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OIG Audit Report DD-10-04 Labor Costs

Appeal Brief Appeal Letter Appeal Analysis

Appeal Brief

Disaster1633-DR-IL
ApplicantCity of Springfield
Appeal TypeSecond
PA ID#167-72000-00
PW ID#N/A
Date Signed2012-12-28T00:00:00

Citation:  FEMA-1633-DR-IL, City of Springfield, Office of Inspector General, Audit Report DD-10-04

Cross-
Reference:
 Labor Costs, Reasonable Cost

Summary:  In 2006, tornadoes and heavy rains caused extensive damage to the electrical distribution system in Springfield, Illinois.  As no other entities were available to assist with the repair, the City of Springfield (Applicant) supplemented its force account capability by executing a Mutual Aid Agreement (MAA) with AMEREN, a private utility company, to restore the system.  FEMA reimbursed the Applicant the Federal share of $11.4M in emergency and permanent work costs.  On January 13, 2010, the Department of Homeland Security Office of the Inspector General (OIG) issued the results of an audit of the Applicant’s disaster related expenses.  The OIG determined that some of the costs related to mutual aid labor and force account labor were ineligible and questioned $794,732 in funding.  The Regional Administrator (RA) agreed with the OIG recommendations and requested that the Applicant return the funds.  In the first appeal, the Applicant claimed that the costs were eligible as AMEREN was paid in accordance with the MAA and the force account labor costs were consistent with the local labor agreement.  The RA denied the appeal, stating that AMEREN’s labor rate mark-ups are a form of cost-plus-percentage-of-cost (CPPC) contract, which is prohibited according to Title 44 of the Code of Federal Regulation (44 CFR) §13.36(f)(4), Procurement, Contract cost and price.  The RA further stated that FEMA only reimburses the actual time during which eligible work is performed; therefore, the employees’ rest time was not eligible.  The Applicant maintains that FEMA should not de-obligate the funding because FEMA field staff had reviewed and approved the costs.  Included with the second appeal, was a letter from AMEREN asserting that the mark-ups were not CPPC, but instead, represent a standard approach for calculating overhead items as a percentage of the labor cost.  Also included was the City’s Labor Contract as evidence that the payments to the employees for rest time were in accordance with the established labor agreement.

Issues:  1. Has the Applicant demonstrated that the mutual aid costs questioned by the OIG are not CPPC?
               2. Are the costs for rest periods of force account staff eligible for reimbursement if they are incurred in accordance with the applicable labor agreement?

Findings:  1. No.
                   2. No.

Rationale:  44 CFR §13.36(f)(4); 44 CFR §206.223(a)(1); DAP9525.7(VII)(8)

Appeal Letter

December 28, 2012

Jonathon E. Monken
Director
Illinois Emergency Management Agency
2200 South Dirksen Parkway
Springfield, Illinois 62703

Re: Second Appeal – City of Springfield, PA ID 167-72000-00, OIG Audit Report DD-10-04 Labor Costs, FEMA-1633-DR-IL

Dear Mr. Monken:

This is in response to your March 6, 2012 letter, which transmitted the referenced second appeal on behalf of the City of Springfield (Applicant).  The Applicant is appealing the U.S. Department of Homeland Security’s Federal Emergency Management Agency’s (FEMA) denial of $1,059,643 in mutual aid and force account labor costs based on findings of the Department of Homeland Security Office of Inspector General (OIG) Audit Report DD-10-04.

As explained in the enclosed analysis, I have determined that the Applicant has not demonstrated that the mutual aid and force account labor costs questioned by the OIG are eligible for reimbursement under FEMA’s Public Assistance Program.  Therefore, I am denying the appeal.

Please inform the Applicant of my decision.  This determination constitutes the final decision on this matter pursuant to 44 CFR §206.206, Appeals.

