amount of bladder tanks to two bladder tanks per inhabited dwelling.[6]   Phase I originally called for 150 bladder tanks at $3,000.00 per unit, totaling $450,000.00, while Phase II originally called for 550 bladder tanks at $1,000.00 per unit, totaling $550,000.00.  

Due to the large nature of the project, FEMA issued several versions of the PWs to address approved scope changes and cost variances.  In PW 4916 Version 3, FEMA noted that the Applicant requested an additional 1,145 bladder tanks at the Phase I price of $3,000.00 per unit.[7]  FEMA concurred with the request, which resulted in a total of 1,845 bladder tanks (1,295 bladder tanks in Phase I and 550 bladder tanks in Phase II) costing $3,435,000.00.[8]  In addition to the changes referenced in PW 4916 Version 3, the Applicant, Contractor, and Engineer entered into multiple change orders that FEMA referenced in subsequent versions.  Change order #4 noted the additional 1,145 tanks installed through February 2008 in Phase I (approved in PW 4916 Version 3), and also noted that an additional 426 tanks were installed for Phase II.  This change order stated that the additional tanks were necessary because the large number of slab-on-grade homes being installed was not anticipated at the time the contract was bid.  Change order #6 noted an additional 22 tanks for Phase I, bringing the final Phase I quantity to 1,317 tanks. 

In PW 4916 Version 5, FEMA’s Cost Estimate Sheet (CES) listed the estimated amounts and costs for both phases of the project, and the CES referenced change orders #4 and #6.[9]  The total estimate for tanks in the CES included 2,293 bladder tanks, totaling $4,927,000.00.[10] 

In addition to the change orders and various versions of the PWs, the Applicant and the Contractor also entered into Field Order #3 for Phase I to provide for installation of underground pumps.[11]  Field Order #3 noted that at the time of signing the contract, the parties did not contemplate the large number of slab-on-grade residences that would be constructed in the wake of Hurricane Katrina.  These permanent dwellings were incompatible with above-ground bladder tanks, and as a result, underground pumping units that would connect to the above-ground tanks were required instead.[12]  The underground pumping units were distinct from the pumps included in the unit price for the bladder tanks in the contract.[13]  Due to this unforeseen need, the Applicant, Contractor, and Engineer agreed that the underground pumps would be billed as bladder tanks for purposes of payment.[14]  The Applicant, Contractor, and Engineer also entered into a corresponding Field Order #3 for Phase II of the project.[15] 

As a result of a complaint received in 2011 regarding the Applicant’s project, the Office of Inspector General (OIG) for the Department of Homeland Security conducted an audit of PWs 4916 and PW 4917, issuing a report on April 15, 2014 (OIG Report).[16]  The OIG found that the Contractor improperly charged the installation of 379 underground pumps as bladder tanks, totaling $811,000.00.[17]  In addition, the OIG concluded that the Contractor billed the Applicant for 290 more bladder tanks than the contract allowed, as the amount billed for (1,914) exceeded the contracted limit of two bladder tanks per inhabited dwelling (1,624).  These additional tanks totaled $608,000.00.  The OIG recommended that FEMA deobligate $1,419,000.00 from PW 4916, finding that by not monitoring its contract adequately, the Applicant had allowed the contractor to bill unreasonable project costs that went beyond the terms of the contract.[18]   

FEMA issued a Corrective Action Plan (CAP) in response to the OIG Report on October 30, 2014.[19]  In the CAP, FEMA concurred with the OIG’s findings regarding the Contractor’s improper billing of tanks and pumps, but FEMA determined that fewer tanks were charged improperly.  As a result, FEMA deobligated a lesser amount of $1,370,215.00, which was reflected in PW 4916, Version 8.  FEMA also deobligated $43,022.00 in PW 4917, Version 6, for a proportional reduction in A/E costs.  The Grantee notified the Applicant of the deobligation via a Final Adjustment Package on January 7, 2015.[20]   

