Reasonable Costs - Engineering and Design Services

Appeal Brief

Appeal Letter

Appeal Analysis

Background

On August 29, 2005, heavy erosion from Hurricane Katrina’s storm surge destroyed Beach Boulevard from Ballentine Street to Bayview Court in the City of Bay St. Louis (Applicant).  Beach Boulevard is a federal aid road, eligible for Federal Highway Administration (FHWA) funding.  The Applicant owned and maintained storm sewer, potable water lines, and sewer and gas lines (utilities) buried immediately beneath Beach Boulevard, which were also destroyed.

The Applicant requested Compton Engineering develop an estimated scope of work, schedule of values and cost estimate for the repair work.  On October 28, 2005, they sent a letter to the Applicant estimating a total project cost of $6,751,726.80, including $568,826.60 for engineering services.[1]

FEMA awarded Project Worksheet (PW) 954 on November 17, 2005, in the amount of $6,689,898.00.  The PW, which included $506,998.00 for engineering design and inspection services, was for work to return the utility system on a segment of Beach Boulevard to pre-storm design, capacity, and function.[2]

In June 2006, the Mississippi Department of Transportation (MDOT) notified the Applicant that the utilities would no longer be allowed beneath the reconstructed boulevard and additional rights-of-way would be required.  The Applicant was unable to secure the funding necessary for the additional rights-of-way and worked with FEMA, FHWA and MDOT to create an affordable alternative for the utilities placement.[3]

On September 7, 2006, the Applicant entered into a contract with Compton Engineering for planning, design, and construction related services necessary to relocate the utilities.  The contract included a provision for the Applicant to compensate Compton Engineering a $342,998.00 fee for planning and design services.[4]  It also contained this contractual provision: “[n]othing in the agreement shall preclude the engineer and owner from clarifying, adding to, or reducing the scope of the agreement and, where a change in scope is involved, from adjusting the accompanying compensation for work which is essential to achieve the objective of the agreement.”[5]

On December 17, 2007, the Applicant reached a joint agreement with the Hancock County Board of Supervisors and MDOT that combined the FHWA eligible roadway work and the utilities work into a single project.[6]  All work was then completed according to the terms of the new joint agreement.  

At closeout, the Applicant requested reimbursement for engineering fees totaling $518,870.50.  FEMA, through the final inspection review, determined the actual engineering cost for the contract was $342,998.00.  FEMA also found that the contract included ineligible FHWA work but was unable to determine the related costs.  So, PW 954, Version 2, the closeout version, was prepared.  It awarded $171,499.00 for engineering fees, one half of the total actual engineering costs.[7]  Version 2 reduced total project eligible funding to $1,981,452.17 from $6,689,898.00, reflecting the utilities project actual cost.[8]

First Appeal

The Applicant appealed and argued that all requested engineering design costs should be eligible for reimbursement because the PW scope of work described a stand-alone utilities project that required preliminary engineering design considerations.  The Applicant argued that FEMA was aware of the exact scope because the project was one of the first Katrina PWs formulated and closely scrutinized.  The Applicant also argued that the eligible costs should be looked on favorably because the joint project with the FHWA led to a large reduction in overall project expenses.[9] 

The Grantee supported the appeal, transmitting it to FEMA on July 15, 2013.  The Grantee alleged that FEMA misunderstood that the scope of work included FHWA roadwork design services and argued the confusion was due to the timing of the agreement to perform separately funded projects simultaneously while tracking costs separately.  The Grantee also requested approval of construction costs and survey fees that FEMA found ineligible.[10]

On September 10, 2014, FEMA’s Region IV Regional Administrator (RA) denied the Applicant’s request for an additional $171,499.00 for engineering design costs.[11]  The RA noted that the $171,499.00 awarded for engineering fees is considerably more than the suggested percentage normally allowed for engineering and design services of above-average complexity.[12] 

PW 954, Version 3, incorporated the first appeal determination and obligated an additional $78,291.56, for a total project cost of $2,059,743.73.[13]

Second Appeal

On November 12, 2014, the Applicant submitted a second appeal letter requesting an additional $171,499.00 for engineering fees.  The Applicant argues that the requested fee is eligible because the engineering design contract was completed before the joint project was created.  It argued that the scope of work included additional design services that were due to design changes and time spent coordinating numerous agencies and unforeseen circumstances.  The Applicant also argued that the fee should be eligible because the joint project saved money, as evidenced by over $600,000.00 in unused funds.  The Applicant’s appeal submission included a memorandum from Compton Engineering justifying the fees as solely for the utilities project and stating they were reasonable, necessary and consistent with the required level of effort.[14]  The memorandum also pointed out that underlying construction project cost estimate was legitimately established but ended up being much lower due to a highly competitive bid market.[15]

