Procurement – Reasonable Costs

Appeal Brief Appeal Letter Appeal Analysis

Appeal Brief

Disaster	FEMA-4241
Applicant	South Carolina Department of Transportation
Appeal Type	Second
PA ID#	000-URFSC-00
PW ID#	PW 836
Date Signed	2018-12-07T00:00:00

Summary Paragraph

In October 2015, prolonged, heavy rainfall caused flooding throughout South Carolina.  Residents of Sumpter and Williamsburg Counties placed Household Hazardous Waste (HHW) debris along rights of way owned by the South Carolina Department of Transportation (Applicant).  The Applicant determined the debris posed a threat to public health and safety and FEMA prepared Project Worksheet (PW) 836 to address debris removal, disposal costs, and traffic control.  The Applicant selected DTS, Inc. (DTS) from its list of prequalified contractors to perform the work.  DTS charged the Applicant $60.00/lb to remove 66,720 lbs of HHW, resulting in costs of $4,003,200.00.  FEMA subsequently found the cost of $60.00/lb unreasonable in comparison with other contractors employed by the Applicant for the same disaster.  FEMA specifically determined that DTS disposed of HHW by shipping the waste to Greensboro, North Carolina where it was neutralized or recycled, rather than disposing of the materials in a landfill, which was the standard of care required.  FEMA calculated $6.00/lb to be a reasonable rate pursuant to the upper range of alternative bids received by the Applicant and reduced costs by $3,602,880.00.  The Applicant appealed and argued it followed its own procurement procedures and based on DTS resources it made a proper selection.  It also contended that the next highest bid was $25.00/lb and FEMA’s determination of $6.00/lb was an unreasonable rate.  The FEMA Regional Administrator denied the appeal, finding that though the Applicant provided a cost comparison, it did not demonstrate a basis for selecting DTS, other than based on geographic proximity and historical performance.  Thus the cost analysis was ineffective.  FEMA then reviewed the bids received by the Applicant and found $25.00/lb also unreasonable, as the remaining six bids were all either below or equal to $6.00/lb or close above. The Applicant again appeals and argues $6.00/lb as the upper limit is not reasonable. 

 

Authorities and Second Appeals

• 2 C.F.R. §§ 200.319, 200.320(d), 200.338, 200.404.
• 44 C.F.R. §§ 13.36, 13.43(a), 206.206(a).
• PA Guide, at 40-41.
• Chambers Cty., FEMA-1791-DR-TX, at 6; Village of Waterford, FEMA-4020-DR-NY, at 4; Dep’t of Transp., FEMA-4068-DR-FL, at 5.

 

Headnote

• Costs must be reasonable and 2 C.F.R. § 200.404 states that 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.”  
  • The Applicant has not demonstrated that $60.00/lb for the removal of HHW was reasonable, nor that $25.00/lb was reasonable, considering the other six contractors’ prices ranged from $2.00/lb to $7.18/lb.

 

Conclusion

The Applicant has not demonstrated that DTS’s costs of $60.00/lb to remove HHW were reasonable, nor that the second highest bid of $25.00/lb was reasonable.  In addition, the RA’s enforcement action finding $6.00/lb reasonable was appropriate.  Therefore, the second appeal is denied.

 

 

 

Appeal Letter

Appeal Analysis

Background

 

During the incident period of October 1 – 23, 2015, prolonged, heavy rainfall caused flooding throughout South Carolina.  Residents of Sumpter and Williamsburg Counties placed Household Hazardous Waste (HHW) debris along rights of way owned and maintained by the South Carolina Department of Transportation (Applicant).  Accordingly, FEMA determined the debris posed a threat to public health and safety and the Agency prepared Project Worksheet (PW) 836 to address debris removal, disposal costs, and traffic control. 

 

Prior to the incident period, the Applicant issued a Request for Proposals (RFP) for disaster recovery assistance and awarded contracts to eight vendors in August 2018.  The Applicant assigned scores that it claimed were based on the vendors’ qualifications, available resources, technical proposals, and costs.  After the disaster struck, the Applicant activated its predisaster debris removal contracts, and selected DTS, Inc. (DTS) from its list of those prequalified contractors to perform the work.  DTS charged the Applicant $60.00/lb to remove 66,720 lbs of HHW, resulting in costs of $4,003,200.00. 