Sincerely,

/s/

Deborah Ingram
Assistant Administrator
Recovery Directorate

Enclosure

cc: Andrew Velasquez III
Regional Administrator
FEMA Region V
 

Appeal Analysis

Background

In 2006, tornadoes and heavy rains caused extensive damage to the electrical distribution system in Springfield, Illinois. The City of Springfield (Applicant) executed an existing Mutual Aid Agreement (MAA) with AMEREN, a private for-profit utility company, to expedite restoration of the electrical distribution system.  The Applicant also incurred force account expenses during the recovery effort.  FEMA reimbursed the Applicant the federal share of $11.4 million in emergency and permanent work costs.

Office of Inspector General Audit DD-10-04

On January 13, 2010, the Department of Homeland Security Office of the Inspector General (OIG) issued the results of an audit of the Applicant’s disaster related expenses.  The OIG questioned approximately $3 million in Public Assistance funding associated with mutual aid costs, contract labor mark-ups, force account labor costs, duplicate invoices, and force account equipment.  Of these five findings, the Applicant is appealing Audit Finding B, related to mutual aid cost mark-ups and Audit Finding C, related to force account labor costs.

Finding B
The OIG Audit Report identified $762,007 in mutual aid labor cost mark-ups included on AMEREN’s invoices as ineligible.  The ineligible line item mark-ups included $252,694 for a labor adder equal to 25 percent of the loaded labor rate (regular pay + premium pay + taxes + pension + leave allowance + medical insurance and other costs), $499,405 in Management Support Personnel costs equal to 82.52 percent of the actual labor costs (regular + premium pay), and $9,908 in Tools equal to 9.98 percent of regular pay.  The OIG determined that the costs represented a form of cost-plus-percentage-of-cost (CPPC) contract and pursuant to Title 44 of the Code of Federal Regulations (44 CFR) §13.36 (f)(4), Procurement, Contract cost and price, CPPC contracts are prohibited for the procurement of services under a federal grant.

Finding C
The OIG also considered $297,636 (reduced from $608,422 in the original audit report) in force account labor costs to be unreasonable and unsupported.  According to the OIG, the Applicant not only paid employees for 24 hours per day for 11 days, but paid some employees for more than 24 hours of work in one day.  Although the Applicant claimed that a union agreement required it to pay employees for a full 24 hours when they work at least 16 hours in a day, the OIG stated that the Applicant failed to document actual work hours in excess of 16 and did not provide the OIG with a labor policy or union agreement that would justify paying employees for 24 hours of work per day.

According to OMB Circular A-87, Cost Principles for State, Local and Tribal Governments, eligible costs must be reasonable and documented.  The OIG noted that 44 CFR §13.20 requires Applicants to maintain accounting records identifying the source and application of funds and must provide supporting documentation such as payrolls and time and attendance records.  In the absence of a union agreement or labor policy, the OIG considered the claimed costs unreasonable as they may have constituted a deviation from the Applicant’s established practices, which unjustifiably increased project costs as described in Appendix A (C)(2)(e) of OMB Circular A-87.  As the Applicant’s documentation did not allow the OIG to discern whether employees were performing eligible work or resting between shifts during those hours in excess of 16, the OIG reduced the eligible costs to 16 hours of work per employee per day.

On June 10, 2011, the Illinois Emergency Management Agency (Grantee) notified the Applicant of the results of OIG Audit DD-10-04 and requested that the Applicant return $798,202, or the Federal share of the total amount of $1,064,269 in questioned costs related to the five findings, A through E.  In a subsequent letter to the Applicant dated September 20, 2011, the Grantee informed the Applicant of its right to appeal the ineligibility determination.

First Appeal

In a first appeal letter, dated November 2, 2011, the Applicant conceded the ineligibility of OIG Audit Findings A, D, and E and limited the appeal request to Findings B and C.  The Applicant stressed that it relied on the assistance and expertise of FEMA field staff to review the documentation, prepare the subgrant applications, and verify the eligibility of the work and associated costs.  While the Applicant notes that FEMA staff failed to question the eligibility of the costs later identified by the OIG as ineligible in findings B and C, the Applicant maintains that the questioned costs were reasonable and necessary.

