Project Documentation and Closeout - Allowable Costs & Reasonable Costs

Appeal Brief Appeal Letter Appeal Analysis

Appeal Brief

Disaster	1791
Applicant	Houston
Appeal Type	Second
PA ID#	201-35000-00
PW ID#	PW 10591
Date Signed	2021-05-24T16:00:00

Summary Paragraph

On September 13, 2008, Hurricane Ike caused damage to the Applicant’s water supply system.  Six years prior, the Applicant procured a contractor to operate its water supply system.  The contract stated that emergency response actions shall be paid as an additional service.  FEMA prepared Project Worksheet (PW) 10591 documenting $294,950.16 in contract costs for completed emergency protective measures and $2,654.00 in direct administrative costs (DAC), obligating $297,604.16 on June 17, 2009.  Seven years later, the Texas Division of Emergency Management (Grantee) recommended deobligation of $5,207.02 as ineligible contract costs, and a review of $289,743.14 for reasonableness.  On August 23, 2018, FEMA deobligated $5,207.02 as ineligible costs per the Grantee’s recommendation, and $23,735.13 for unsupported costs.  On November 19, 2018, the Applicant appealed, stating all documents requested by FEMA were supplied, all costs not subject to agreement were removed from the PW, and FEMA is barred by Section 705(c) of the Stafford Act from deobligating funding.  The Grantee supported the appeal.  On September 9, 2019, FEMA Region VI Regional Administrator denied the appeal for the deobligated $28,942.15, stating the Applicant did not provide documentation to support the claimed labor and equipment costs, and deobligated an additional $119,937.53 for insufficient documentation (total $148,879.68).  The RA also determined that Section 705(c) of the Stafford Act does not bar recovery because the purpose of the grant was not accomplished.  On second appeal, the Applicant seeks $288,568.38 of the total original $294,950.16 plus DAC. 

Authorities and Second Appeals

• Stafford Act §§ 403(a)(3)(1), 705(c).
• 44 C.F.R. §§ 13.20(b)(6), 13.22(b), 206.225(a).
• OMB Circular A-87, at Attachment (C)(1)(j), (2).
• PA Guide, at 40; FP-205-081-2, at 4-7; FP 9525.7, at 3.
• Midwest Energy, Inc., FEMA-4063-DR-KS, at 6 (May 1, 2018).

Headnotes

• Section 705(c) of the Stafford Act bars FEMA from deobligating previously awarded funding if: (1) the payment was authorized by an approved agreement specifying the costs; (2) the costs were reasonable; and (3) the purpose of the grant was accomplished.
  • The payment to the Applicant was authorized by an approved agreement specifying costs and Applicant supplies documentation to support that the purpose of the grant was accomplished, subject to reasonableness. 
• OMB Circular A-87 provides 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.  FP 9525.7 Labor Costs – Emergency Work provides that it is not reasonable for a person to work more than 48 hours continuously without an extended rest period.  FEMA will reimburse up to 24 hours for each of the first two days, and up to 16 hours for each of the following days for emergency work.
  • The Applicant’s contractor employee’s hours for one employee are not reasonable according to FP 9525.7.

Conclusion

FEMA determines the Applicant’s documentation supports $140,105.94 of its $142,497.90 in contract costs relating to emergency protective measures, and the remaining $2,391.96 are unreasonable costs.  The Applicant was previously awarded $4,895.60 in DAC, for a total allowable obligation of $291,072.02 in eligible costs.  Any monies in excess of $291,072.02 paid to the Applicant shall be deobligated and recovered.  Therefore, the Applicant’s appeal is partially granted in the amount of $140,105.94.

 

Appeal Letter

Appeal Analysis

Background

The City of Houston (Applicant) operates water supply plants, wastewater treatment plants and lift stations otherwise known as the Kingwood system (Facilities).  On September 13, 2008, strong winds from Hurricane Ike caused a power outage that damaged the Facilities.  Prior to the disaster, in 2002, the Applicant contracted Severn Trent Environmental Services (Contractor) to operate its water supply system.[1]  The contract stipulated that emergency response actions provided during a major emergency shall be paid as an additional service.[2]  Following the disaster, the Contractor provided emergency protective measures. 