 

FEMA subsequently found the cost of $60.00/lb unreasonable in comparison with other contractors employed by the Applicant for the same disaster.  FEMA notified the Applicant of its determination in a March 22, 2017 letter.  FEMA specifically found that DTS disposed of HHW by shipping the waste to Greensboro, North Carolina where it was neutralized or recycled, rather than disposing of the materials in a landfill, which was the standard of care required.  FEMA calculated $6.00/lb to be a reasonable rate pursuant to the upper range of alternative bids received by the Applicant and therefore reduced costs by $3,602,880.00. 

 

First Appeal

 

In a May 26, 2017 letter, the Applicant appealed FEMA’s determination and requested $3,602,880.00 in funding.  The Applicant argued that it procured its eight vendors and awarded those contracts in accordance with its documented procurement procedures, which were consistent with general procurement standards for the Public Assistance (PA) program and federal grants, as outlined in Title 2 of the Code of Federal Regulations (2 C.F.R.) § 200.318(a), which require that a non-Federal entity must use its own documented procurement procedures provided those conform to applicable Federal law.  In addition, the Applicant claimed its procurement actions complied with the full and open competition requirements as outlined in 2 C.F.R. § 200.319.  It further claimed the procurement met 2 C.F.R. § 200.320(d)’s provisions, requiring that: RFPs be publicized, identify all evaluation factors, and be solicited from an adequate number of qualified sources; the applicant must have a written method of documenting technical evaluations of the proposals received and selecting recipients; and contracts must be awarded to the responsible firm whose proposal is most advantageous to the program with price and other factors considered.  Finally, the Applicant argued that its selection of DTS complied with Federal cost principles in 2 C.F.R. § 200.404, which provides that a cost is reasonable if in its nature and amount, it does not exceed what would be incurred by a prudent person under the circumstances prevailing at the time the decision was made to incur the cost.  In sum, the Applicant claimed the cost for removal of HHW was not the sole assessment factor that led to the award of the contract with DTS.  It argued it awarded the contract after thoroughly evaluating multiple factors, including unit costs, and projected costs likely to be incurred for all cost items contained in the proposal rather than just the one.  Based on the circumstances prevailing at the time of the decision and its documented process, it claimed it acted prudently and decisively in evaluating all of the projected cost items which gain savings over the life of the contract, in addition to the availability of contract resources within the geographic area.  The South Carolina Emergency Management Division (Grantee) concurred in a June 27, 2017 letter and forwarded the Applicant’s appeal to FEMA Region IV.

 

On February 26, 2018, FEMA Region IV sent the Applicant and Grantee a Final Request for Information (RFI), informing them that the current administrative record was insufficient to support the appeal.  As such, FEMA requested the cost analysis performed prior to assigning DTS the debris removal work, documentation demonstrating the Applicant’s assertion that $25.00/lb was the next highest bid price for removal, as well as contracts and cost analyses performed for the other vendors, to include the reasons why those contractors were not used.  The Applicant responded on March 19, 2018 and included the contracts requested, the bidders’ technical proposal, price proposals, statement of awards, and its cost comparisons, which it stated included both the unit prices and cumulative cost associated with an estimated quantity for each pay item.  It reiterated that work order assignments were decided based primarily on responsiveness, prior performance, and cost.  The Applicant also forwarded a cost analysis performed in response to a 2014 ice storm disaster, stating it demonstrated that DTS was the most cost-effective contractor used on the prior event.

