Direct Administrative Costs – Project Management Costs

Appeal Brief

Summary

From October 27, 2012, to November 9, 2012, Hurricane Sandy caused damage in the State of New York.  The Applicant hired project management contractors, including Camp Dresser McKee & Smith (CDM Smith), to assist with the administration of multiple Public Assistance (PA) grants.  CDM Smith’s employees often traveled to the Applicant’s jurisdiction and worked on multiple projects during each trip or billing period.  CDM Smith allocated these expenses on a pro rata basis according to the eligible hours worked by a given employee (Expense Allocation Methodology).  In 2015, the Applicant, the New York State Division of Homeland Security and Emergency Services (Grantee), and FEMA agreed to a process that would allow for further review of certain contractor expenses without delaying reimbursement for other work done on the various PWs.  As part of this process, FEMA informed the Applicant by letter dated January 6, 2017 that CDM Smith’s travel expenses associated with direct administrative and project coordination tasks were not eligible for reimbursement as DAC.  Subsequently, the Grantee submitted a Large Project Final Accounting (LPFA) request for each of the PWs.  Following its final inspection of each LPFA, FEMA adjusted the PWs to include DAC that it found the Applicant had substantiated, but denied funding for indirect travel costs in each PW, in accordance with its January 6, 2017 letter.  The Applicant appealed FEMA’s LPFA determinations, arguing that the Expense Allocation Methodology was permissible under the Applicant’s interpretation of applicable regulations and FEMA policy, and that the travel costs so allocated were eligible for reimbursement as either DAC or contract costs.  On first appeal, FEMA Region II’s Regional Administrator (RA) upheld the denial of costs either as DAC or as contract costs.  The Applicant filed second appeals for PW 1853 and PW 4113, reiterating its arguments from its first appeals.   

Authorities and Second Appeals

• Stafford Act § 324
• 2 C.F.R. § 200.110
• 44 C.F.R. §§ 207.2, 207.6
• DAP 9525.9 (Nov. 13, 2007); Memo., DAC Guidance (Sept. 8, 2009);
  DAP 9525.11 (Apr. 22, 2001)
• FEMA-4069-DR-MN, City of Duluth, Mult. PWs, at 5 (June 15, 2015)

Headnotes

• FEMA policy provides that travel expenses related to one specific PW qualify as DAC, while travel expenses “related to general support and not directly tied to one specific project” are indirect costs, and therefore ineligible as DAC.  By extension, expenses allocated to every task for all PWs in proportion to the hours worked on the task are not eligible as DAC. 
  • CDM Smith utilized its Expense Allocation Methodology to divide travel expenses incurred by its employees to benefit multiple PWs across said PWs on a prorated basis.  Accordingly, the costs are not eligible DAC.

Appeal Letter

Appeal Analysis

Background

From October 27, 2012, to November 9, 2012, Hurricane Sandy caused damage throughout the

State of New York.  Nassau County (Applicant) hired project management contractors, including Camp Dresser McKee & Smith (CDM Smith), to assist with the administration of multiple Public Assistance (PA) grants.  CDM Smith’s employees often traveled to the Applicant’s jurisdiction and worked on multiple projects over the course of a day, billing period, and trip.  They also kept records of time spent working on each project task by assigning different codes to different projects, tasks, and categories of tasks. 

Between June 25, 2013 and December 8, 2015, FEMA obligated several Project Worksheets (PWs) to document emergency protective measures and disaster-related repairs.  During the period in which FEMA initially obligated these PWs, the Applicant, the New York State Division of Homeland Security and Emergency Services (Grantee), and FEMA met and discussed the division of certain CDM Smith disaster consulting work into the following three categories: (1) Direct Administrative Costs (DAC), (2) project management, and (3) project coordination.  During administration of the projects, CDM Smith utilized a methodology to allocate travel expenses across multiple projects (Expense Allocation Methodology), described in a Memorandum dated January 8, 2013 (Expense Analysis Memo).[1]  Specifically, CDM Smith calculated an hourly travel expense rate for each of its employees per billing period by dividing the employee’s total travel expenses by the total number of hours the employee worked on Applicant-related projects during the billing period.^[2]  CDM Smith then multiplied an employee’s travel expense rate for the billing period by the number of hours billed to a specific task by that employee, in order to allocate travel expenses to each project on a pro rata basis.^[3]