FEMA prepared Project Worksheet (PW) 10591, obligating $294,950.16 in completed contract costs and $2,654.00 in direct administrative costs (DAC), for a total of $297,604.16 on June 17, 2009.  The funds were drawn down and paid to the Applicant on August 5, 2009.  The Applicant submitted its P.4 Project Completion and Certification Report to the Texas Division of Emergency Management (Grantee) on June 27, 2011.[3]  In a letter dated June 6, 2018, the Grantee recommended FEMA deobligate $5,207.02 in ineligible contract costs and requested a review to determine the reasonableness of an additional $289,743.14 in contract costs.

On August 23, 2018, FEMA deobligated $28,942.15, which included:

• $5,207.02 as ineligible contract costs per Grantee recommendation.
• $266.55 being outside the scope of work dates;
• $838.57 for undocumented costs involving contractor employee timesheets;
• $13,240.80 for undocumented claims for contractor’s purchased materials;
• $639.84 for contractor’s claim not supported by invoicing; and
• $8,749.37 for contractor’s materials claims not supported by invoicing. 

FEMA determined that the remaining $266,008.01 in contractor costs were reasonable and eligible.  FEMA also approved an increase of $2,241.60 in the amount of eligible DAC bringing the total to $4,895.60 of DAC for the PW.

 

First Appeal

On November 19, 2018, the Applicant appealed FEMA’s determination denying $28,942.15 by reason of undocumented and unsupported costs.  The Applicant stated the emergency protective measures work was 100 percent complete when the PW was written.  It stated that all documents requested by FEMA were supplied for validation and substantiation, all costs not subject to agreement were removed from the PW, and FEMA fully vetted the supporting documents.  The Applicant argued that it adequately documented its claim and that the costs were supported, reasonable, and eligible.  Finally, the Applicant stated FEMA was barred by Section 705(c) of The Robert T. Stafford Disaster Relief and Emergency Assistance Act of 1988[4] (Stafford Act) from deobligating the $28,942.15.  In a January 15, 2019 letter, the Grantee supported the Applicant’s appeal. 

FEMA issued a Request for Information (RFI) on April 26, 2019, noting FEMA’s deobligation was consistent with the Grantee’s closeout recommendation; the costs at issue were either incurred in the performance of ineligible work or unsupported by documentation; and the Grantee supported the Applicant’s costs on first appeal, contrary to its earlier letter.  The RFI further identified additional costs not supported by documentation.  FEMA, the Grantee, and the Applicant conducted a facilitated discussion on May 10, 2019.  On June 21, 2019, the Applicant responded to the RFI, reiterating its first appeal arguments and again stating that the documentation in the record fully supported the costs at issue.

The FEMA Region VI Regional Administrator denied the appeal on August 29, 2019 affirming the deobligation of $28,942.15 and finding a further $119,937.53 to be deobligated.  The total amount for deobligation was $148,879.68.  FEMA determined that the claimed labor and equipment costs could not be verified with the documentation provided, and it was unable to determine whether claimed costs for materials were reasonable.  FEMA also found that subcontractor costs for fuel were not supported by the available documentation and noted one instance of an ineligible duplicate cost.  Finally, FEMA determined the purpose of the grant was not accomplished because there was inadequate documentation in support of the Applicant’s costs and therefore Section 705(c) of the Stafford Act did not bar FEMA from recovering funding. 