 

The Region IV Regional Administrator (RA) denied the appeal in a letter dated July 3, 2018.  The RA found that while the Applicant included an overall cost comparison of the contractors taken from their prequalification pool, it did not indicate the Applicant’s basis for selecting DTS to perform the HHW removal.  The RA stated that the Applicant’s submissions demonstrated that the Applicant did not perform an effective cost analysis before awarding the work to DTS.  Instead, it appeared that the Applicant awarded the work to DTS based on its prior experience with the company and a faulty analysis that did not follow its own standards for determining the assignment.  The RA noted that while the Applicant’s stated evaluation criteria included historical performance as one factor, it was not the exclusive factor.  Here, the RA determined that the other criteria of responsiveness and cost favored another company, Ceres, at $4.25/lb to remove the HHW.  The RA found the removal costs charged by DTS ($60.00/lb) were significantly disproportionate to the majority of the other prequalified contracts.  Specifically, the other seven bidders’ HHW removal costs were $2.00, $2.75, $4.25, $5.00, $6.00, $7.18, and $25.00 per pound.  In looking at the remaining bids, the RA indicated that even the rate of $25.00/lb was significantly out of line with the remaining bidders.  Accordingly, the RA found the Applicant failed to demonstrate that the requested rate of $60.00/lb was reasonable, or alternatively that the $25.00/lb rate was.

 

 

 

 

Second Appeal

 

The Applicant appealed the RA’s decision in an August 23, 2018 letter, again requesting $3,602,880.00 in costs.[1]  The Applicant reiterates its prior arguments, and also notes that half of the eight awarded contracts have a rate equal to or higher than FEMA’s upper limit of reasonableness ($6.00/lb).  Furthermore, the Applicant claims the $6.00/lb rate is not reasonable as the upper limit of reasonableness.  The Grantee concurred in a September 28, 2018 letter.   

 

Discussion

 

Procurement Requirements – Reasonable Costs

 

Local governments are allowed to follow their own procurement procedures which reflect applicable state and local laws and regulations, provided the procurement conforms to Federal standards.[2]  In addition, costs must be reasonable.  Federal procurement regulations state that 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.”[3]  When determining whether a cost is reasonable, consideration is given to whether the cost is of a type generally recognized as ordinary and necessary for the subject facility and type of work, whether the individuals involved acted with prudence in conducting the work, and whether normal procedures were followed.[4]  The reasonableness of a cost can be evaluated by examining historical documentation for similar work, average costs for similar work in the area, published unit costs from national cost estimating databases, FEMA cost codes, equipment rates, and engineering and design service curves.[5]

 

The Applicant argues that it acted prudently at the time of the decision to procure the services of DTS, by considering the geographical proximity to the work and historical performance, as well as cost considerations, and therefore contends that the costs were reasonable.  The Applicant stated in its first appeal that the cost for removal of HHW was not the sole factor in assessing the usage of DTS, but that it also relied upon its documented procedures which placed emphasis on the price of all components contained in a proposal rather than just one.[6]  Its method of contractor assignment states that “efforts are made to minimize the cost of disaster response while ensuring exemplary service.  If a contractor has unit prices that are significantly higher than the others, this contractor would be assigned counties that would be expected to have lesser impacts, or perhaps not assigned any counties.”[7]  However, the scoring sheet for the eight vendors receiving contracts did not include DTS in the top five of contractors; instead it was ranked sixth.[8]  In addition, the Applicant has acknowledged in its RFI response that it previously worked with DTS in a prior disaster, and that DTS was the most cost effective contractor from that other disaster, as opposed to the other contractors who were only awarded the current contracts a short time before the incident period.    

 

In this case, the removal costs of DTS ($60.00/lb) were significantly disproportionate to the majority of the bid contracts.  Even $25.00/lb was much higher than the remaining six contractors’ pricing.  The average price per pound of the other six vendors equals $4.53.[9]  Excluding two disproportionately high prices, only one of the remaining six contractors proposed a price slightly higher ($7.18/lb) than the $6.00/lb that FEMA allowed as reasonable.  The other five contractors proposed $2.00, $2.75, $4.25, $5.00, and $6.00 per pound for the same removal work, which is commensurate with the cost to perform the same work by other contractors in the same disaster.  Upon reviewing the claim for reimbursement, FEMA sought justification of the very high contract rate for DTS.  The pricing for the items of work specified in this solicitation – among contractors who are competing for the same opportunity – establishes the fair market cost to do the work at the time of solicitation/selection.  In looking at the various prices, FEMA determines that $60.00/lb exceeds that price which would be incurred by a prudent person under the circumstances prevailing at the time the decision was made to incur the cost.  Though the Applicant claims otherwise, it has not demonstrated that either $60.00/lb or $25.00/lb was a reasonable price upon comparing all of the prices for this line item that were submitted at the time of solicitation.[10] 

