U.S. flag

An official website of the United States government

Dot gov

Official websites use .gov

A .gov website belongs to an official government organization in the United States.

Https

Secure .gov websites use HTTPS

A lock ( ) or https:// means you’ve safely connected to the .gov website. Share sensitive information only on official, secure websites..

OIG Audit, Procurement, 705(c)

Appeal Brief Appeal Letter Appeal Analysis

Appeal Brief

DisasterFEMA-1766
ApplicantColumbus Regional Hospital
Appeal TypeSecond
PA ID#005-UOFZF-00
PW ID#Multiple Project Worksheets
Date Signed2017-12-27T00:00:00
Conclusion: The Applicant failed to comply with 2 C.F.R. Pt. 215 when procuring contracted work following the disaster.  FEMA Region V acted within its authority when de-obligating funding associated with these violations.  Moreover, Stafford Act § 705(c) does not preclude FEMA from recouping the associated grant funds since the purpose of the grant was not accomplished. 
 
Summary Paragraph
The Applicant is a county non-profit hospital located in Bartholomew County, Indiana.  From May 30 to June 27, 2008, the State of Indiana experienced severe storms and flooding which caused damage to the Applicant’s hospital facility.  To address emergency and permanent work required after the disaster, FEMA prepared various Project Worksheets (PWs), including PWs 1530, 1904, 2013, 2014, 2066, 2073, 2184, 2206, 2210, 2348, 2373 and 2374.  In 2013, the DHS OIG issued Audit Report OIG-14-12-D, FEMA Should Recover $10.9 Million of Improper Contracting Costs from Grant Funds Awarded to Columbus Regional Hospital, Columbus, Indiana, after its investigation demonstrated that the Applicant violated numerous procurement requirements prescribed by 2 C.F.R. §§ 215.43, 215.44, 215.45 and 215.48.  The OIG recommended that FEMA deobligate a total of $10,931,981.00 from various PWs.  FEMA concurred with the OIG’s recommendations, but ultimately deobligated $9,612,831.19 due to mathematical discrepancies.  The Applicant appealed FEMA’s decision to deobligate funding based on procurement violations, arguing it was not subject to Federal procurement requirements, the costs were reasonable, and Stafford Act § 705(c) precluded FEMA from deobligating funding notwithstanding the asserted infractions.  The FEMA Region V Regional Administrator (RA) denied the appeal, finding that the Applicant was subject to requirements found in 2 C.F.R. Pt. 215 and failed to comply with Federal procurement regulations.  In addition, applying FEMA Recovery Policy FP-205-081-2, Stafford Act Section 705, Disaster Grant Closeout Procedures, the RA concluded that Section 705(c) did not apply because the purpose of the grant was not accomplished due to the procurement violations.  In the second appeal, the Applicant once again argues that costs should be allowed, regardless of procurement violations, because they are reasonable.  Additionally, the Applicant asserts that, under the plain reading of the provision, this appeal meets all three prongs of Stafford Act § 705(c), and the RA erred in applying FP-205-081-2 retroactively pursuant to Stafford Act § 325. 
 
Authorities and Second Appeals
  • Stafford Act §§ 325 and 705(c).
  • OMB Circular A-110, Uniform Administrative Requirements for Grants and Agreements with Institutions of Higher Education, Hospitals, and Other Nonprofit Organizations.
  • 2 C.F.R. Pt. 215.
Headnotes
  • OMB Circular A-110, as codified in 2 C.F.R. Pt. 215, requires applicants to perform open and free competition and avoid use of cost plus percentage of cost (CPPC) contracts when procuring work reimbursed by Federal funding.
    • During disaster recovery efforts, the Applicant used pre-selected bidders to procure two contracts contra to 2 C.F.R. § 215.43. 
    • The Applicant also used two CPPC contracts in violation of 2 C.F.R. § 215.44.
  • When an applicant materially fails to comply with procurement requirements, 2 C.F.R. §§ 215.61 and 215.62 authorizes FEMA to partially deobligate funding to remedy the violation.
    • The Applicant violated Federal procurement requirements.  As such, the RA was within her authority to deobligate funding associated with the violation.  
  • Stafford Act § 705(c) prohibits FEMA from recouping funding when the funds were authorized in an approved agreement, the costs were reasonable, and the purpose of the grant was accomplished.  
    • Due to the procurement violations, FEMA is not precluded from disallowing costs because the purpose of the grant was not accomplished.
 
 

 

Appeal Letter

Bryan Langley
Director
Indiana Department of Homeland Security
302 West Washington Street, Room E-208
Indianapolis, Indiana 46204
 
Re:  Second Appeal – Columbus Regional Hospital, PA ID 005-UOFZF-00, FEMA-1766-DR-IN, Multiple Project Worksheets – OIG Audit, Procurement, 705(c)  
 
Dear Mr. Langley:
 
This is in response to a letter from your office dated March 7, 2017, which transmitted the referenced second appeal on behalf of Columbus Regional Hospital (Applicant).  The Applicant is appealing the Department of Homeland Security’s (DHS) Federal Emergency Management Agency’s (FEMA) deobligation of $9,612,831.19 for violations of Federal procurement requirements found in Title 2 of the Code of Federal Regulation (C.F.R.) Part 215 following a DHS Office of Inspector General audit.    
 