First Appeal

The Applicant submitted its first appeal by letter dated March 6, 2015, contending that the costs were reasonable given that FEMA allowed the project to proceed through closeout.[21]  However, the Applicant argued that even if FEMA found the costs were unreasonable, FEMA should grant an exception under 44 C.F.R. § 13.6 because the Applicant acted in good faith by alerting the OIG to the billing errors discovered during the Applicant’s internal audit, and that applicants may be less inclined to report contractors’ improper actions if FEMA penalized the Applicant in this case.  In addition, the Applicant argued that under 44 C.F.R. § 13.52(a), FEMA could sue the Contractor instead of recovering funding from the Applicant.  Finally, the Applicant argued that the OIG erred in finding that the Applicant’s contract administration led to the billing issues because the OIG did not assess the Applicant’s internal controls.

The Grantee forwarded the Applicant’s appeal, echoing the Applicant’s argument that FEMA should grant an exception under 44 C.F.R. § 13.6 because the Applicant had acted in good faith.  In addition, the Grantee argued that the OIG had miscalculated the number of additional bladder tanks because it assumed that a street address represented a single dwelling, when it was possible that multiple temporary dwellings were located at one address.[22]  The Grantee also argued that the Applicant and Contractor had entered into change orders to address the uncontemplated increase in bladder tanks and that FEMA approved these changes.  Finally, the Grantee disputed the OIG’s finding that 379 pumps were billed in addition to being included in the cost for bladder tanks, because the installed pumps were distinct from those included in the contract.  According to the Grantee, these pumps became necessary due to the unforeseen increase in the construction of permanent dwellings.[23] 

Region IV issued a Final Request for Information (Final RFI), asking the Applicant to provide information showing why FEMA should grant the Applicant an exception under 44 C.F.R. § 13.6.[24]  In its response, the Grantee stated that the exception applied to all of Part 13, and therefore, FEMA had the authority to grant an exception to the requirement in section 13.36(b)(2).[25]  The Applicant did not respond to the Final RFI.

Region IV issued its first appeal decision on August 18, 2017, denying the Applicant’s appeal.  The Regional Administrator (RA) found that contrary to the requirements of 44 C.F.R. § 13.30(d)(1), the Applicant had changed the scope of work without prior approval from FEMA.[26]  In addition, the RA found that granting an exception under 44 C.F.R. § 13.6(c) was not appropriate, given that the Applicant was responsible for ensuring the costs corresponded to the contract’s terms under 44 C.F.R. § 13.36(b) and that the Applicant could have easily discovered the billing issue early on had it carefully reviewed the Contractor’s billed charges.[27]  The RA also found that because it was the Applicant’s responsibility to enforce the contract, it was not appropriate for FEMA to recoup the funds from the Contractor under 44 C.F.R. § 13.52(a).[28]  Finally, the RA denied the Applicant’s request for a proportional increase in funding for PW 4917’s A/E costs, given that FEMA was denying the Applicant’s request for additional funding in PW 4916.[29]

Second Appeal

In its second appeal dated October 17, 2017, the Applicant renews the arguments it made on first appeal.[30]  In addition, the Applicant notes that FEMA did not make the Applicant aware of any scope of work issues under 44 C.F.R. § 13.30 in the Final RFI, and that it was not until the first appeal decision letter that it learned that anything other than 44 C.F.R. § 13.6 was a possible basis for denial.[31]  To respond to FEMA’s scope of work finding made on first appeal, the Applicant argues that the bladder tanks were within the scope of work that FEMA had approved, and that FEMA also found the costs reasonable because the project proceeded through closeout.

