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Procurement Costs, Reasonable Costs, PNP, 705(c)

Appeal Brief

DisasterFEMA-1551
ApplicantCommunity Action Program Committee, Inc
Appeal Type2nd
PA ID#033-00C58-00
PW ID#Multiple PWs
Date Signed
Conclusion:  The Applicant did not comply with federal procurement regulations for the contract associated with this grant.  As such, FEMA Region IV was within its discretionary authority to award reasonable costs to remedy the procurement non-compliance.  Summary ParagraphDuring the incident period from September 13, 2004 to November 17, 2004 Hurricane Ivan destroyed modular classrooms owned by the Community Action Program Committee (Applicant), a private non-profit (PNP). The Applicant secured project management services from Reconstruction Management Corporation (RMC) to replace ten classroom units.  FEMA prepared Project Worksheets (PW) 3741, 3743, 3744, 3746, 3768, 3769, 3770, 3773, 3775, and 3776 to document costs associated with the replacement of the ten modular classrooms. On December 5, 2014, FEMA stated that it would make adjustments to nine PWs to deobligate a total of $267,514.17 because the Applicant used a CPPC in non-compliance with 2 CFR § 215.44(c). The Applicant appealed FEMA’s determination arguing: (1) it chose to compensate RMC with a percentage of each PW written because compensating RMC by an hourly rate would have been too costly (2) cost overruns were justified and (3) 705(c) would bar FEMA from recovering funds associated with these PWs. The FEMA Region IV Regional Administrator (RA) denied the first appeal and exercised her discretionary authority to award the original cost estimate and deobligate the cost overruns to remedy the procurement non-compliance.  On second appeal, the Applicant requests $267,514.17 in cost overruns and reiterates its previous arguments. The Grantee also contends: excluding PNPs from protection under 705(c) is arbitrary agency action. Authorities and Second Appeals
  • Administrative Procedures Act § 706(2)(A).
  • Stafford Act § 705(c).
  • 2 C.F.R. §215.43, 215.44(c), 215.62, 230 Appendix A.
  • PA Guide, at 28-31, 34.
  • FP-205-081-2, Stafford Act Section 705, Disaster Grant Closeout Procedures, at 1, 4-7.
  • Muschany v. United States, 324 U.S. 49, 61-62 (1944).
  • Chambers Cty., FEMA-1791-DR-TX, at 6 (May 26, 2017).
  • St. Mary’s Acad., FEMA-1603-DR-LA, at 2 (June 22, 2017).
 Headnotes
  • Per 2 C.F.R. § 215.44(c), “the ‘cost plus a percentage of cost’ and ‘percentage of construction cost’ methods of contracting shall not be used.”
    • The Applicant entered into a non-compliant CPPC.
  • Per 2 C.F.R. § 215.62, when an applicant fails to comply with the terms and conditions of an award, FEMA may disallow all or part of the cost of the activity or action not in compliance.
    • The RA correctly exercised her discretionary authority to award reasonable costs to remedy the non-compliance.
  • Stafford Act, Section 705(c) applies to state, local, and tribal governments.  It does not extend to PNPs.
    • The Applicant is a PNP; therefore protections of 705(c) are inapplicable.
  

 

Appeal Letter

Wesley MaulDirectorFlorida Division of Emergency Management2555 Shumard Oak Blvd.Tallahassee, FL 32399-2100              Re:  Second Appeal – Community Action Program Committee, Inc., PA ID: 033-00C58-00, FEMA-1551-DR-FL, Multiple PWs – Procurement, Reasonable Costs, PNP, 705(c) Dear Mr. Maul: This is in response to your letter dated July 17, 2017, which transmitted the referenced second appeal on behalf of the Community Action Program Committee (Applicant).  The Applicant is appealing the Department of Homeland Security’s Federal Emergency Management Agency’s (FEMA) denial of funding in the amount of $267,514.17 associated with services contracted for the replacement of modular classrooms. As explained in the enclosed analysis, I have determined that the Applicant did not comply with federal procurement requirements.  The Regional Administrator correctly exercised her discretionary authority to award reasonable costs to address the procurement non-compliance.  Accordingly, I am denying the appeal.  In addition, Stafford Act § 705(c) does not extend to private non-profit organizations, such as the Applicant.  Therefore, FEMA is not barred from recovering all disallowed costs. Please inform the Applicant of my decision.  This determination is the final decision on this matter pursuant to 44 C.F.R. § 206.206, Appeals.  Sincerely,        /S/ Christopher LoganDirector         Public Assistance DivisionEnclosure cc: Gracia B. Szczech      Regional Administrator      FEMA Region IV

