Direct Administrative Costs & Management Costs – Project Management and Design Services – Insurance

Appeal Brief Appeal Letter Appeal Analysis

Appeal Brief

Disaster	4286
Applicant	South Island Public Service District
Appeal Type	Second
PA ID#	013-UTF1Z-00
PW ID#	PW 1124
Date Signed	2020-09-16T16:00:00

Summary Paragraph

During October 4 through 30, 2016, Hurricane Matthew caused damage to the South Island Public Service District’s (Applicant’s) facilities, including facilities dedicated to water and wastewater treatment, collection, and delivery, which were documented in Project Worksheet (PW) 1124 for multiple sites.  In PW 1124, the Applicant requested $190,962.40 in Public Assistance (PA) funding, including $133,365.40 in repair costs, $9,989.94 in Force Account Labor (FAL) Direct Administrative Costs (DAC), and $47,607.66 in contract costs from CH2M HILL Engineers, Inc. (CH2M) for work documented on invoices as “engineering services.”  FEMA denied all CH2M costs, finding that the repairs were minor and therefore did not warrant engineering and design services.  FEMA also found some DAC to be excessive and took an anticipated insurance proceed reduction, bringing total project costs to $7,735.54.  The Applicant appealed the DAC denial and a portion of FEMA’s insurance reduction based on actual proceeds being lower than anticipated, and it justified its contract costs by explaining that CH2M’s services were not limited exclusively to engineering and design services, but also included consulting services such as project management (PM), construction observation, document management, coordination with FEMA and the South Carolina Emergency Management Division, and efforts to pursue the insurance claims from its insurer.  In a Request for Information, FEMA asked the Applicant to: distinguish CH2M’s costs incurred for DAC, from those incurred for engineering and design and insurance claim support; provide documentation and explanation of time and expenses for CH2M and the applicant on a per site basis; demonstrate that all claimed costs were presented to its insurer; and provide its insurer’s response.  The Applicant responded but did not provide documentation distinguishing between CH2M’s costs, did not show it presented all costs to its insurers, and did not provide a response from the insurer explaining the denial.  In a first appeal decision, FEMA granted all FAL DAC, but continued to find CH2M’s costs ineligible, as engineering and design services were not warranted, costs were not clearly separated between DAC, insurance claim support, and engineering and design services; and DAC was not reasonable or attributed to one PW.  FEMA also awarded additional funding for repair costs not covered by insurance, but maintained a reduction of $36,383.84 for costs covered by the insurance policy.  On second appeal, the Applicant now characterizes CH2M’s costs as DAC, but continues to tie costs to insurance claim support and continues to request reimbursement for repairs not covered by insurance.

Authorities and Second Appeals

• Stafford Act § 312.
• 44 C.F.R. § 206.250(c).
• PAPPG, at 21, 36-37, 39.
• Cameron Parish Sch. Bd., FEMA-1607-DR-LA, at 3-4.

Headnotes

• Administrative costs related to managing the PA Program and PA projects, if tracked, charged, and accounted for directly to a specific eligible project, are eligible as DAC.
• PM activities, such as procurement, document review, and construction oversight, are eligible provided the activities are tracked and directly related to a specific, eligible project.  Engineering and design services and construction inspection are also eligible provided the services are necessary. 
• To be eligible, all costs must be adequately documented and reasonable.
  • The Applicant provided inconsistent descriptions of its contractor’s services and did not separately identify or distinguish DAC from engineering and design, PM, or insurance claim support costs.
• FEMA reduces eligible costs by actual or anticipated insurance proceeds and requires applicants to make reasonable efforts to recover insurance proceeds they are entitled to receive.
  • The Applicant did not explain why repair expenses were not covered by insurance or demonstrate that it made reasonable efforts to receive proceeds to which it was entitled.

Conclusion

The Applicant has not separately identified or distinguished DAC from engineering and design, PM, or insurance claim support costs.  The Applicant also has not shown that additional insurance proceeds are unavailable.  Therefore, the Applicant has not demonstrated its contractor’s costs are reasonable or otherwise eligible as DAC and has not demonstrated that FEMA’s insurance reductions were improper. 