With respect to Finding B, the Applicant claimed that the costs listed on AMEREN’s invoices were consistent with the MAA.  The appeal letter explained that as a private for-profit utility company, AMEREN would not have assisted the Applicant in restoring electricity to the City without the cost mark-ups outlined in the MAA.  In further discussion of the mark-ups, the Applicant referred to a June 10, 2010, letter to FEMA Region V from the Applicant’s legal counsel that explained that AMEREN had calculated labor costs based on actual labor rates and itemized profit margin separately through the mark-up line items.  The letter stated that if FEMA had informed the Applicant that the mark-ups would render the costs ineligible, the Applicant would have renegotiated the MAA with AMEREN.

In response to Finding C, the appeal letter stated that the Applicant incurred the questioned force account labor costs in accordance with the Applicant’s collective bargaining agreement with the International Brotherhood of Electrical Workers (IBEW) Local 193.  The agreement required the Applicant to compensate employees for 8 hours of paid rest when the employees worked at least 16 hours in one day.  The Grantee transmitted the first appeal to FEMA with a November 4, 2011, letter, which supported the Applicant’s arguments.  The Grantee remarked that not only was the Applicant contractually obligated to pay its employees according to the labor agreement, but if the Applicant had limited its employees to less than 16 hours of work and had not contracted with AMEREN in accordance with the MAA, restoration of the City’s damaged electrical distribution system would have been significantly delayed.

The FEMA Region V Regional Administrator (RA) responded to the Applicant’s appeal with a letter dated December 22, 2011.  The RA concurred with the OIG determination that AMEREN’s line item mark-ups constituted a form of CPPC contract and stated that the documentation submitted by the Applicant was insufficient to overturn the OIG’s finding.  The RA acknowledged that the Applicant incurred the force account costs in accordance with its labor contract, but explained that FEMA could not reimburse costs for employees’ rest periods regardless of the stipulations in the applicable labor agreements.  In addressing the Applicant’s concerns over FEMA’s inclusion of the questioned cost in the original determination of eligibility, the RA stated that FEMA staff endeavor to identify and reimburse all of an applicant’s eligible costs, but in cases where costs are subsequently found to be in violation of the governing statutes, regulations or policies, FEMA is legally compelled to adjust the grant in order to remain compliant.

Second Appeal

The Applicant’s second appeal, submitted on March 5, 2012, reiterates the arguments presented in the first appeal and emphasizes that it relied on FEMA staff to determine which costs were eligible for reimbursement.  The letter stresses that the Applicant trusted FEMA’s Project Specialists to formulate its Project Worksheets and to review all costs and work items for eligibility.  Although the FEMA Project Specialists identified several smaller costs as ineligible, the Applicant expresses concern as to why the FEMA staff failed to recognize the mutual aid mark-ups and force account labor costs as ineligible during initial project review and approval.  While the Applicant did not present any new information regarding Finding C, the Applicant submitted a February 27, 2012, letter from AMEREN that describes the mark-ups in greater detail.

The letter disputes the OIG determination that the mark-ups represent a form of CPPC contract.  In fact, AMEREN states that only the 25 percent labor adder specified in the MAA, which accounted for $252,694 of the questioned mutual aid costs, constituted a mark-up; whereas, the remainders were neither mark-ups nor profit but represented supervision, office support, hand tools, consumable supplies and other costs that AMEREN incurred as a result of the repair work.  AMEREN concedes that the costs were calculated as a percentage of the labor cost, but disagrees that the costs represented a type of contract prohibited by 44 CFR §13.36.  Instead, AMEREN contends that the methodology is a common practice for calculating fully loaded labor units under time and equipment contracts.

