Procurement and Contracting Requirements/Allowable Costs & Reasonable Costs

Appeal Brief

Appeal Letter

Appeal Analysis

Background

From September 7 through October 2, 2008, Hurricane Ike struck Texas with high winds, heavy rains, and storm surge. The disaster tore nine skylights off the flat roof of the Stafford Municipal School District’s (Applicant) middle school/high school building and annex (Facility), causing water to enter the Facility. The water infiltration resulted in additional damage to the Facility. The Applicant requested Public Assistance (PA) funding for costs associated with the Facility repairs. FEMA prepared and obligated multiple versions of project worksheet (PW) 3942 to capture the scope of work (SOW) of $318,447.87 for wind damage repairs and $7,202.79 in direct administrative costs (DAC). FEMA also reduced costs according to actual insurance proceeds of $209,750.96, for a total claim of $115,899.70. The repair costs included actual contract costs for completed work, as well as $10,158.85 in estimated costs for work yet to be completed to enclose a skylight.[1]

On February 8, 2022, the Texas Division of Emergency Management (Recipient) submitted a Large Project Closeout Request to FEMA. A Financial Compliance Review, prepared by the Recipient’s auditor, recommended that FEMA deobligate all the funds associated with repairs because the Applicant had not substantiated any of the contract costs and had not provided documentation to show it had followed competitive procurement procedures. On June 29, 2022, FEMA prepared an amendment to PW 3942, deobligating the entire $115,899.70 for the Facility repairs and DAC. FEMA stated that, in the absence of supporting documentation such as cancelled checks, payrolls, and time/attendance records, it could not determine whether the costs were reasonable or whether the Applicant had accomplished the purpose of the grant. FEMA also explained that because the Applicant could not substantiate repair costs or verify project completion, all DAC tied to those repairs was similarly ineligible.

First Appeal 

The Applicant appealed, stating the FEMA deobligation was inconsistent with federal law, regulations, and FEMA policy. The Applicant stated that it complied with the record retention schedules mandated by the Texas State Library and Archives Commission and Title 2 Code of Federal Regulations § 200.334[2], and that FEMA never notified it of the need to retain records past the three year-period following the disbursement of funds based on any exception to 2 C.F.R. § 200.334 requirements. The Applicant also stated that requiring it to pay back the funds would cause it financial hardship. The Recipient supported the appeal. In a March 16, 2023 decision, the FEMA Region 6 Regional Administrator denied the appeal, finding the Applicant did not provide adequate documentation to support the claimed costs. 

Second Appeal

The Applicant submitted a second appeal on May 15, 2023, reiterating its first appeal arguments, and also arguing that FEMA was untimely in issuing its first appeal decision and that it misrepresented the Recipient’s position as supporting the deobligation. The Applicant disputes the deobligation of $115,899.70. The Recipient transmitted the appeal on May 23, 2023, along with a letter of support.

Discussion

Procurement and Contracting Requirements

Title 44 of the Code of Federal Regulations (44 C.F.R.) Part 13, Uniform Administrative Requirements for Grants and Cooperative Agreements to State and Local Governments, codifies the requirements for local governments seeking, receiving, or administering PA grants.[3] Section 13.36 requires an applicant to procure services in a manner that allows full and open competition.[4] Among other requirements, applicants must also perform and document a cost or price analysis in connection with every procurement action, and take necessary affirmative steps to assure that minority-owned firms, women’s business enterprises, and labor surplus area firms are used when possible.[5] The Applicant also must maintain records sufficient to detail the significant history of its procurement.[6] 

As a local government entity, the Applicant was required to comply with federal procurement standards found in 44 C.F.R. § 13.36 at the time of the disaster declaration. Here, the Applicant did not maintain records sufficient to detail the history of its procurement, and thus it did not demonstrate that it: (1) procured services in a manner that allowed full and open competition; (2) performed and documented a cost or price analysis in connection with the procurement of the service contracts; and (3) took necessary affirmative steps to assure that minority-owned firms, women’s business enterprises, and labor surplus area firms were used when possible. Therefore, the Applicant did not demonstrate that it properly procured the repair work contracts.

Allowable Costs & Reasonable Costs

FEMA has discretionary authority that it exercises on a case-by-case basis to resolve issues of noncompliance with procurement requirements.[7] The range of authorized actions include disallowing all or part of the cost of the activity or action not in compliance.[8] While enforcement action taken by FEMA is discretionary, the action selected must be appropriate given the circumstances.[9] To the extent FEMA agrees to allow funding, FEMA first determines whether costs are reasonable.[10] For costs to be allowable and therefore reimbursable, under a PA award, the costs must be, among other requirements, reasonable and adequately documented.[11] A cost is reasonable if, in its nature or 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 costs.[12]

Given the Applicant’s procurement noncompliance, FEMA previously disallowed the contract costs at issue because it was unable to determine reasonable costs without documentation such as cancelled checks, payrolls, and time/attendance records, which the Applicant states it did not maintain. However, FEMA can also use other information, including paid invoices, to help determine reasonableness.[13] Here, the invoices contained within the Administrative Record provide sufficient detail to directly tie the claimed costs of $308,289.02 to associated work in PW 3942 and show that those costs are reasonable. The descriptions in the invoices are specific enough for FEMA to evaluate the eligibility of the work and costs, and the multiple invoices from multiple companies are date-stamped and contain contemporaneous notations confirming that work was complete and detailing the costs.[14] The SOW included in the PW was 97 percent complete and the PW itself was written based on actual contract costs.[15] Although FEMA did not make a reasonable cost determination in the project at that time, FEMA has now performed a reasonable cost analysis as part of its second appeal review and determines that PA funding totaling $308,289.02 represents reasonable costs a prudent person would incur for the work at issue. For example, on second appeal, FEMA reviewed an invoice for labor for journeyman electrical work to install, repair and rewire lights, billed at $65.00 per hour, and finds the costs to be fair and equitable for the type of work being performed. Thus, FEMA finds that the Applicant has provided documentation to reinstate $308,289.02 in deobligated funding for the completed repairs.[16] Additionally, FEMA previously deobligated DAC tied to unsubstantiated costs for completed repairs. Because FEMA is reinstating all completed repair costs after substantiating reasonable and eligible costs, the agency is also reinstating $7,202.79 in deobligated DAC.

However, FEMA upholds its deobligation of $10,158.85 in estimated costs for enclosing a skylight because the Applicant did not substantiate through documentation that the repair was completed, and if so, the actual costs of those repairs.[17]

Conclusion

FEMA finds the Applicant did not demonstrate that it procured its contracts in accordance with federal regulations. However, the Applicant has substantiated through documentation that $105,740.85 of the requested costs for completed work are reasonable and directly tied to the performance of eligible work. FEMA awards reasonable costs of $105,740.85 for the completed work. Therefore, this appeal is partially granted.