Direct Administrative Costs & Management Costs – Project Management and Design Services – Insurance

Appeal Brief Appeal Letter Appeal Analysis

Appeal Brief

Disaster	4286
Applicant	Hilton Head Public Service District
Appeal Type	Second
PA ID#	013-01693-00
PW ID#	PW 1087
Date Signed	2020-12-01T17:00:00

Summary Paragraph

From October 4 through 30, 2016, Hurricane Matthew caused damage to the Applicant’s equipment, fences and water storage tanks necessary for the function of its water treatment facilities.  FEMA prepared Project Worksheet (PW) 1087 to document repair work, engineering and design (A/E) services, hazard mitigation and force account labor (FAL) Direct Administrative Costs (DAC).  FEMA denied all contractor costs for engineering and DAC, finding that the repairs were minor and therefore did not warrant A/E services.  FEMA also found some FAL DAC to be excessive and reduced anticipated insurance proceeds.  The Applicant appealed the reductions and explained that services provided by the contractor were not limited exclusively to A/E services, but also included disaster-related consulting services such as project management (PM), and efforts to pursue the Applicant’s insurance claims from its insurance carrier.  The FEMA Region IV Regional administrative partially granted the appeal, determining that all FAL DAC eligible, but found the contractor’s costs ineligible, as A/E services were not warranted, costs were not clearly separated between DAC, insurance claim support, and A/E services; and DAC was neither reasonable nor attributed to one PW.  On second appeal, the Applicant characterizes its contractor’s costs as DAC.

Authorities and Second Appeals

• 2 C.F.R. § 200.403(a), (g).
• PAPPG, at 21, 36-37, 39.
• Cameron Par. Sch. Bd., FEMA-1607-DR-LA, at 3-4; South Island Pub. Serv. Dist., FEMA-4286-DR-SC, at 4. 

Headnotes

• Costs for administrative work that can be tracked, charged, and accounted for directly to a specific eligible project, are eligible as DAC.  Costs for PM, A/E services and construction inspection are also eligible provided the services are necessary to complete eligible work.  To be eligible, all costs must be adequately documented and reasonable.
• Administrative costs in pursuit of insurance claims are not eligible as DAC.
  • The Applicant provided inconsistent descriptions of its contractor’s services and did not separately identify or distinguish DAC from A/E, PM, or insurance claim support costs referenced throughout the appeal process.

Conclusion

The Applicant has not separately identified or distinguished DAC from ineligible engineering and design, project management, or insurance claim support costs.  Therefore, the Applicant’s second appeal is denied.

Appeal Letter

Appeal Analysis

Background

During October 2016, severe high winds, rain surge, high water tides, and flooding from Hurricane Matthew caused damage to the Hilton Head Island Public Service District’s (Applicant’s) facilities.  FEMA prepared Project Worksheet (PW) 1087 to document the Applicant’s requested costs to repair damage at its water treatment facilities.  The Applicant retained CH2M Hill Engineers of Raleigh (CH2M) for associated engineering and design (A/E) services associated with the repair work.  The Applicant requested costs for CH2M’s A/E services and direct administrative costs (DAC).

FEMA subsequently denied $58,572.60 in CH2M A/E costs as the work conducted to repair the damages did not necessitate a high level of A/E work.  Further, FEMA found that the claimed DAC could not be substantiated beyond $4,503.42.  FEMA also reduced project costs by $73,210.94 in anticipated insurance proceeds.