 

Enforcement Actions - Reasonable Costs

 

FEMA has discretionary authority that it exercises on a case-by-case basis to resolve issues of noncompliance, including procurement noncompliance.[11]  In such instances FEMA may, as appropriate, take a number of enforcement actions including, but not limited to, wholly or partially deobligating project funding and/or taking other remedies that may be legally available.[12]  While enforcement actions taken by FEMA are discretionary, actions selected, including the reimbursement of reasonable costs, must be appropriate given the circumstances.[13]  An appeal must contain documented justification supporting the Applicant’s position.[14]

 

The Applicant’s failure to comply with Federal grant procurement standards, specifically with regard to reasonable costs, represents a material failure to comply with the terms of the PA grant program.  FEMA therefore exercised its discretionary enforcement authority in finding $6.00/lb reasonable, as it fell within the higher range of costs proposed by the other contractors.  While the Applicant did provide a breakdown of costs, as noted above, it did not demonstrate that the cost of either $60.00/lb or even $25.00/lb was reasonable.  Therefore, given the Applicant’s noncompliance with Federal grant procurement standards and failure to demonstrate reasonable costs, FEMA finds the RA’s determination to be appropriate.

 

Conclusion

 

The Applicant has not demonstrated that DTS’s costs to remove HHW were reasonable.  In addition, the RA’s enforcement action finding $6.00/lb reasonable was appropriate.  Therefore, the second appeal is denied. 

 

[1] Letter from Deputy Sec’y for Eng’g, S.C. Dep’t of Transp., to Dir., S.C. Emergency Mgmt. Div. (Aug. 23, 2018) [hereinafter Applicant Second Appeal].

[2] Title 44 Code of Federal Regulations (44 C.F.R.) § 13.36(b) (2014).

[3] 2 C.F.R. § 200.404; Public Assistance Guide, FEMA 322, at 40 (June 2007) [hereinafter PA Guide].

[4] PA Guide, at 41.

[5] Id.

[6] Letter from Deputy Sec’y for Eng’g, S.C. Dep’t of Transp., to Dir. Recovery Div., FEMA, at Exhibit 1 (Mar. 19, 2018), “Debris Contract Pricing Comparison,” (the Cost Comparison includes all work associated with debris removal, rather than just that associated with HHW, including training, traffic control, burning, vegetative debris, removal of hazardous trees and stumps, marine debris removal, equipment costs, generators, labor costs, and other miscellaneous costs, and accordingly HHW costs are one line item.  The estimates for each contractor for HHW was based on their proposed cost multiplied by 5,000 lbs, the estimated quantity of debris removal.  The document demonstrates that the cost for HHW was based on an estimated 5,000 lbs, rather than the actual amount of 66,720 lbs.  While not the reason for denial of costs, in looking at the price difference between the estimates and actual amount of debris removed, DTS would go from ranking fifth in a cost comparison to last.).  

[7] Applicant Second Appeal, Exhibit 4, “On-Call, Pre-Event Disaster Recovery Contractor Assignment Methodology.”

[8] Applicant Second Appeal, Exhibit 2, “Scoring,” (noting that any vendor scoring above 234.897 may be awarded a contract, which therefore only excluded one vendor).

[9] This reflects the average price of $2.00, $2.75, $4.25, $5.00, $6.00, and $7.18.  Even including the $25.00/lb in averaging the price, the average totals only $7.45/lb.

[10] The Applicant claims in its appeals that its procurement guidelines comported with Federal regulations, specifically 2 C.F.R. § 200.320(d), and that it followed as such when it selected DTS due to the circumstances prevailing at the time of the decision.  The RA did not deny the first appeal on the grounds that the Applicant did not comply with 2 C.F.R. § 200.320(d) and as such, FEMA will not address the issue substantively in this appeal. 

[11] 44 C.F.R. § 13.43(a).

[12] Id.; 2 C.F.R. § 200.338.

[13] Id.; FEMA Second Appeal Analysis, Chambers Cty., FEMA-1791-DR-TX, at 6 (May 26, 2017).

[14] 44 C.F.R. § 206.206(a).