 

Second Appeal

In a second appeal dated October 30, 2019, the Applicant seeks $288,568.38 of its original $294,950.16, a difference of $6,381.78 related to the duplicated cost noted in the first appeal response, plus $4,895.60 in DAC.  Effectively, the Applicant is seeking $142,497.90 of the $148,879.68 in contract costs denied on first appeal.  The Applicant adopts its arguments from the first appeal regarding the adequacy of its supporting documentation and protections under Section 705(c) of the Stafford Act.  Additionally, it asserts that FEMA is prohibited from challenging the sufficiency of the documentation, arguing that FEMA issued PW 10591 after work had been completed, based on the same documents FEMA now deems inadequate.[5]  Finally, the Applicant states that FEMA relied on policy[6] issued after the present disaster to deny the first appeal; therefore the policy does not apply and FEMA’s decision was in error.  In its November 4, 2019 letter, the Grantee supports the Applicant’s second appeal.

On September 3, 2020, FEMA sent an RFI to the Applicant requesting documentation showing that costs pertaining to Contractor hours for 24-hour workdays over continuous periods were reasonable.  The Applicant acknowledged receipt of the RFI on September 14, 2020 but did not respond to the RFI. 

 

Discussion

Stafford Act Section 705(c)

Section 705(c) of the Stafford Act bars FEMA from deobligating previously awarded funding if:  (1) the payment was authorized by an approved agreement specifying the costs; (2) the costs were reasonable; and (3) the purpose of the grant was accomplished.[7]  FEMA issued FP-205-081-2, Stafford Act Section 705, Disaster Grant Closeout Procedures, to implement these criteria.[8]  If all three conditions of 705(c) are met, FEMA is prohibited from recouping grant funds even if it later determines that it made an error in determining eligibility.[9]  

Payment Authorized

Payment has occurred when the recipient draws down funds obligated for the completion of the approved scope of work through SmartLink, regardless of whether the recipient has disbursed funds to the subrecipient.[10]  Here, PW 10591, formulated under a valid FEMA-State agreement pertaining to DR-1791, was authorized under the PA Program and specified costs.[11]  FEMA obligated PW 10591 on June 17, 2009, in the amount of $297,604.16, and the funds were drawn down and paid to the Applicant on August 5, 2009.  Therefore, the first condition under Section 705(c) is satisfied.

Purpose of the Grant

Section 403 of the Stafford Act authorizes FEMA to provide assistance essential to meet immediate threats to life and property following a major disaster.[12] This includes work and services that reduce immediate threats to life, property and public health.[13]  Work to restore power to critical facilities is considered an emergency protective measure.[14]  For a cost to be eligible, it must be directly tied to the performance of eligible work.[15]  Additionally, claimed costs can be supported by documentation such as cancelled checks, paid bills, and payrolls.[16]  Finally, costs should be adequately documented to be allowable.[17] 

Regarding the third condition under Section 705(c), FEMA considers that the purpose of the grant was accomplished if the scope of work is completed, the work and costs are supported with documentation, and post-award terms and conditions are met.[18]  In this case, the criteria at issue is whether the Applicant provided supporting documentation.  Here, the Applicant has supplemented its information on second appeal with details cross-referencing the contract costs and work.[19]  The Applicant’s documentation includes timesheets, maps, invoices, audit reports, photos, purchase orders, receipts, and cost breakdowns.  The documentation establishes the date of the work, the activity performed, the equipment used for the activity and the cost associated with the work.  The documentation supports the Applicant’s claimed costs.  Therefore, the purpose of the grant is accomplished.

Reasonable Costs

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.[20]  In addition, FEMA policy provides that it is not reasonable for a person to work more than 48 hours continuously without an extended rest period, so FEMA will reimburse up to 24 hours for each of the first two days, and up to 16 hours for each of the following days for emergency work.[21]