Between June 28, 2017 and February 7, 2018, the Grantee submitted to FEMA the Applicant’s Large Project Final Accounting (LPFA) for the PWs (LPFA Requests).  Prior to these submissions, however, FEMA had informed the Applicant by letter dated January 6, 2017 (DAC Determination Memo) that CDM Smith’s travel expenses associated with direct administrative and project coordination tasks were indirect costs, and not eligible for reimbursement as DAC.[4]  This determination rested on FEMA Disaster Assistance Policy (DAP) 9525.9, Section 324 Management Costs and Direct Administrative Costs, issued on November 13, 2007 and the Memorandum from the Assistant Administrator, Disaster Assistance Directorate dated September 8, 2009, ^[5] (DAC Guidance).   Between March 12, 2018 and March 20, 2018, following its final inspection of the LPFA Requests, FEMA applied the DAC Determination Memo to each PW and denied funding for the types of travel costs that it had previously found to be indirect costs, as those indirect costs were ineligible for reimbursement as DAC or as contract costs.[6]   

Table of Eligible Costs and Ineligible Travel Expenses by PW

First Appeal

By letters dated between May 11, 2018 and May 24, 2018, the Applicant transmitted its first appeals to the Grantee (Applicant’s First Appeals).[7]  In its first appeal requests, the Applicant argued that costs it was claiming as DAC “directly correspond to the number of labor hours an employee spent working on a specific project,”^[8] per the Expense Allocation Methodology described in the Expense Analysis Memo.  The Applicant also argued that it would have been unreasonable to restrict CDM Smith’s employees to a single PW over the course of a given trip.

The Applicant claimed that Section 207.6 (c) of Title 44 of the Code of Federal Regulations (44 C.F.R.), read in conjunction with DAP 9525.9, allows applicants to claim, as DAC, those costs which can be “identified separately and assigned to a specific project… if such costs can be and are attributed to individual projects.”[9]  The Applicant supported this argument by pointing to a pair of U.S. Office of Management and Budget (OMB) regulations, which encourage applicants to allocate “reasonable costs”[10] among multiple projects, if said costs benefit two or more projects “in proportions that can be determined without undue effort or cost.”[11]  The Applicant also provided meeting notes, email correspondence, and various memoranda, and in a supplemental narrative, stated that the “Project Coordination” category of work was the creation of FEMA, in order to capture certain expenses from CDM Smith’s employees as contract costs, rather than DAC.[12]   In this supplemental narrative, the Applicant also explained that it had allocated all of CDM Smith’s travel expenses in accordance with the Expense Allocation Methodology, including DAC travel costs and Project Coordination travel costs.  The Applicant stated it believed that, since project coordination and project management were both contract costs, travel expenses assigned to these categories should also be eligible for PA funding as contract costs.  In support, the Applicant relied on a provision in FEMA’s Public Assistance Guide [hereinafter PA Guide], which allows costs incurred for project supervision and management under a contractor’s Master Service Agreement to qualify as contract costs.^[13] 

Finally, in an attachment containing an undated position paper, the Applicant noted that assignment/allocation of consultant expenses as DAC was a continuing source of contention, and disputed FEMA’s consistent interpretation of DAP 9525.9.[14]  The Applicant claimed that FEMA and the Applicant had agreed that the Applicant would record the expenses associated with “Project Management” and “Project Coordination” tasks as contract costs, rather than DAC.

On May 11, 2018, the Grantee transmitted the Applicant’s First Appeals to FEMA Region II, expressing support for them.

FEMA issued a Final Request for Information (Final RFI) for each of the PWs via letters dated between June 19, 2018 and June 28, 2018.[15]  In each of the Final RFIs, FEMA requested documentation: (1) defining or describing project coordination costs and project coordination travel costs; (2) explaining how project coordination travel costs differ from travel expenses categorized as DAC; and/or (3) supporting the Applicant’s claims that DAP 9525.9 does not apply to the contractor’s project coordination travel costs and/or that such costs should qualify as eligible contract costs.[16]  Neither the Applicant nor the Grantee responded to the Final RFIs.