 

Appeal Analysis

BackgroundDuring the incident period from September 13, 2004 to November 17, 2004 strong winds, heavy rainfall, and wind-driven rain from Hurricane Ivan caused widespread destruction across many areas of Florida.  These events resulted in considerable damage to modular classrooms owned by the Community Action Program Committee, Inc. (Applicant).  The Applicant is a private non-profit (PNP) organization based in Pensacola, Florida. The Applicant applied for FEMA Public Assistance (PA) to repair the damaged classrooms.  Due to the extent of damage, FEMA determined that ten classrooms were eligible for replacement and prepared Project Worksheets (PW) 3741, 3743, 3744, 3746, 3768, 3769, 3770, 3773,[1] 3775, and 3776 to fund costs associated with those projects.  The Applicant secured project management services from Reconstruction Management Corporation (RMC) to replace the ten classroom units. At closeout, the Applicant submitted a list of actual costs incurred during reconstruction and replacement that exceeded the original cost estimates.  Initially, the Region awarded the Applicant actual costs for nine of the PWs and included an explanation for the increase in costs above the original cost estimates.  Subsequently, FEMA determined that the Applicant did not comply with federal procurement requirements and used a prohibited cost-plus-percentage-of-cost (CPPC) contract when securing RMC’s services.  After finding that the Applicant was non-compliant with a number of procurement regulations, the Region created new versions of the PWs.  To remedy the applicant’s non-compliance, FEMA determined the original estimate of $116,865.00 for each project to be a reasonable cost and deobligated or disallowed amounts in excess.   On October 30, 2014, FEMA made the adjustments to the PWs, reducing the total obligated amounts to the original cost estimates, less insurance proceeds.  Through a December 5, 2014 letter, the Grantee forwarded FEMA’s project application summary to the Applicant, which stated that FEMA would reduce funding for the nine PWs by amounts exceeding the original cost estimate.[2]   First Appeal The Applicant filed a first appeal in a letter dated February 10, 2015, asserting that the CPPC contract prohibition does not apply because it was based on a fixed cost estimate and compensation was based on a percentage of the estimate.  The Applicant stated that it chose to compensate RMC with a percentage of each PW written because compensating RMC by an hourly rate would have been too costly and asserted that the PWs were approved by FEMA numerous times without any objection to the type of contract that was involved.[3]  The Applicant characterized its contract with RMC as a contract between an owner and construction manager, which it opined is distinguishable from a contract between an owner and a contractor.  The Applicant also explained that it awarded a sole sourced contract to RMC because there was a shortage of other contractors in the area.[4]  The Applicant asserted that the additional cost overruns were the result of: (1) movement and replacement of classrooms, (2) delay in the delivery of trailers, (3) completing the security systems and plumbing, (4) relocation of the students, and (5) additional ramps and walkways.   In its first appeal transmittal letter to FEMA, dated February 26, 2015, the Florida Division of Emergency Management (Grantee) also argued that Section 705(c) of the Robert T. Stafford Disaster Relief and Emergency Assistance Act (Stafford Act) bars FEMA from recovering funds associated with these PWs because (1) the payment was authorized by an agreement specifying the costs, (2) the costs were reasonable, and (3) the purpose of the grant was accomplished. FEMA sent a Final Request for Information on March 16, 2016, stating that there was insufficient evidence in the administrative record to support the Applicant’s assertion that all costs associated with the CPPC contract were reasonable.  The Applicant responded by arguing the contract is a standard form agreement developed by The American Institute of Architects (AIA), intended for contracts between owner and construction manager, where the construction manager is not the constructor.  It explained that because actual costs must be documented and percentages are calculated to cover contractor overhead and profit margin, costs are limited by the work completed.  