As explained in the enclosed analysis, I have determined that Acting Regional Administrator of FEMA Region V acted within her authority pursuant to 2 C.F.R. §§ 215.61 and 215.62 in deobligating costs associated with procurement violations.  In addition, Stafford Act § 705(c) does not apply when procurement violations occur, as is the case here, because the purpose of the grant is not accomplished.  Therefore, I am denying this appeal.  
 
Please inform the Applicant of my decision.  This determination is the Agency’s final decision on this matter pursuant to 44 C.F.R. § 206.206, Appeals.
 
Sincerely,
 
        /s/
 
           Alex Amparo
                                                                        Assistant Administrator  
                                                                        Recovery Directorate   
 
Enclosure
cc:  James K. Joseph
Regional Administrator
FEMA Region V

 

Appeal Analysis

Background
From May 30 to June 27, 2008, the State of Indiana experienced severe storms and flooding which caused damage to Columbus Regional Hospital’s (Applicant) medical facility.  The Applicant procured contract labor to address emergency and permanent work required as a result of the disaster.  Specifically, the Applicant procured Rollins Construction Company to build a flood wall, Ernst & Young, LLP to complete administrative services associated with the grant, McCarthy Building Companies to perform restoration work, and Paul Davis Restoration, Inc. to clean up the first floor of the hospital.  FEMA prepared various Project Worksheets (PWs), including PWs 1530, 1904, 2013, 2014, 2066, 2073, 2184, 2206, 2210, and 2348 reflecting such disaster work.
 
In 2013, the Department of Homeland Security’s (DHS) Office of Inspector General (OIG) issued Audit Report OIG-14-12-D, FEMA Should Recover $10.9 Million of Improper Contracting Costs from Grant Funds Awarded to Columbus Regional Hospital, Columbus, Indiana, after its investigation demonstrated that the Applicant committed several procurement violations pursuant to Title 2 of the Code of Federal Regulation (C.F.R.) §§ 215.43, 215.44, 215.45 and 215.48.  The OIG ultimately recommended that FEMA deobligate a total of $10,931,981.00 from various PWs.[1]  FEMA Region V initially concurred with the OIG’s recommendation and deobligated the full recommended amount, but later adjusted the deobligated amount to $9,612,831.19[2] upon discovery of a calculation error.  Additionally, Region V conducted its own review of the PWs related to one of the contracts questioned by the OIG and deobligated additional funding as captured in PWs 2373 and 2374.[3] 
 
First Appeal
On June 6, 2014, the Applicant appealed FEMA’s determination to disallow funding, as recommended by the OIG, due to procurement violations.  The Applicant accused the OIG of not conducting its audit in compliance with the Robert T. Stafford Disaster Relief and Emergency Assistance Act (Stafford Act) § 705 and FEMA’s closeout procedures by “focusing on procurement violations and other factors that are irrelevant in a Stafford Act audit of a governmental unit.”[4]  The Applicant further asserted that, even if Stafford Act § 705 did not exist, there was no basis for deobligating all of its aid, only the amount FEMA deemed unreasonable.  Additionally, the Applicant stated that FEMA’s determination should consider its consultant’s cost analysis, the OIG’s miscalculations concerning the costs at issue, and exigent circumstances, but not the financial status of the hospital.  Finally, the Applicant argued that it was not bound by the procurement rules and regulations cited by the OIG because it is a hospital and a governmental unit.  
 
On August 8, 2016, FEMA Region V sent a Final Request for Information (RFI) to the Applicant identifying outstanding concerns that the Applicant had not complied with Federal procurement requirements.  Region V requested that the Applicant demonstrate it was exempt from complying with 2 C.F.R. Pt. 215 and OMB Circular A-110, Uniform Administrative Requirements for Grants and Agreements with Institutions of Higher Education, Hospitals, and Other Nonprofit Organizations.  The Region also provided information regarding the development of FEMA Recovery Policy FP 205-081-2, Stafford Act Section 705, Disaster Grant Closeout Procedures, and stated that Section 705(c) did not apply because the Applicant, by failing to comply with post-award terms and conditions, did not accomplish the purpose of the grant.  Region V requested that the Applicant provide any additional information within 30 days of receipt of the Final RFI.   
 
The Applicant responded to FEMA’s Final RFI on September 7, 2016, clarifying several of its arguments.  First, the Applicant stated that the Administrative Record was unclear and that it could not determine what documents were missing in order to supplement it.  The Applicant also stated that the Administrative Record included many documents it was not privy to, including the FP 205-081-2 policy.  Further, the Applicant argued that FEMA erred in deobligating funds because the costs were reasonable and neither the Stafford Act nor regulation mandates such action.  The Applicant also argued that deobligation was improper under the plain meaning of Stafford Act § 705(c) which “serves as a statutory barrier to FEMA’s ability to deobligate funds.”[5]  Specifically, the Applicant asserted that FEMA’s reliance on FP 205-081-2 in determining that the purpose of the grant was not accomplished, and thus, that all three elements of Section 705(c) were not met, was improper because the policy was issued after the disaster date.  The Applicant went on to say, “[s]trict compliance with procurement regulations might provide an incidental benefit from the grant, but cannot be said to be the ‘purpose’ of the grant….”[6] Finally, the Applicant asserted that nothing in the FEMA-State Agreement requires strict compliance with every regulation that might potentially apply to grant administration.  
 