Discussion

Finding B
First, there seems to be confusion over the reason why the OIG questioned the invoiced costs, as correspondence from both the Applicant and Grantee stated that it would have been unreasonable not to include profit in the mutual aid contract and to expect a private for-profit company to perform work at cost.  The OIG Audit contained no presumption that profit caused the determination, rather it was the use of a percentage of cost to derive the profit, as well as other costs, that the OIG deemed ineligible.  Moreover, 44 CFR §13.36 (f)(2) states that “subgrantees will negotiate profit as a separate element of the price for each contract in which there is no price competition and in all cases were cost analysis is performed.”  This fixed profit must be reasonable and appropriate relative to the scope of work of the contract and the circumstances prevailing at the time. 

Second, the letter from AMEREN contends that, with the exception of the 25 percent adder, the majority of the questioned costs, while calculated as a percentage of labor cost, were not profit but overhead and miscellaneous expenses that should be eligible for reimbursement.  However, the language in 44 CFR §13.36(f)(4) unequivocally states that “[t]he cost plus a percentage of cost and percentage of construction cost methods of contracting shall not be used.”  The primary reason for the proscription of CPPC contracts is the inherent disincentive for the contracted party to control costs.  AMEREN claims that using a percentage factor of the labor cost is a common practice for calculating indirect costs on time and equipment contracts.

The mutual aid costs questioned by the OIG in Audit DD-10-04 were calculated as a percentage of the labor cost, they represent a form of CPPC contract, and since CPPC contracts are prohibited by 44 CFR §13.36(f)(4), these costs are ineligible for reimbursement under FEMA’s Public Assistance Program.

Finding C
Per sections 2 and 3 of Article VI of the Labor Agreement between Local 193 International Brotherhood of Electrical Workers A.F. of L. – C.I.O. and City of Springfield, Office of Public Utilities, which establish that “After sixteen (16) consecutive hours of work…[a]ll employees shall be paid at their regular straight time rate for the hours of the above rest period that falls in their regular work shift,” the Applicant was contractually obligated to pay employees for rest periods.  Whereas, 44 CFR §206.223 (a)(1), General work eligibility, requires that “[t]o be eligible for financial assistance, an item of work must…[b]e required as the result of the emergency or major disaster event” and 44 CFR §206.225 (a)(3), Emergency work, states that eligible emergency protective measures must “[e]liminate or lessen immediate threats to live, public health or safety…or…threats of significant additional damage to improved property.”  Accordingly, FEMA considers only the cost of the time spent performing eligible work to be eligible for reimbursement and pursuant to 44 CFR 206.228 (a)(2), Allowable costs, Force Account Labor Costs, only overtime costs for force account employees performing eligible emergency work is eligible.  In this case, the Applicant’s employees’ rest time does not qualify as eligible work as it does not meet the regulatory requirements listed above.  Therefore, the force account labor costs questioned by the OIG are ineligible for reimbursement.

In regard to the Applicant’s claim of it suffered having acted on alleged erroneous information provided by FEMA Officials, the purpose of FEMA’s Public Assistance Grant Program is to provide financial grants to public and certain private non-profit entity for all of the eligible disaster-related costs allowable under the law.  Under the Inspector General Act of 1978, the OIG is authorized to conduct financial audits of FEMA grants.  When the OIG identifies costs that were incurred or funds that were expended illegally, FEMA must make adjustments to ensure that all grants are consistent with policy and are reimbursed in accordance with the laws and regulations that govern the Public Assistance Program.

Conclusion

Even though the Applicant incurred mutual aid costs and the force account labor costs according to the specifications of the respective agreements that were in effect at the time of the disaster, not all of the incurred costs are eligible for reimbursement.  FEMA regulations prohibit the use of CPPC contracts, making the costs on AMEREN’s invoice that were calculated as a percentage of the labor cost, ineligible.  Furthermore, reimbursement of eligible work is limited to the actual hours during which that eligible work is performed.  The cost of paying employees during their rest periods is not eligible.

Last updated May 28, 2020