The FEMA Region II Regional Administrator (RA) denied each of the Applicant’s First Appeals in decisions dated August 20, 2018 (First Appeal Determinations). [17]  The RA found that DAP 9525.9 limits reimbursement for travel costs (as DAC) to those costs that relate to “one specific project.”[18]  The RA also rejected the Applicant’s reliance on Title 2 Code of Federal Regulations (2 C.F.R.) § 200.405, since 2 C.F.R. § 200.110 expressly excludes all disasters declared prior to December 26, 2014 from the allocation principles codified in 2 C.F.R. § 200.405.[19]  Further, the RA found that the Applicant had not substantiated its contention that travel expenses associated with project coordination tasks should be treated as contract costs, since DAP 9525.9 and the DAC Guidance “specifically define[] DAC as including costs associated with the preparation and submission of PWs.”[20]

Second Appeal

The Applicant submitted its second appeals via letters dated October 15, 2018 and reiterated its prior arguments from its first appeals.[21]  By letters dated October 23, 2018, the Grantee transmitted the Applicant’s second appeals to FEMA Region II, supporting them.

Discussion

Direct costs are those that can be “identified separately and assigned to a specific project,” such as staff time to conduct an initial inspection, prepare and submit PWs, and make interim and final inspections of the project.[22]  By contrast, “costs a grantee or subgrantee incurs for a common or joint purpose benefitting more than one cost objective that are not readily assignable to the cost objectives specifically benefitted”[23] are indirect costs.  Travel expenses related to one specific PW qualify as DAC, while travel expenses “related to general support and not directly tied to one specific project” are indirect costs.[24]  Indirect costs are not reimbursable as DAC.[25]  More pertinently, an applicant cannot allocate expenses to every task for all PWs in proportion to the hours worked on the task, and then claim such expenses as DAC.[26]   

Here, the Applicant attempts to claim as DAC and/or contract costs certain travel expenses that its contractors incurred, despite its acknowledgment that CDM Smith’s employees worked on several PWs over the course of each trip at issue.  Specifically, the Applicant seeks pro rata allocations of travel and lodging expenses across multiple PWs, based upon the hours worked on a given PW during the course of a given trip.[27]  The Applicant believes it is entitled to reimbursement for the hourly travel expense rate for a given employee multiplied by the number of hours that employee billed for each PW in a given billing period, since it does not attempt to claim a pro rata share of travel expenses for hours spent on indirect tasks.

As an example, in PW 4113, the Applicant claims a CDM Smith employee spent “234.5 hours performing work on 27 projects which has been individually tracked and documented on CDM Smith’s invoice #3.”[28]  This employee incurred a total of $9,097.10 in travel, lodging, and meal expenses during the period covered by CDM Smith’s invoice #3.  To allocate these expenses, the Applicant first divided the total travel expenses by the hours worked during the invoice period to obtain an hourly expense rate for that period ($38.79/hour).  This CDM Smith employee claimed 5.5 hours of work eligible as DAC (or, in the alternative, as contract costs) during the period covered by invoice #3, and therefore the Applicant seeks reimbursement for $213.36  ($38.79/hour x 5.5 hours) in travel expenses for this employee that it associates with PW 4113.

However, as noted, a pro rata allocation of expenses across every task for all PWs on the basis of hours worked on the task does not make such expenses eligible for reimbursement as DAC.[29]  Since the travel expenses at issue benefitted more than one PW, they are indirect costs.  Accordingly, under DAP 9525.9, the Applicant cannot allocate or otherwise assign such expenses to individual projects as DAC or contract costs.  Such costs are only reimbursable as management expenses under the Applicant’s administrative allowance, if at all.[30]

The Applicant also relies on the indirect cost allocation under 2 C.F.R. § 405(d) in support of its appeal; however, this regulation does not apply to disasters declared before December 26, 2014.[31]

Conclusion

Since the travel expenses at issue benefitted more than one PW, they are indirect costs under DAP 9525.9, and the Applicant cannot allocate or otherwise assign such expenses to individual projects as DAC or as contract costs.  Accordingly, the appeal is denied.