On December 20, 2016, the FEMA Region V Acting Regional Administrator (RA) denied the first appeal for multiple reasons. First, the RA found that the Applicant did not follow federal procurement requirements when it used costs plus a percentage of cost (CPPC) contracts to repair its hospital.  Next, the RA noted that the Applicant—as a hospital—was required to follow OMB A-110, Uniform Administrative Requirements for Grants and Agreements With Institutions of Higher Education, Hospitals, and Other Non-Profit Organizations, when procuring contracts for projects obligated under the Public Assistance (PA) program.  Finally, the RA determined that Stafford Act § 705(c), as implemented by FP 205-081-2, Disaster Grant Closeout Procedures, did not apply, and FEMA was not prohibited from deobligating funding because the Applicant materially failed to comply with the terms of the grant in securing contracts that violated Federal procurement regulations.  
 
Second Appeal
In its second appeal, dated February 16, 2017, the Applicant states that FEMA Region V erred in calculating the costs at issue and did not consider exigent circumstances and other factors surrounding its contracting decisions.  Additionally, the Applicant argues that the costs are reasonable, and Region V should have considered its consultant’s cost/price analysis performed after it entered in to the contracts.  Finally, the Applicant asserts that CPPC contracts are the same as time and materials contracts—for which FEMA has allowed reasonable costs in past instances. 
 
The main focus of the appeal is that FEMA is prohibited from deobligating funding by Stafford Act § 705(c) because all three prongs of the subsection are satisfied.  The Applicant additionally argues that deobligation was improper under the plain reading of the language of Section 705(c) because the statute is clear and FEMA did not originally contest the issue of whether payment was authorized pursuant to an approved agreement specifying costs or whether the purpose of the grant was accomplished.[7]  Finally, the Applicant states that Region V’s use of FP-205-081-2 as supporting rationale and authority violated Stafford Act § 325 because the policy was issued after the disaster event and that the policy is contrary to the United States District Court for the Southern District of Florida’s interpretation of § 705(c) in South Florida Water Management District v. FEMA (SFWMD). 
 
Discussion
Governing Authority
In order to receive Federal grant assistance, a grantee must comply with all applicable federal laws and regulations, not merely the Stafford Act.[8]  Moreover, as the recipient of Federal grant funding, the Grantee’s obligations under Federal law, regulations, executive orders, and the terms and conditions of the FEMA-State agreement apply to sub-recipients of that funding as well and flow down to an applicant, thus making an applicant accountable to the Grantee to comply with all Federal grant requirements.[9]  In addition to the Stafford Act, the PA program is governed by a myriad of laws, regulations and policies,[10] including OMB Circular A-110.  OMB Circular A-110, as codified at 2 C.F.R. Pt. 215, establishes standard requirements for Federal grants awarded to institutions of higher learning, hospitals, and other non-profit organizations and is applicable to all Federal agencies.[11]
 
As a non-profit hospital, the Applicant was required to follow the procurement standards found in 2 C.F.R. Pt. 215.[12]  While the Applicant argues that its procurement was not governed by 2 C.F.R. Pt. 215, it does not provide any support for this position.  Although the primary authority for PA funding is the Stafford Act, FEMA ensures compliance with other laws, including those governing procurement, when obligating Federal funds.  Per the FEMA-State Agreement, the Grantee, as the recipient of Federal grand funding, is required to follow all Federal statutory and regulatory requirements, not simply Stafford Act provisions.[13]  Pursuant to 2 C.F.R. §§ 215.0(b)(3) and 215.5, the requirements of the FEMA-State Agreement apply to and flow down to the Applicant as the sub-recipient of those funds.[14]  Here, the Grantee was required to follow 2 C.F.R. Pt. 215 which consequently applied to the Applicant.  In addition, the FEMA-State Agreement provided that “enforcement remedies shall be processed as specified under 44 C.F.R. § 13.43 when the Terms and Conditions… are not met.”[15]  As such, the Applicant was required to comply with 2 C.F.R. Pt. 215 when procuring labor and equipment to complete disaster-related work in order to receive PA reimbursement. 
 
While the Applicant makes arguments under both 44 C.F.R. Pt. 13 and 2 C.F.R. Pt. 215, it must be noted that, even though the Applicant is a county non-profit hospital, 2 C.F.R. Pt. 215 does not distinguish between non-profit hospitals that are private and those that are governmental units.  Although the Applicant argues it is a local governmental unit, and thus, not under the purview of 2 C.F.R. Pt. 215,[16] 44 C.F.R. § 13.4(a)(1) states that 44 C.F.R. Pt. 13 does not apply to state and local hospitals.  As such, the applicable authority for evaluating procurement requirements for this Applicant is 2 C.F.R. Pt. 215.[17]
 
Procurement Violations
 
  1. Mandatory Compliance with 2 C.F.R. Part 215
     
    Adherence to Federal procurement laws is required to receive grant assistance.[18]  Contrary to what the Applicant asserts, compliance with 2 C.F.R. Pt. 215 is mandatory. In addressing non-compliance, FEMA has discretion to determine appropriate enforcement options on a case-by-case basis.[19]   At times, FEMA may exercise its discretion and award reasonable costs.    
     