On December 15, 2014, the Grantee submitted the second appeal to FEMA, agreeing with the Applicant and asserting that the engineering agreement was followed and no roadway work was billed to the Applicant.  The Grantee noted it is unfair to penalize the Applicant for creating a joint project that resulted in overall cost savings.[16] 

Discussion

The Robert T. Stafford Disaster Relief and Emergency Assistance Act (Stafford Act) Section 406 authorizes FEMA to “make contributions to a State or local government for the repair, restoration, reconstruction or replacement of a public facility damaged or destroyed by a major disaster and for associated expenses incurred by the government.”[17]  Implementing such authority, Title 44 of the Code of Federal Regulations (C.F.R.) § 206.223(c) states facilities belonging to a public entity may be eligible for funding.[18]  FEMA may reimburse “costs of basic engineering and design services normally performed by an architectural-engineering firm on complex construction projects.”[19]

It is the Applicant’s position that the Compton Engineering contract consisted entirely of the scope of work necessary for the restoration of the utilities project and that costs associated with that scope should be reimbursed by FEMA.[20]  The Applicant argues that, in light of reducing project costs, the engineering costs are clearly not excessive or a duplication of effort.[21]  Therefore, the Applicant concludes that the entire requested fee amount is eligible for reimbursement.  The Grantee supported the Applicant’s position and added that the contract was strictly followed.[22]

In the first appeal determination, the RA found that the fee was excessive because the engineering design contract was negotiated as a percentage of the Applicant’s total construction cost estimate of $6,751,727.00 and not adjusted after the lower actual costs became known.[23]  The contract included a provision allowing either party to adjust compensation when changes were made to the scope of work.  While the initial contract reflected reasonable costs associated with the first eligible scope of work, it should have been amended once a less complex project was identified.  Without sufficient documentation delineating the costs associated with the amount of work completed for the original scope of work and the cost to complete design work for the second scope of work, cost reasonableness based on the original scope of work cannot be determined.

Cost Reasonableness

In accordance with OMB Circular A-87, FEMA evaluates reasonable costs using the standard “[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.”[24]  Had the Applicant’s engineering services been detailed and supported by invoices, actual costs could have been determined at final inspection and reconciliation. [25]  However, because the information was not presented in such fashion, FEMA has the discretion to disallow all or part of the cost of the activity or action not in compliance.[26]

The PA Guide describes the following ways reasonable costs may be established: historical documentation for similar work, average costs for similar work in the area, published unit costs from national cost estimating databases, and FEMA cost codes.[27]  When FEMA cannot determine cost reasonableness using these mechanisms, FEMA follows the estimated figure provided in Cost Curve B for costs associated with engineering and design services.[28]

In this instance, Cost Curve B, for projects of average complexity, is an appropriate cost estimating tool.[29]  Using Curve B, the estimated amount is $108,574.07, 5.75 percent of the actual construction cost for the eligible utilities project.[30]  This reduces the previously eligible amount by $62,924.93. 

Stafford Act § 705(c) Applicability

Section 705(c) of the Stafford Act prohibits FEMA from recovering payments made to a state or local government if: the payment was authorized in an approved agreement specifying the costs, the costs were reasonable, and the purpose of the grant was accomplished.[31]  All three criteria must be met for the prohibition to apply.[32]  With regard to the second criteria, FEMA relies on the OMB Circular A-87, as outlined above, to determine the reasonableness of costs.[33]  On second appeal, FEMA found the engineering fees that the Applicant incurred to be unreasonable because the Compton Engineering contract should have been amended when the less complex project was identified.  The Applicant’s failure to do so required FEMA to determine the reasonable cost of the work conducted for the eligible project.  Exercising its discretionary authority, FEMA determined that only $108,574.07 of engineering fees are reasonable and reimbursable.  Consequently, FEMA is not prohibited from recovering the additional $62,924.93 in costs identified as unreasonable because the second criteria of Section 705(c) has not been met.

Conclusion

This appeal is denied.  The eligible engineering design service amount for this project is $108,574.07, as determined using FEMA Cost Curve B.  The Regional Administrator will adjust Project Worksheet 954 accordingly and reduce the engineering fees by $62,924.93.