 

Appeal Letter

Appeal Analysis

Background

During October 4 through 30, 2016, severe high winds, rain, power outages, high water tides, and flooding from Hurricane Matthew caused damage to the South Island Public Service District’s (Applicant’s) facilities.  FEMA prepared Project Worksheet (PW) 1124 to document damages to multiple facilities on a per site basis – including their equipment, structures, and appurtenances – dedicated to water treatment, storage, and delivery; wastewater collection and treatment; and reclaimed water storage and distribution.  The Applicant requested $190,962.40 in Public Assistance (PA) funding, including $133,364.80 in repair costs, $9,989.94 in Force Account Labor (FAL) Direct Administrative Costs (DAC), and $47,607.66 in contract costs from CH2M HILL Engineers, Inc. (CH2M) for work documented on invoices as “engineering services.”[1]

In a determination memorandum, FEMA approved costs for repairs as eligible, but denied all contract engineering costs from CH2M, finding that the repairs were minor and therefore did not warrant engineering and design services.  FEMA also determined that $3,254.40 in excess DAC was ineligible; and deducted $132,364.80 to avoid duplicating anticipated insurance proceeds, bringing total project costs to $7,735.54.

 

First Appeal

In a first appeal dated November 6, 2018, and transmitted by the South Carolina Emergency Management Division (Grantee) on November 19, 2018, the Applicant contested FEMA’s denial of $47,607.66 for CH2M’s contract costs and $3,254.40 in FAL DAC.  The Applicant also appealed a portion of FEMA’s insurance reduction totaling $57,838.04.  In an attached letter, the Applicant explained that the services provided by CH2M “were not limited exclusively to engineering design services, but included an array of disaster-related consulting services such as project management [(PM)], damage assessment, construction observation, document management, preparation of correspondence, staff augmentation, and coordination” with FEMA, the Grantee, and its insurance carrier.[2]  It also explained that a significant portion of CH2M’s costs represented necessary efforts to pursue the Applicant’s insurance claims from its insurer, and these costs may offset insurance reductions according to FEMA policy.  The Applicant next contended that any excessive DAC was due to excessive and redundant documentation demands from FEMA.  Finally, the Applicant stated that FEMA’s anticipated insurance reduction was based on estimates that did not reflect the actual insurance proceeds documented in Proof of Loss statements and comprehensive spreadsheet tables provided by the Applicant.

On June 6, 2019, FEMA issued a Request for Information (RFI) raising concerns about engineering and design and DAC work descriptions and asking that the Applicant: clarify and distinguish between CH2M’s engineering and design, DAC, and insurance claim support costs; provide explanation and justification for the Applicant’s decision to contract an engineering firm to complete engineering and design, DAC, and insurance claim support; and provide additional clarification on DAC activities performed.  FEMA also requested that the Applicant provide the most current insurance statement of loss, supplements or settlements relevant to the project, and the insurance adjuster’s final estimates/settlement.  Finally, FEMA requested that the Applicant explain whether all costs incurred on a per site basis were presented to the insurance carrier for coverage and reimbursement and provide the insurance carrier’s response.

In emails dated August 2 and 6, 2019, the Applicant and its engineer provided more detailed explanation of specific DAC activities questioned in the RFI, and explained that the Applicant did not have engineers on staff to design and plan major projects or repairs, and did not have the staff or expertise to navigate the complicated process of filing claims with FEMA, the Grantee, and insurance companies, which is why it engaged CH2M for these tasks.  The Applicant did not respond directly to FEMA’s request to distinguish between CH2M’s engineering and design, DAC, and insurance claim support costs.  Additionally, while the Applicant’s engineer noted that the Applicant had already submitted the most current version of its statement of loss to FEMA with accompanying spreadsheets, the Applicant did not respond to FEMA’s request for an insurance adjuster’s final estimate/settlement, it did not explain whether all incurred costs were presented to the insurance carrier, and it did not provide any response from the insurer explaining the reason for denial.  The RFI response also requested that additional documentation and email correspondence be added to the administrative record.