  2. Cost-Plus-a-Percentage-of-Cost Contracts
     
A CPPC contract is a cost reimbursement contract containing some element that obligates the subgrantee to pay the contractor an amount (in the form of either profit or cost), undetermined at the time the contract was made and to be incurred in the future, based on a percentage of future costs.[20]  Unlike other disfavored but allowable contract mechanisms,[21] 2 C.F.R. § 215.44(c) strictly prohibits CPPC contracts.[22]  These contracting instruments are prohibited because they provide a disincentive for contractors to control costs (i.e., the more contractors charge, the more profit they make).[23]
 
In OIG-14-12-D, the OIG found that the Applicant awarded two CPPC contracts, the McCarthy and Paul Davis contracts, totaling $44,725,020.00.  The McCarthy contract was awarded for the Phase 1 rebuilding of the hospital while the Applicant procured the Paul Davis contract for emergency clean-up following the disaster.[24]  The OIG found both contracts were prohibited,[25] but only recommended FEMA deobligate the mark-up costs – $2,232,956.00.  FEMA concurred and deobligated the recommended amount.
 
On second appeal, the Applicant does not contest that the contracts used violated procurement requirements.  In fact, the Applicant continually asserts that Federal procurement requirements are “a means to an end,”[26] strict compliance is not necessary, and “any alleged procurement violations are irrelevant and of no moment….”[27]  The Applicant also argues the contracts were necessitated by exigent circumstances and the costs were reasonable.  The Applicant’s arguments are not compelling. 
 
CPPC contracts are strictly prohibited by regulation and nothing in 2 C.F.R. Pt. 215 permits the use of CPPC contracts in exigent circumstances.[28]  Nonetheless, exercising its discretionary authority under 2 C.F.R. §§ 215.61 and 215.62, FEMA has at times addressed an Applicant’s noncompliance by reducing the award by the “mark-up” of the contracts.[29]  Noting such, depending on the circumstances, FEMA could deobligate all funding associated with the contracts.  In this instance, the former remedy, which aligns with the OIG recommendation, is appropriate since the concern over CPPC contracts is uncontrolled costs due to the additional percentage accrued for an undefined level of costs.  As such, reducing the award by the amount of the additional percentage reduces the likelihood the costs claimed are unreasonable.  As explained below, re-obligating the “mark-up” costs on these contracts is not warranted. 
 
  1. Free and Open Competition
According to 2 C.F.R. § 215.43, an applicant is required to solicit contractors in a manner that provides, to the maximum extent practicable, free and open competition.  While not defined in regulation, “free and open competition” generally means that contractors for a project are publicly solicited and all responsible sources are permitted to compete.[30]
 
The OIG recommended the greatest amount of disallowed funding for the Applicant’s failure to allow for free and open competition.  The OIG recommended disallowing a total of $8,699,025.00[31] awarded under two contracts—Rollins and Ernst & Young—for non-exigent work because the Applicant used pre-selected contractors when bidding the work, rather than advertising or otherwise publicizing its procurement to other potential qualified bidders.  By utilizing a pre-selected list of vendors, the Applicant reduced the likelihood that the most cost-effective contractor was selected. 
 
The OIG further found that the Ernst & Young contract’s hourly rates were unreasonably high for administrative services when compared to similar service contracts awarded by the Applicant and guidance provided in Disaster Assistance Policy (DAP) 9525.9, Section 324 Management Costs and Direct Administrative Costs (DAC).  Following the OIG audit, Region V conducted a review of the associated PWs and discovered an additional amount from other PWs where funding was reimbursed for DAC incurred by Ernst & Young.  The total additional amount deobligated ($956,952.19) was captured in PWs 2373 and 2374. 
 
In both instances of noncompliance with 2 C.F.R. § 215.43, the Applicant does not dispute the OIG’s findings nor that its contracts violated Federal regulatory requirements.  Instead, it argues that FEMA should award reasonable costs regardless of procurement violations.  Again, FEMA’s authority to award costs it deems reasonable is distinct from the Applicant’s requirements under 2 C.F.R. Pt. 215. 
 
As reflected in PW 2066, the Applicant used a pre-selected list of contractors to install a retaining wall.  While Rollins may have been the lowest bidder among the five pre-selected contractors, there is no guarantee that it would have been the lowest had procurement been free and open.  Moreover, as the OIG highlighted, the recommended disallowed costs were incurred after the exigent period expired.[32]  Therefore, there is no practical reason why free and open competition should not have occurred.  The Applicant argues that Region V should have considered the March 3, 2014 cost analysis conducted by FTI Consulting or its own CEF analysis which estimated the project to cost $6,556,121.00 as opposed to deobligating the full amount of the contract.  However, by utilizing a preselected list of vendors, the Applicant reduced the likelihood that the most cost-effective contractor was selected.  In addition, a CEF is an estimate of the project.  Therefore, even though Rollins price was under the CEF, there is no guarantee that a contractor solicited under free and open competition would not have bid lower than both Rollins and the CEF. 
 