Regarding the second condition under Section 705(c), FEMA’s first appeal response to the Applicant was silent on the issue of reasonableness of costs.  The Applicant’s exhibits to its second appeal document that a Contractor’s employee worked 20 hours on one day, 24 hours daily for the next 5 days, then 18, 20 and 17 hours on the days that followed.[22]  The employee’s overtime rate is recorded as $77.16 per hour.  FEMA determines the first two 24-hour periods are reasonable, as is 16 hours of each day thereafter, therefore the balance of 31 hours at the overtime rate of $77.16 for a total of $2,391.96 is unreasonable.  PA funding in the amount of $2,391.96 will be deobligated.  The remaining $286,176.42 in contractor costs are reasonable.[23]

It is determined that all three conditions of 705(c) are satisfied.  Therefore, of the $288,568.38 appealed, $286,176.42 are reasonable and the remaining $2,391.96 are unreasonable costs.  It is unnecessary to determine further if FEMA made any error in determining whether there is an eligibility error.  FEMA may recover $2,391.96 in unreasonable costs because it is not barred by 705(c) regarding this amount. 

 

Conclusion

FEMA determines the Applicant’s documentation supports $140,105.94 of its $142,497.90 in contract costs relating to emergency protective measures, and the remaining $2,391.96 are unreasonable costs.  The Applicant was previously awarded $4,895.60 in DAC, for a total allowable obligation of $291,072.02 in eligible costs.  Any monies in excess of $291,072.02 paid to the Applicant shall be deobligated and recovered.  Therefore, the Applicant’s appeal is partially granted in the amount of $140,105.94.

 

[1] Renewed in 2007.

[2] PW 10591 provides excerpts from contract.

[3] Applicant Second Appeal Letter to Chief, Texas Div. Emer. Mgmt [hereinafter Applicant Second Appeal], Exhibit A, at 2, (October 30, 2019) (No certification by the Grantee on Applicant’s P.4.).

[4] Robert T. Stafford Disaster Relief and Emergency Assistance (Stafford) Act § 705(c), 42 U.S.C. § 5205 (2006).

[5] The general rule is that the federal government may not be equitably estopped from enforcing public laws, even though private parties may suffer hardship as a result in particular cases.  Office of Personnel Management v. Richmond, 496 U.S. 414 (1990); Heckler v. Community Health Services of Crawford County, Inc., 467 U.S. 51 (1984); INS v. Miranda, 459 U.S. 14 (1982); Schweiker v. Hansen, 450 U.S. 785 (1981); Federal Crop Ins. Corp. v. Merrill, 332 U.S. 380 (1947).

[6] FEMA Recovery Policy FP-205-081-2, Stafford Act Section 705, Disaster Grant Closeout Procedures (Mar. 31, 2016).

[7] Stafford Act § 705 (c).

[8] FP-205-081-2, at 4-7, applies to projects which have not received a final administrative/agency decision.

[9] Id. at 4.

[10] Id.

[11] Id. at 4.

[12] Stafford Act § 403(a) (2013).

[13] Stafford Act § 403(a)(3)(1).

[14] Title 44 Code of Federal Regulation (44 C.F.R.) § 206.225(a) (2007).

[15] Public Assistance Guide, FEMA 322, at 40 (June 2007).

[16] 44 C.F.R. § 13.20(b)(6).

[17] OMB CIRCULAR A-87, Cost Principles for State, Local, and Indian Tribal Governments, at Attachment

(C)(1)(j) (2008).

[18] FP-205-081-2, at 5.

[19] Applicant Second Appeal, at exhibit “B” (Oct. 30, 2019) (“tick and tie” details, cross-referencing costs, labor summary sheets, invoices and work orders).

[20] 44 C.F.R. §13.22(b) citing to OMB Circular A-87, C.2.

[21] Recovery Policy 9525.7, Labor Costs - Emergency Work, at 3 (2006); See also FEMA Second Appeal, Midwest Energy, Inc., FEMA-4063-DR-KS at 6 (May 1, 2018).

[22] On September 3, 2020, FEMA sent an RFI to the Applicant requesting the Applicant provide documentation to support these costs as reasonable.  The Applicant did not respond to the RFI.

[23] Competitively procured services, equipment rates are comparable to FEMA equipment rates.