The Grantee forwarded the Applicant’s second appeal by letter dated December 8, 2017.[32]  The Grantee argues that the scope and objective of the project never changed but additional tanks and pumps were necessary for project completion, and thus, the Grantee and Applicant did not need approval from FEMA prior to installing the pumps and additional tanks.  The Grantee also contends that language in the Public Assistance Guide does not require that Applicants and Grantees obtain prior approval for scope changes, and thus, FEMA could still approve the work completed.[33]  Moreover, the Grantee contends that FEMA had approved every increase in the amount of bladder tanks.  Regarding the installation of the underground pumps that were billed as additional bladder tanks, the Grantee states that the Applicant’s decision to enter into Field Order #3, “while not ideal, appear[ed] reasonable under the difficult prevailing circumstances.”[34] 

Discussion

Contract Administration

Part 13 of Title 44 Code of Federal Regulations “establishes uniform administrative rules for Federal grants and cooperative agreements and subawards to State, local, and Indian tribal governments.”[35]  These rules provide that applicants and grantees “will maintain a contract administration system which ensures that contractors perform in accordance with the terms, conditions, and specifications of their contracts or purchase orders.”[36]  FEMA may provide exceptions to these rules on a case-by-case basis.[37]  If FEMA makes a final determination reducing the amount of an award paid to a grantee, FEMA may recover the funds by “[m]aking an administrative offset against other requests for reimbursements, [w]ithholding advance payments otherwise due to the grantee, or [o]ther action permitted by law.”[38]  However, applicants and grantees are responsible for resolving settlement of contractual or administrative disputes that arise from procurements.[39]  In addition, applicants must substantiate their arguments and explain how documentation supports their appeals.[40] 

The Applicant argues that the costs FEMA deobligated were reasonable, and in the alternative, that even if the costs were unreasonable, FEMA should recover the funds from the Contractor because the Applicant acted in good faith by reporting the issue to the OIG.  In addition, the Applicant argues that the OIG’s finding on contract administration was in error, given that the OIG did not assess the Applicant’s internal controls.  While the Applicant may have reported the billing issues to the OIG, the Applicant did not discover the billing errors until a year past closeout, during the Applicant’s internal audit.  Moreover, the regulations do not require the OIG to assess an applicant’s internal controls prior to making such a finding, and the Applicant’s controls clearly were not adequate given that that the Contractor did not perform in accordance with the terms, conditions, and specifications of the contract.  What is more, the Applicant has to substantiate its claims on appeal, [41] but has presented no evidence to support its argument that its internal controls were sufficient. 

The Grantee also argues that in reaching its finding, the OIG miscalculated the number of additional bladder tanks because the OIG assumed that a street address represented a single dwelling, when it was possible that multiple temporary dwellings were located at one address.[42]  Although the Grantee states that this was a possibility, neither the Grantee nor the Applicant have provided any evidence to support that proposition.  Both the Applicant and the Grantee also contend that there was no improper administration of the contract because the underground pumps that were installed were distinct from the pumps that were included in the contract, and were only installed due to the unforeseen rise in construction of permanent dwellings.  However, this argument, even if accurate, establishes that the underground pumping units were not billed according to the contract, and the Grantee itself conceded that the Applicant’s decision to allow billing the underground units as bladder tanks was “not ideal.”[43] 

As the OIG determined, these overbilled costs were unreasonable, and moreover, the purpose of the grant was not accomplished due to the Applicant’s contract administration failure.  Although FEMA may grant exceptions to procurement requirements on a case-by-case basis, neither the Applicant nor the Grantee have presented justification for such an exception other than the Applicant’s good faith argument.  Thus, FEMA was justified in not granting an exception in this case.

Finally, the Applicant argues that because FEMA may take any lawful action to recover funds, it should recover funds from the Contractor instead of from the Applicant.[44]  However, the Applicant is required to monitor administration of its contract, and is solely responsible for settling any disputes with its Contractor.  Thus, it is not appropriate for FEMA to pursue recovery from the Contractor.[45]             

Conclusion

The Applicant did not maintain an adequate contract administration system, leading to its Contractor billing excessive costs.  In addition, the Applicant has not presented a basis for FEMA to grant an exception to this procurement requirement.  Accordingly, the second appeal is denied.