Moreover, 2 C.F.R. § 215.45 requires some form of cost or price analysis and documentation in the procurement files in connection with every procurement action—the implication being that the cost/price analysis is done at the time of procurement.  As the OIG noted, failure to conduct a cost or price analysis at the time of procurement increases the likelihood of unreasonable contract costs and misinterpretations or errors in pricing relative to the scopes of work.[33]  The FTI analysis was completed in March 2014, years after the work was procured.  In addition, Region V noted that the FTI analysis did not accurately reflect the prevailing costs for the locality at the time of solicitation.  Consequently, Region V properly concluded that the FTI analysis was not as accurate as a cost analysis would have been had it been performed at the time of the procurement or the time that work commenced.
 
Regarding the Ernst & Young contract, the Applicant contests FEMA’s decision to wholly deobligate costs, asserting that the actual costs incurred were reasonable because the contract was procured during the agreed upon exigent period.  Typically, FEMA finds exigency when lives or property are at stake or the work is for critical services or not permanent in nature.[34]  In comparison, FEMA awards costs for administrative activities, including identifying damage, attending the Applicant’s briefing, establishing files and providing copies and documentation, preparing for audits, working with the State during project monitoring, final inspection, and audits, and assessing damage, collecting costs data and developing cost estimates,[35] and does not view such actions as “critical services” or done in furtherance of saving lives or property.  In this case, while the work may have been procured during the exigency period, it is administrative work and thus not exigent in nature.[36] 
 
In addition, FEMA assesses the reasonableness of rates for administrative services based on complexity of the work or level of technical expertise needed.[37]  For instance, FEMA has previously determined that an hourly rate of $285 for administrative services was unreasonable absent evidence that the management tasks were complex.[38]  In this instance, the Applicant’s documentation does not demonstrate that the administrative tasks were complex in nature justifying the rates charged. 
 
Moreover, the scope of the Ernst & Young contract does not comport with 2 C.F.R. § 215.44[39]  which compounds the issue of the rates charged for administrative services because the limited scope restricts FEMA’s ability to determine whether the rate charged was reasonable for the work claimed.  The Applicant initially received contract proposals related to processing insurance claims, not administrative work.  Even though the Applicant solicited new proposals after FEMA raised concerns about the scope of work, the Applicant’s modified solicitation only added the word “FEMA” to the scope.  The Applicant also failed to provide pre-award documentation to determine the proposed scope of services. 
 
As such, that Applicant has not demonstrated that the exigency or technical level of services provided compelled the contractor to charge nor the Applicant to agree to rates between $300 and $550 per hour.  Had the Applicant competitively bid its administrative service contract per 2 C.F.R. § 215.43, the likelihood for potentially excessive rates would decrease.  Consequently, FEMA finds the decision to not award actual costs for the Ernst & Young contract is appropriate.
 
Alternatively, the Applicant requests FEMA award reasonable costs based on a previous second appeal decision[40] in which FEMA awarded reasonable costs for contracts not procured according to Federal procurement laws.  Specifically, the Applicant requests that FEMA reimburse costs based on the total hours claimed (5,233.06) multiplied by $155.00.  To support the proposed $155.00 figure, the Applicant cites to OIG-14-12-D which says FEMA approved this rate for administrative services that did not require highly technical expertise in a 2013 appeal decision.[41]  However, neither the audit report nor the Applicant specify which 2013 appeal decision concluded $155.00 was a reasonable rate.  FEMA presumes the Applicant is referencing a City of Cedar Rapids second appeal decision.[42]  However, as explained in that appeal decision, the $155.00 rate was derived from an extensive cost analysis that applied to that particular disaster.  This appeal involves dissimilar facts, a different declared event, a different geographic area, and other distinguishing factors that do not warrant FEMA applying the $155.00 rate in this appeal. 
 
Enforcement and Reasonable Costs
Pursuant to 2 C.F.R. §§ 215.61 and 215.62, FEMA may disallow all or part of the cost of the activity or action not in compliance when an applicant materially fails to comply with the terms and conditions of an award.  Compliance with Federal procurement requirements is a condition of the grant.  Here, there is no question that the Applicant failed to comply with procurement requirements under 2 C.F.R. Pt. 215.  As such, FEMA was within its authority to deobligate funding from the grant award. 
 
In the case of procurement violations, FEMA will often use its discretionary authority to independently determine, on a case-by-case basis, whether contract costs are reasonable and fair and, depending on the nature of the violation may balance its desire to assist communities in their recovery with ensuring conditions of the grant are met, reimburse such costs.[43]  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.[44]  However, price is not the only factor considered in determining reasonable cost.[45]  When determining whether a cost is reasonable, FEMA considers: (1) whether the cost is of a type generally recognized as ordinary and necessary for the performance of a Federal award; (2) the restraints or requirements imposed by Federal, State and other laws and regulations and conditions of the Federal award; (3) market prices for comparable good or services; (4) whether the individuals concerned acted with prudence in the circumstances given their responsibilities to the governmental units, its employees, the public at large, and the Federal government; and (5) significant deviations from the established practices of the governmental unit which may unjustifiably increase the Federal award’s cost.[46]  In applying the factors for determining reasonable costs, it is clear that the implicated contracts do not comport with several of them. 
 