The Applicant also provided four examples of estimated costs for the replacement of portable style classroom buildings, similar to those replaced by RMC, to demonstrate that costs were reasonable and well under comparable costs for similar structures.  Finally, the Applicant asserted that “the use of ‘cost-plus-percentage’ contracts are common practice, especially for emergency construction work….”[5] The Region IV Regional Administrator (RA) denied the appeal on April 12, 2017, affirming the deobligation of $267,514.17 in funding.  The RA stated that FEMA policy unequivocally prohibits the use of CPPC contracts.  The RA also found that the contract appeared to be a sole source contract, a violation of the Applicant’s own procurement practices as well as non-compliant with federal procurement regulations.  The Applicant’s financial management policy on purchasing is written to promote open and free competition,[6] however, the administrative record does not contain proof that the contract was competitively bid or an explanation of special circumstances causing the variance.  Similarly, transactions under federal grants must be procured in a manner providing open and free competition.[7] To remedy the procurement noncompliance, the RA exercised her discretionary enforcement authority by limiting funding to the original cost estimates.  In making this determination, the RA considered the four portable style classroom buildings proffered by the Applicant as similar to the those replaced by RMC; however, the RA found them unpersuasive because they were current and did not include comparable costs from the time of the disaster.  The RA also found that Section 705(c) “only prohibits FEMA from recovering certain payments from state, Indian tribal governments, or local governments, and does not extend such protections to private-non-profits.”[8]  Therefore, relief under Section 705(c) is not available to the Applicant as it is a PNP. Second Appeal In its June 7, 2017 appeal, the Applicant again asserts that the CPPC contract is a standard agreement intended to be used for a construction manager and not for a contractor.  The Applicant also claims that the cost overruns are allowable under 44 C.F.R. § 206.204(e). Regulation provides that cost overruns normally include: variation in unit prices, changes in the scope of eligible work, or delays in the timely start or completion of eligible work.  The Applicant argues that it incurred additional costs for payments to architects for bid specifications, increased labor costs for the removal and storage of the contents of the structure, increased cost for compliance with the Americans with Disabilities Act (ADA), setup costs, wiring of the security and alarm system, lodging/per diem costs not accounted for in the original cost estimate, delay in arrival of the modular structure and additional contractor mark-ups. In addition, the Applicant asserts that Stafford Act § 705(c) unjustly excludes a specific class of applicants which is an agency action that is “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.”[9]  By way of a July 17, 2017 letter, the Grantee transmitted the appeal with a recommendation for approval.  Discussion Procurement  In procuring the services of RMC as construction manager and contractor, the Applicant did not comply with a number of federal procurement regulations by entering into an impermissible CPPC contract, sole sourcing construction to RMC, and creating an organizational conflict of interest. Regulation strictly prohibits the use of CPPC contract provisions.  Specifically, 2 C.F.R. § 215.44(c) states “the ‘cost plus a percentage of cost’ and ‘percentage of construction cost’ methods of contracting shall not be used.”  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.[10]  This type of contract is prohibited because there is no incentive for the contractor to keep its incurred costs low.  Instead, there is a reverse incentive for the contractor to continue to incur additional costs in order to continue to drive the contractor’s percentage of costs up.  In other words, increased spending by the contractor will yield higher profits. Here, RMC’s payment is made on a pre-determined percentage rate which is applied to actual performance cost.  