On November 22, 2019, FEMA Region IV’s Regional Administrator (RA) issued a decision partially granting the Applicant’s first appeal but denying the majority of appealed costs.  The RA found all FAL DAC to be eligible, as the Applicant had sufficiently explained DAC tasks performed by its FAL staff.  However, the RA found that engineering and design services were not warranted for the type of minor repair work performed, including roof shingle, flashing, eave, and fence repairs, and pump and circuit breaker replacement.  In addition, the Applicant did not clarify which of CH2M’s costs were for engineering and design, DAC, or insurance claim support as FEMA had requested.  Were the costs to be claimed as DAC, the RA found they would still be ineligible as they appeared unreasonable and could not be solely attributed to a single PW.  Next, after reviewing the insurance documentation provided, FEMA determined that costs in five segments of the statement of loss were covered under the Applicant’s insurance policy and that there were still additional remaining anticipated insurance proceeds totaling $36,383.84, but that for remaining segments the settlement was properly adjusted, or coverage did not exist.  Therefore, FEMA awarded an additional $21,454.20 to reflect actual insurance proceeds being lower than anticipated based on the Applicant’s statement of loss.  Finally, FEMA incorporated the requested email correspondence into the administrative record but noted the Applicant did not explain how any additional documentation should be applied in support of the appeal.

 

Second Appeal

The Applicant submitted a second appeal dated January 15, 2020, and transmitted by the Grantee by letter dated March 13, 2020, requesting $83,991.50 for PW 1124, including $47,607.66 for CH2M’s services and $36,383.84 for repairs not covered by insurance.  The Applicant now characterizes CH2M’s costs as DAC, incurred as a result of FEMA’s and the Applicant’s  insurer’s extensive documentation requirements.  It also continues to cite policy allowing FEMA to offset insurance reductions with the Applicant’s costs to pursue claims to recover insurance proceeds.  The Applicant further states that CH2M’s costs are documented in the same format as the FAL DAC that FEMA approved.  The Applicant lastly reiterates that the statement of loss it provided was its final settlement, demonstrating repairs were not covered by insurance.

 

Discussion

Direct Administrative Costs & Management Costs

FEMA provides PA funding for administrative costs related to managing the PA Program and PA projects.[3]  If an applicant tracks, charges, and accounts for these costs directly to a specific eligible project, the costs are eligible as DAC.[4]  Separately, PM activities, such as procurement, document review, and construction oversight, are eligible provided the activities are tracked and directly related to a specific, eligible project.  Engineering and design services and construction inspection are also eligible provided the services are necessary to complete eligible work.  When evaluating the eligibility of PM and engineering and design services, FEMA considers numerous factors, including project complexities and unexpected site conditions.[5]  In addition, if an applicant expends costs to pursue an insurance claim, FEMA offsets its insurance reductions (which are applied to avoid a duplication of benefits) with the applicant’s reasonable costs to pursue its claim.[6]  To be eligible, all costs must be adequately documented and reasonable.[7]

The Applicant requests reimbursement for services provided by its contractor CH2M.  However, the Applicant has offered inconsistent descriptions of CH2M’s services throughout the appeal process.  On second appeal, the Applicant claims CH2M’s costs as DAC.  However, in the invoices and spreadsheets submitted in support of its request, the costs are characterized as pertaining to engineering services.  On first appeal, the Applicant clarified that the costs were not “limited exclusively to engineering design services,” but also included disaster-related consulting services such as PM, construction observation, and document management.[8]  The Applicant also maintained that a significant portion of CH2M’s costs represented efforts to pursue the Applicant’s insurance claims from its insurer, and it continues to tie its request on second appeal to those efforts.[9] 

FEMA policy distinguishes between DAC, costs for PM and engineering and design, and an Applicant’s costs to pursue insurance claims, and outlines separate eligibility considerations for each of these costs.[10]  For example, FEMA determined that no engineering and design services were eligible because the complexity of repairs were minor, but that some DAC was eligible for this PW.  FEMA therefore asked the Applicant to separately identify the costs for CH2M’s various services to determine eligibility.  However, the Applicant did not respond to this specific request and did not separately identify or distinguish DAC from engineering and design, PM, or insurance claim support costs, so FEMA cannot determine which of these costs are reasonable or otherwise eligible.  Therefore, the Applicant has not demonstrated the costs are eligible as DAC.