A CPPC contract does not comport with the factors considered when determining reasonable costs enumerated in OMB Circular A-87, Cost Principles for State, Local, and Indian Tribal Governments.[47]  As such, FEMA was within its authority to deobligate funding from the grant award.
 
Regarding the contracts that violate 2 C.F.R. § 215.43, the Applicant’s argument that it should be awarded reasonable costs despite the violations is problematic because it wholly disregards the intent behind free and open competition.  The facts demonstrate that the Rollins contract was procured outside of the exigency period, and as such, did not warrant using non-competitive procurement procedures.  In addition, the rates charged by Ernest & Young were well above what other contractors were charging following the disaster as shown through historical data.  As such, beyond the Applicant failing to adhere with the requirements imposed by Federal law, it did not act prudently or reasonably when procuring the questioned contracts.  Accordingly, FEMA Region V acted appropriately when it deobligated funding associated with these procurement violations.  Therefore, no additional costs will be awarded through this second appeal decision.    
 
Stafford Act § 705(c) Applicability
Stafford Act § 705(c) provides that a state or local government is not liable for reimbursement or any other penalty for any payment made pursuant to the Stafford Act if the payment was authorized in an approved agreement specifying costs, the costs were reasonable, and the purpose of the grant was accomplished.[48]  FEMA implemented this statutory provision[49] through its Recovery Policy FP-205-081-2, Stafford Act Section 705, Disaster Grant Closeout Procedures.[50] 
 
In applying FP-205-081-2 to the facts of the appeal,[51] FEMA finds the prohibitions of § 705(c) do not apply.  The statutory restriction is not applicable when a violation of mandatory Federal procurement requirements occurs because the purpose of the grant is not accomplished in such instances.[52]  Here, the deobligated amount is associated with costs incurred under CPPC contracts and non-competitive contracts contra to 2 C.F.R. §§ 215.44 and 215.43, respectively.  Therefore, due to the regulatory violations, the Applicant’s claim does not meet the third prong of Stafford Act § 705(c). 
 
Conclusion
By entering into CPPC contracts and using pre-selected bidders, the Applicant failed to comply with Federal procurement requirements and the conditions of the grant award.  FEMA Region V took appropriate enforcement action pursuant to 2 C.F.R. §§ 215.61 and 215.62 to address those violations, Finally, Stafford Act § 705(c) does not preclude FEMA from deobligating funding because the purpose of the grant is not accomplished when procurement violations occur.  