The agreement at Articles 12 and 13 describe the services and costs that are to be payable to the contractor and the basis for the compensation.[11]  Article 13.4.1 describes that a 10% rate will be applied to the reimbursable expenses detailed in Article 12.[12]  Additionally, Articles 13.2.1- 13.3.1 detail that compensation is to be made to the contractor for the hourly billable rate of the supervisor in addition to 10% profit and 10% overhead.[13]  The contractor’s entitlement is based on percentage rates applied to the reimbursable costs and the total amount for the reimbursable costs are unknown at the time of contracting.  The Applicant asserts that the reimbursable costs are based on fixed estimates; however, had FEMA reimbursed actual costs at closeout, RMC’s compensation would have commensurately increased.  Thus, the Applicant entered into a prohibited CPPC contract in non-compliance with federal grant procurement requirements. The Applicant does not deny that the contract between it and RMC is a CPPC contract.  Instead, it asserts that the CPPC contract is not prohibited because it is a contract between the Applicant and its construction manager.  This distinction is not relevant to the purpose of this regulation, because the prohibition applies to all contracts procured with federal funding.[14]   All procurement transactions using federal funds must also be conducted in a manner providing open and free competition.[15]  Here, the Applicant entered into an agreement with RMC for services provided as a construction manager and then subsequently chose RMC to serve as constructor as well.  The Applicant stated that it chose RMC as constructor because of the shortage of available contractors in the area, but has not provided documentation to support its assertion or that it even attempted to open a bid for the contract.  The Applicant’s sole source contract with RMC was not executed in a manner providing open and free competition and therefore does not comply with procurement regulations. Regulation further provides that an entity shall be alert to organizational conflicts of interest as well as noncompetitive practices among contractors that may restrict or eliminate competition or otherwise restrain trade.[16]  By hiring RMC as the construction manager and contractor, the Applicant created an organizational conflict of interest.  This conflict of interest compounded the Applicant’s noncompliance with its use of the CPPC contract.  The AIA contract vehicle was intended for contracts between owner and construction manager, where the construction manager is not the constructor.[17]  However, because of the organizational conflict of interest, RMC as constructor did not have any incentive to keep costs low.  Therefore, the Applicant again did not comply with federal procurement requirements. Reasonable Costs FEMA has discretionary enforcement authority that it exercises on a case-by-case basis to resolve issues of noncompliance, including procurement noncompliance.[18]  Permissible actions include disallowing all or part of the cost of the activity or action not in compliance.[19]  Regulation requires that for a cost to be allowable, and therefore reimbursable, under a PA award, the cost must be, among other requirements, reasonable and adequately documented.[20]  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.[21]  Reasonable costs may be established by reference to: historical documentation of similar work; average costs for similar work in the area; published unit costs from national cost estimating databases; and FEMA cost codes.[22] The original project estimates were prepared with Xactimate, an industry software solution for property claims that uses extensive cost research published monthly for geographic regions covering the United States and Canada.[23]  Because it incorporates national cost databases into project estimates, Xactimate was an appropriate means of establishing reasonable costs, therefore the RA acted appropriately and within her discretionary authority to deobligate $267,514.17 in claimed costs.   Stafford Act Section 705(c)  Section 705(c) of the Stafford Act bars FEMA from deobligating previously awarded funding if certain conditions are met.[24]  However, Section 705(c) explicitly states that “a state or local government shall not be liable for reimbursement of other penalty under this act,” and does not include PNPs.  