 

Insurance

Section 312 of the Stafford Act prohibits FEMA from duplicating benefits from other sources, including insurance.[11]  FEMA therefore reduces otherwise eligible costs by actual and anticipated insurance proceeds, and requires applicants to make reasonable efforts to recover insurance proceeds that they are entitled to receive.[12]

The administrative record includes the Applicant’s insurance policy and a statement of loss from its insurer, with attached supplements, that the Applicant claims is final.  This documentation shows that the Applicant received lower than anticipated proceeds for several sites on appeal.  However, it also indicates that coverage was available and that the Applicant’s repair costs were below the policy limits for those sites.[13]  For at least one site on appeal, the documentation further indicates that the Applicant received higher than anticipated proceeds from its insurer.[14] 

The Applicant did not respond to FEMA’s RFI to explain whether all costs were presented to the insurer, and if so, to provide the insurer’s response.  The Applicant also did not respond to FEMA’s RFI to provide the final adjuster’s estimates or settlement.  The insurance documents that the Applicant did provide do not show the amounts claimed by the Applicant and instead only show the payments made by the insurer.  If the costs on appeal were in fact presented to the insurer, the Applicant did not provide FEMA with an explanation for why they were denied, did not demonstrate that it questioned the settlement amounts, and did not provide any further documentation from the insurer to show efforts to maximize insurance proceeds to which the Applicant was entitled.  Therefore, the Applicant did not adequately explain why certain repair expenses were not covered by insurance or demonstrate that it made reasonable efforts to receive proceeds to which it was entitled.  Accordingly, FEMA finds that it properly applied insurance reductions for anticipated proceeds.

 

Conclusion

The Applicant has not separately identified or distinguished DAC from engineering and design, PM, or insurance claim support costs.  The Applicant also has not shown that additional insurance proceeds are unavailable.  Therefore, the Applicant has not demonstrated its contractor’s costs are reasonable or otherwise eligible as DAC and has not demonstrated that FEMA’s insurance reductions were improper.  As such, the Applicant’s se

 

[1] Invoices from CH2M Hill Engineers, Inc., Engineering Services for Hurricane Matthew Recovery Support for South Island Public Service District (Jan. 31, 2017 & Sept. 15, 2017) [Doc. Nos. 7-8 in Admin. Record Index].

[2] Letter from Fin. Dir., S. Island Pub. Serv. Dist. (Applicant), to Employee, S.C. Emergency Mgmt. Div. (Grantee), at 1-2 (Aug. 20, 2018).

[3] Public Assistance Program and Policy Guide, FP-104-009-2, at 36 (Jan. 1, 2016) [hereinafter PAPPG] (citing Robert T. Stafford Disaster Relief and Emergency Assistance (Stafford) Act § 324, 42 U.S.C. § 5165b (2012)).

[4] PAPPG, at 37.

[5] Id., at 36.

[6] Title 44 Code of Federal Regulations § 206.250(c) (2006); PAPPG, at 39.

[7] PAPPG, at 21.

[8] Letter from Fin. Dir., Applicant, to Employee, Grantee, at 1-2 (Aug. 20, 2018) (emphasis added).

[9] Id.; Letter from Fin. Dir., Applicant, to Dir., Grantee (Jan. 15, 2018).

[10] See PAPPG, at 21, 36-37, 39; see also FEMA Second Appeal Analysis, Cameron Parish Sch. Bd., FEMA-1607-DR-LA, at 3-4 (Dec. 16, 2019) (noting that FEMA guidance clearly distinguishes between DAC activities carried out to support the request for federal assistance and PM activities, such as oversight of an eligible project from the design phase to the completion of work).

[11] Stafford Act § 312, 42 U.S.C. § 5155 (2012); 44 C.F.R. § 206.250(c).

[12] 44 C.F.R. § 206.250(c); PAPPG, at 39; Recovery Policy FP 206-086-1, Public Assistance Policy on Insurance, at 9 (June 29, 2015).

[13] Compare Project Worksheet 1124, S. Island Pub. Serv. Dist., Version 0 (Aug. 31, 2019), with State Fiscal Accountability Auth. Ins. Reserve Fund, Common Policy Declarations, at 5-12 (Dec. 14, 2015) (showing policy limits on a per site basis greater than the eligible damages documented in PW 1124 for those same sites).

[14] The Applicant received a combined total of $24,447.99 in actual proceeds for Segment # 871 across two separate Proof of Loss statements, the first issued on Sept. 20, 2017 ($12,767.99) and the second issued on Nov. 13, 2017 ($11,680.00), which was more than the $24,293.40 in eligible repair costs for that segment.  See State Fiscal Accountability Auth. Ins. Reserve Fund, Proof of Loss # 0085752, at 2 (Sept. 20, 2017), and State Fiscal Accountability Auth. Ins. Reserve Fund, Proof of Loss # 0088509, at 1 (Nov. 13, 2017).