[1] U.S. Dep’t of Homeland Sec. Office of Inspector Gen. (OIG), OIG-14-12-D, FEMA Should Recover $10.9 Million of Improper Contracting Costs from Grant Funds Awarded to Columbus Regional Hospital, Columbus, Indiana, at 9 (2013).
[2] Independently, FEMA deobligated the following amounts from each project worksheet (PW): PW 2184 -$26,143; PW 2013 -$112,619; PW 2066 -$7,710,091; PW 2014 -$244,043; PW 1904 -$26,013; PW 2348 -$21,635; PW 2210 -$4,573; PW 2206 -$1,634; PW 1530 -$473,219; PW 2073 -$35,909; PW 2373 -$951,558; and PW 2374 -$5,393.
[3] FEMA Region V reviewed all of the PWs that included costs claimed under the Ernst & Young contract for administrative services.  In doing so, the Region found an additional $956,952.19 ineligible for Public Assistance (PA) reimbursement and prepared PWs 2373 and 2374 to specifically address the additional deobligation. 
[4] Letter from Counsel, Ice Miller Legal Counsel, to Reg’l Adm’r, FEMA Region V, at 2 (June 6, 2014).
[5] Letter from Counsel, Ice Miller Legal Counsel, to Pub. Assistance Program Dir., IN Dep’t of Homeland Sec. and Pub. Assistance Branch Chief, FEMA Region V, at 4 (Sep. 7, 2016).
[6] Id. at 5.
[7] Letter from Attorneys, Ice Miller Legal Counsel, to Pub. Assistance Program Dir., IN Dep’t of Homeland Sec., at 11 (Feb. 16, 2017) [hereinafter Second Appeal Letter]. 
[8] See Illinois Equal Employment Opportunity Regulations for Public Contracts, B-167015, 54 Comp. Gen. 6 (1974) (holding “[i]t is clear that a grantee receiving Federal funds takes such funds subject to any statutory or regulatory restrictions which may be imposed by the Federal Government. (citations omitted). Therefore, although the Federal Government is not a party to contracts awarded by its grantees, a grantee must comply with conditions attached to the grant in awarding federally assisted contracts.”)
[9] See 44 C.F.R. § 13.37(a) (2007) (requiring Grantees to ensure that every subgrant includes any clauses required by Federal statute and executive orders and their implementing regulations and that applicants are aware of requirements imposed upon them by Federal statute and regulation).
[10] See The Robert T. Stafford Disaster Relief and Emergency Assistance Act of 1988, Pub. L. No. 93-288, §§ 316, 321, 325, and 701(a)(1) (mandating adherence to other statutory requirements and authorizing FEMA to implement Stafford Act provisions through Regulation and policies).  
[11] Office of Mgmt. & Budget, Exec. Office of the President, OMB Circular A-110, Uniform Administrative Requirements for Grants and Agreements with Institutions of Higher Education, Hospitals, and Other Nonprofit Organizations (1999) (codified at 2 C.F.R. Pt. 215).
[12] OMB A-110, 2 C.F.R. Pt. 215 applies to PA grants. 
[13] FEMA-State Agreement, Exhibit C, Article III (stating, “[t]he Grantee agrees to comply with all applicable laws and regulations, including but not limited to the following law, regulations, and OMB Circulars that govern standard grant management practices and are incorporated into this Agreement by reference: The Robert T. Stafford Disaster Relief and Emergency Assistance Act, 42 U.S.C. §§ 5121-5206 (Stafford Act); Title 44 of the Code of Federal Regulations (CFR); OMB Circulars A-21, A-87, A-102, A-110, A-122 and A-133; and 31 CFR § 205.6) (signed June 10, 2008).
[14] Cf. 44 C.F.R. § 13.37(a).
[15] FEMA-State Agreement, Exhibit C, Article IV. 
[16] See 2 C.F.R. §§ 215.0(b)(3), 215.5 (2008). 
[17] It is also important to note that many of the requirements found in OMB Circular A-110 also apply to state and local governments under OMB Circular A-102, Uniform Administrative Requirements for Grants and Cooperative Agreements to State and Local Governments, as codified at 44 C.F.R. Pt. 13.
[18] 2 C.F.R. § 215.5.
[19] See FEMA Second Appeal Analysis, City of Springfield, FEMA-1633-DR-IL, at 4 (Dec. 28, 2012) (concluding that the costs questioned by the OIG represented “a form of CPPC contract, and since CPPC contracts are prohibited…, these costs are ineligible for reimbursement under FEMA’s Public Assistance Program.”); see also FEMA Second Appeal Analysis, City of Nome, FEMA-4050-DR-AK, at 6 (Sep. 28, 2016) (determining that the Applicant did not comply with Federal procurement requirements; therefore, costs associated with contract work were not eligible for PA funding).
[20] See Muschany v. United States, 324 U.S. 49, 61-62 (1944).
[21] The Applicant states that CPPC contracts are the same contracting mechanism as time-and-material contracts.  See Second Appeal Letter, at 13.  However, the Regulations and FEMA policy distinguish between these two types of contracts—permitting time and material contracts in limited circumstances while strictly prohibiting CPPCs.  See 2 C.F.R. § 215.44(c); see also Public Assistance Guide, FEMA 322, at 53 (June 2007) [hereinafter PA Guide]; cf. 44 C.F.R. §§ 13.36(b)(10), (f)(4).
[22] 2 C.F.R. § 215.44(c) (stating “[t]he ‘cost-plus-a-percentage-of-cost’ or ‘percentage of construction cost’ methods shall not be used”) (emphasis added).
[23] U.S. Dep’t of Homeland Sec. Office of Inspector Gen. (OIG), OIG-14-12-D, FEMA Should Recover $10.9 Million of Improper Contracting Costs from Grant Funds Awarded to Columbus Regional Hospital, Columbus, Indiana, at 6 (2013); cf. Decision of the Comptroller General, B-119292, 1954 U.S. Comp. Gen. LEXIS 649 (Oct. 8, 1954) (“Section 4(B) of the Armed Services Procurement Act of 1947 prohibits the use of the cost-plus-a-percentage-of-cost system of contracting. The intent of Congress in opposing this system is clearly discernible in the legislative history of this and other acts regulating government procurement. Conditions which it sought to prevent are those which provide an incentive and an opportunity for a contractor or subcontractor to increase his profit by increasing his costs at the expense of the government.”).
[24] OIG-14-12-D at 6.
[25] Id. at 7.
[26] Second Appeal Letter at 11.
[27] Id. at 25.