 

First Appeal

In a letter dated October 30, 2018, the Applicant appealed, requesting that FEMA reinstate $50,601.55, which was the difference between actual and anticipated insurance proceeds.  The Applicant also explained that the services provided by CH2M “were not limited exclusively to A/E services, but included an array of disaster-related consulting services such as project management [(PM)], damage assessment, construction observation, document management, preparation of correspondence, staff augmentation and coordination” with FEMA, the South Carolina Emergency Management Division (Grantee), and its insurance carrier.[1] 

The Applicant provided spreadsheets of the PW-related activities performed by both the Applicant’s force account labor (FAL) and its contractor, CH2M.  The first spreadsheet, titled “Direct Administrative Cost Summary,” included hours billed for DAC activities completed by FAL (e.g., Data Collection & Dissemination and Financial Compliance Reviews (PA)).  The second spreadsheet, titled “Engineering Cost Summary,” which billed for CH2M work, also itemized hours billed for different tasks that were classified under a DAC heading, such as Data Collection & Dissemination and Financial Compliance Reviews (PA).  Although the Applicant listed certain additional requested costs under the combined category of “DAC/Engineering” in its appeal letter, it explained in its attached correspondence that a significant portion of CH2M’s costs also represented necessary efforts to pursue the Applicant’s insurance claims from its insurer, and these costs may offset insurance reductions according to FEMA policy.  The Grantee transmitted the first appeal on November 30, 2018. 

FEMA issued a Request for Information (RFI) on May 30, 2019, which requested: (1) clarification on which services the Applicant claimed were A/E and which were DAC, including the costs associated with each service; (2) an explanation and justification for using CH2M, an engineering firm, for both DAC and A/E services; and (3) additional information specifying what work was DAC (i.e., clarification on the individual activities performed).    

The Applicant responded in a letter dated July 26, 2019.  Regarding the DAC spreadsheet for FAL, the Applicant supplemented prior documentation by providing specific descriptions of DAC tasks associated with each previously identified general task.  Regarding the second spreadsheet, the Engineering Cost Summary table previously submitted in support of CH2M costs, the Applicant stated this included a description of the type of activities performed for A/E services, DAC, and insurance claim support activities.  Attached to the table, the Applicant provided the same list of specific DAC descriptions as that provided for the Applicant-personnel DAC spreadsheet.  Lastly, the Applicant provided a Statements of Loss from its insurer that documented the actual insurance proceeds related to this project.

On December 17, 2019, the FEMA Region IV Regional Administrator partially granted the appeal.  FEMA determined all FAL DAC to be eligible, as the Applicant sufficiently explained the DAC tasks performed by its FAL staff.  However, FEMA denied $58,572.60 in CH2M-related costs because it found the Applicant had not provided documentation separating out CH2M’s A/E services from its claimed DAC.  FEMA determined the Applicant did not provide sufficient documentation to demonstrate those costs were necessary or reasonable.  Finally, FEMA found that most of the insurance reduction represented repair costs and the $2,896.21 constituted CH2M-estimated engineering costs that were ineligible, not funding that was reduced because of a duplication of benefits issue.    

 

Second Appeal

In a second appeal dated February 14, 2020, the Applicant requests $61,468.82 in CH2M DAC-related costs, inclusive of the previously mentioned $2,896.21.[2]  The Applicant reiterates prior first appeal arguments and states that CH2M was able to provide engineering guidance on the repair work while also providing DAC-related work to pursue insurance claims and to prepare PWs for the Applicant.  Regarding the $2,896.22, the Applicant states this has already been incurred and categorized it as PW processing tasks.  Additionally, in support of the CH2M DAC originally claimed, the Applicant states that those costs are documented in the same format as the FAL DAC that FEMA approved.  Lastly, the Applicant asserts the insurance reduction should be decreased by $2,896.21 (thereby increasing eligible project costs by that amount), because these costs were part of the CH2M DAC, and were not covered or expected to be reimbursed by insurance.

 

Discussion

FEMA provides Public Assistance (PA) funding for administrative costs related to managing the PA Program and projects.[3]  If an applicant tracks, charges, and accounts for these costs directly to a specific eligible project, the costs are eligible as DAC.[4]  Separately, project management (PM) activities, such as procurement, document review, and construction oversight, are eligible provided the activities are tracked and directly related to a specific, eligible project.[5]  A/E services and construction inspections are also eligible provided the services are necessary to complete eligible work.[6]  When evaluating the eligibility of PM and A/E services, FEMA considers numerous factors, including project complexities and unexpected site conditions.[7]  In addition, if an applicant expends costs to pursue an insurance claim, FEMA offsets its insurance reductions (which are applied to avoid a duplication of benefits) with the applicant’s reasonable costs to pursue its claim.[8]  To be eligible, all costs must be adequately documented and reasonable.[9]