Moreover, FEMA Recovery Policy FP-205-081-2, Stafford Act Section 705, Disaster Grant Closeout Procedures implements this section by stating it does not apply to PNPs.[25] The Applicant states that excluding a certain class of applicants from asserting a defense is arbitrary, capricious, an abuse of discretion, and without observance of procedure required by law.  The Applicant cites to an Administrative Procedures Act (APA) provision granting judicial review of agency action.  However, the “arbitrary and capricious” standard found in APA Section 706(2)(A) applies only to executive agencies.[26]  In this case, it was Congress in the promulgation of law that decided to exclude PNPs, therefore the APA does not apply.  Consequently, FEMA is not prohibited from deobligating the $267,514.17 previously awarded to the Applicant. Conclusion The Applicant did not procure the services of RMC in accordance with regulation.  As an enforcement action to remedy various procurement non-compliances, FEMA’s decision to award reasonable costs and reduce the grant by the amounts in excess of the original cost estimate was appropriate.  The protections of Stafford Act Section 705(c) do not extend to PNPs; as such, FEMA is not barred from recovering the deobligated costs. [1] For PW 3773, funding received from the Department of Health and Human Services and insurance proceeds covered the full costs of replacing that classroom.  PW 3773 was included in first and second appeal correspondence; however, none of the adjustments at issue and considered in this decision were applied to PW 3773.  Therefore, PW 3773 is not further discussed.[2] FEMA deobligated a total of $267,514.17 from seven PWs and disallowed a total of $68,976.56 from two PWs.  Disallowance is distinguishable from deobligation for the two PWs because funding has not been made available to the Applicant. The Applicant did not include the disallowed costs in the amount in dispute for its first and second appeals, though it included all nine PWs.  Regardless, the analysis set forth in this decision applies to all previously deobligated and disallowed amounts documented in the nine PWs.  [3] Letter from Sr. Project Mgr., Cmty. Action Program Comm., Inc., to Rep., FEMA, at 3 (Feb. 10, 2015).[4] Id.[5] Letter from Exec. Dir., Cmty. Action Program Comm., Inc., to Pub. Assistance Branch Chief, FEMA, at 2 (June 14, 2016).[6] FEMA First Appeal Analysis, Cmty Action Program Comm., FEMA-1551-DR-FL, at 7 (Apr. 12, 2017) [hereinafter First Appeal Analysis] (citing Financial Management: Policies, Standards, Regulations, and Procedures, Purchasing, Community Action Program Committee, at 22 (Revised, 2002).[7] FEMA First Appeal Analysis, Cmty Action Program Comm., FEMA-1551-DR-FL, at 7 (Apr. 12, 2017).[8] First Appeal Analysis, at 5; See also FEMA Recovery Policy FP-205-081-2, Stafford Act Section 705, Disaster Grant Closeout Procedures, at fn. 5. (Mar. 31, 2016).[9] Letter from Exec. Dir., Cmty. Action Program Comm., Inc., to Dir., Fla. Div. of Emergency Mgmt., at 1 (June 7, 2017) (citing 5 U.S.C. §§ 706(2)(A), (C), and (D)).[10] See Muschany v. United States, 324 U.S. 49, 61-62 (1944).[11] Contract between Cmty. Action Program Comm., Inc. and Reconstr. Mgmt. Corp., LLC, at 9 (Nov. 12, 2004) [hereinafter RMC Contract].[12] RMC Contract, at 10.[13] Id.[14] See FEMA Second Appeal Analysis, Spanish Flat Water Dist., FEMA-1646-DR-CA, at 4 (May 22, 2012); see also FEMA Second Appeal Analysis, City of Springfield, FEMA-1633-DR-IL, at 4 (Dec. 28, 2012).[15] 2 C.F.R. § 215.43.[16] Id.[17] RMC Contract, at 1.[18] 2 C.F.R. § 215.62;  See FEMA Second Appeal Analysis, St. Mary’s Acad., FEMA-1603-DR-LA, at 2 (June 22, 2017).[19] 2 C.F.R. § 215.62.[20] Id. § 230, Appendix A;  See FEMA Second Appeal Analysis, Chambers Cty., FEMA-1791-DR-TX, at 6 (May 26, 2017).[21] 2 C.F.R. § 230, Appendix A.[22] PA Guide, at 34.[23] Xactimate, Features, Xactware Solutions, Inc., available at https://www.xactware.com/en-us/solutions/claims-estimating/xactimate/28….[24] The Robert T. Stafford Disaster Relief and Emergency Assistance Act of 1988, Pub. L. No. 93-288, § 705(c), 42 U.S.C. § 5205(c) (2000) (emphasis added).[25] FEMA Recovery Policy FP-205-081-2, at 4-7.[26] The Administrative Procedure Act, Pub. L. No. 89-544, § 706(2)(A), 5 U.S.C. § 706(2)(A) (2000).
Last updated May 28, 2020

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