[28] Unlike 44 C.F.R. § 13.36(d)(4)(i)(B) which permits non-competitive procurement when the award of a contract is infeasible under a competitive procurement mechanism and “[t]he public exigency or emergency for the requirement will not permit delay resulting from competitive solicitation,” no such condition-precedent exists in 2 C.F.R. Pt. 215.  In addition, the Regulation defines “procurement by non-competitive proposals” as “procurement through solicitation of a proposal from any one source, or after solicitation of a number of sources, competition is determined inadequate.” 44 C.F.R. § 13.36(d)(4). 
[29] See 2 C.F.R. § 215.4 (permitting the Federal awarding agency to grant exceptions for procurement requirements under 2 C.F.R. Pt. 215 on a case-by-case basis); PA Guide, at 53.
[30] OIG-14-12-D at 4; cf. 48 C.F.R. § 2.101 (2007) (defining “full and open competition” with respect to a contract action as “all responsible sources are permitted to compete”).
[31] Specifically, the OIG recommended disallowing $5,114,305.00 for the Rollins contract which related to building a flood wall (PW 2066), and deobligating $3,584,720.00 of costs awarded under the Ernst & Young contract for administrative work (PWs 1530, 1904, 2013, 2014, 2066, 2073, 2184, 2206, 2210, and 2348). 
[32] FEMA, the OIG and the Applicant agree the exigency period lasted through April 2009.  However, the Rollins contract was entered into on April 20, 2011. 
[33] OIG-14-12-D at 8.
[34] Second Appeal Analysis, Martinsville CUSD, FEMA-1771-DR-IL, at 4 (July 19, 2016).
[35] Public Assistance Policy Digest, FEMA 321, at 4 (Jan. 2008).
[36] See Second Appeal Analysis, City of Pierre, FEMA-1984-DR-SD, at 11 (May 27, 2015) (defining “exigency” as “something that is necessary to a particular situation that requires or demands immediate aid or action”). 
[37] See Memorandum from Assistant Adm’r, FEMA Disaster Assistance Directorate, to Reg’l Adm’rs, FEMA Regions I-X, at 2 (Sep. 8, 2009).  The memorandum stated that a junior or mid-level technical or program specialist is appropriate for most PA projects.)
[38] Second Appeal Analysis, City of Cedar Rapids, FEMA-1763-DR-IA, at 11 (May 9, 2014).
[39] 2 C.F.R. § 215.44(a)(3)(i) (stating the scope of the contract must provide “a clear and accurate description of the technical requirements for the material, product or service to be procured”).
[40] Second Appeal Letter at 29 (citing FEMA Second Appeal Analysis, Henderson County, FEMA-1771-DR-IL, (Sep. 20, 2013)).
[41] OIG-14-12-D at 5. 
[42] Second Appeal Analysis, City of Cedar Rapids, FEMA-1763-DR-IA (Apr. 22, 2013) (explaining that the Regional Administrator limited DAC rates to $155.00 an hour after FEMA performed an extensive cost analysis for the disaster).
[43] See Second Appeal Analysis, City of Vero Beach, FEMA-1545/1561-DR-FL, at 4 (Nov. 21, 2016); Second Appeal Analysis, Nishnabotna Valley Rural Electric Cooperative, FEMA-1880-DR-IA, at 6 (Nov. 7, 2016); City of Nome, FEMA-4050-DR-AK, at 5-6 (Sep. 28, 2016); and Second Appeal Analysis, City of Ft. Lauderdale, FEMA-1609-DR-FL, at 5-6 (Nov. 25, 2015). 
[44] Office of Mgmt. & Budget, Exec. Office of the President, OMB Circular A-87, Cost Principles for State, Local, and Indian Tribal Governments, Attachment A, Section C.2 (2004).
[45] Second Appeal Analysis, St. Mary’s Academy, FEMA-1603-DR-FL, at 5 (Aug. 4, 2015).
[46] OMB Circular A-87.
[47] See id. (stipulating the Agency considers requirements imposed by Federal laws and regulations and conditions of the Federal award when determining reasonable costs); see also PA Guide, at 40 (stating eligible costs must not only be reasonable, but “compliant with Federal, State, and local requirements for competitive procurement”). 
[48] Stafford Act § 705(c).
[49] Section 705(c) is not a self-executing statutory provision.
[50] FEMA Recovery Policy FP-205-081-2, Stafford Act Section 705, Disaster Grant Closeout Procedures, at 4-7 (Mar. 31, 2016) (interpreting 705(c) requirements as follows: (1) payment occurs when the recipient draws down funds obligated through SmartLink, regardless of whether the recipient has disbursed funds to the subrecipient, (2) the purpose of the grant is accomplished when the SOW is completed and the Applicant has demonstrated compliance with post-award terms, and (3) costs are reasonable if, in their nature and amount, they do not exceed that which would be incurred by a prudent person under similar circumstances).  In the second appeal, the Applicant challenges FEMA’s use of FP-205-081-2 in analyzing Section 705(c) as it relates to the facts of this appeal, arguing that it violates Stafford Act § 325(a)(2).  Section 705(c), which restricts FEMA’s ability to hold a state or local government liable for reimbursement or any other penalty for any payment made under the Stafford Act that meet the three prongs of the subsection, focuses on the Agency’s ability to recover funds that were previously awarded rather than reducing through policy change the availability of assistance to applicants.
[51]  FEMA Recovery Policy, FP-205-081-2, Stafford Act Section 705, Disaster Grant Closeout Procedures applies to “all open PWs, meaning appeal, arbitration, or dispute resolution rights have not been exhausted and FEMA has not made a final administrative decision (e.g., an adjudicated second appeal, final arbitration decision).” FP-205-081-2, at 2. 
[52] Id. at 6 (stating, “[i]f, after the recipient has submitted the appropriate documentation, FEMA determines that the recipient or subrecipient failed to comply with a post-award term or condition of the award (such as federal requirements for procurement, environmental planning and historic preservation compliance, or obtaining and maintaining insurance), the purpose of the grant was not accomplished and FEMA is not prohibited by Section 705(c) from recovering payments as a remedy”); Second Appeal Analysis, City of Coral Springs, FEMA-1609-DR-FL, at 8 (May 19, 2017).
Last updated May 28, 2020