The Applicant requests reimbursement for services provided by its contractor, CH2M.  The Applicant, however, has offered inconsistent descriptions of CH2M’s services throughout the project formulation and appeal process.  On first appeal, the Applicant clarified that the costs were not limited exclusively to A/E services, but also included disaster-related consulting services such as PM, construction observation, and document management.[10]  In the Applicant’s second appeal, the Applicant claims CH2M’s costs as DAC, but describes CH2M’s work to include engineering guidance on the repair work, and DAC-related work to pursue insurance claims and to prepare PWs for the Applicant.  The table provided by the Applicant for CH2M’s tasks on first and second appeal was titled “Engineering Cost Summary,” indicating it pertained to engineering services.  The general tasks listed in the table were categorized as DAC.  The Applicant also maintained that a significant portion of CH2M’s costs represented efforts to pursue the Applicant’s insurance claims from its insurer, and it continues to tie its request on second appeal to those efforts.[11] 

FEMA policy distinguishes between DAC, costs for PM and engineering and design, and an Applicant’s costs to pursue insurance claims, and outlines separate eligibility considerations for each of these costs.[12]  For this project, FEMA previously determined that no A/E services were eligible because the complexity of repairs were minor.  FEMA therefore asked the Applicant to separately identify the costs for CH2M’s various services to determine DAC eligibility.  However, unlike the Applicant’s documentation submitted on first appeal pertaining to its FAL DAC, the Applicant did not produce documentation responsive to this request and did not separately identify or distinguish DAC from A/E, PM, or insurance claim support costs, so FEMA cannot determine which of these costs are reasonable or otherwise eligible.[13]  Therefore, the Applicant has not demonstrated any of the costs on appeal are eligible as DAC.

 

Conclusion

The Applicant has not separately identified or distinguished DAC from ineligible A/E, PM, or insurance claim support costs.  Therefore, the Applicant’s second appeal is denied.

 

[1] Letter from Chief Fin. Officer, Hilton Head Pub. Serv. Dist., to Pub. Assistance Specialist, South Carolina Emergency Mgmt. Div. (SCEMD), at 1-2 (Aug. 18, 2018) [hereinafter Incurred Costs Letter].

[2] The estimated work to be completed has been documented as both $2,896.22 and $2,896.21, with the correct amount being $2,896.22.  However, FEMA reduced $2,896.22 due to the costs being ineligible as A/E services, not due to a potential duplication of benefits by insurance as claimed by the Applicant.

[3] Public Assistance Program and Policy Guide, FP-104-009-2, at 36 (Jan. 1, 2016) [hereinafter PAPPG].

[4] PAPPG, at 37.

[5] Id. at 36

[6] Id.

[7] Id.

[8] Id. at 39.

[9] Title 2 Code of Federal Regulations § 200.403(a), (g) (2016); PAPPG, at 21.

[10] See Incurred Costs Letter at 1-2. 

[11] Id. at 2 (citing PAPPG at 39); Letter Fin. Mngr., Hilton Head Pub. Serv. Dist., to Dir., S.C. Emergency Mgmt. Div. at 1 (Feb. 14, 2020).  

[12] See PAPPG, at 21, 36-37, 39; see also FEMA Second Appeal Analysis, Cameron Par. Sch. Bd., FEMA-1607-DR-LA, at 3-4 (Dec. 16, 2019) (noting that FEMA guidance clearly distinguishes between DAC activities carried out to support the request for federal assistance and PM activities, such as oversight of an eligible project from the design phase to the completion of work).

[13] See FEMA Second Appeal Analysis, South Island Pub. Serv. Dist., FEMA-4286-DR-SC, PW 1177, at 4 (June 8, 2020) (noting that the documentation provided, similar to that provided in this current appeal, did not effectively separate DAC from ineligible A/E services, PM, or insurance claim support costs).