Direct Administrative Costs and Management Costs – Appeals

Appeal Brief Appeal Letter Appeal Analysis

Appeal Brief

Disaster	1791
Applicant	Memorial Hermann Hospital System
Appeal Type	Second
PA ID#	000-UADRD-00
PW ID#	PW 14742
Date Signed	2020-11-13T17:00:00

Summary Paragraph

Between September 7 and October 2, 2008, Hurricane Ike struck Texas with high winds, heavy rains and storm surge and damaged the Memorial Hermann Hospital System’s (Applicant’s) facilities.  FEMA prepared and obligated Project Worksheet (PW) 14742 for $570,283.00 to fund repairs to the Institute for Rehabilitation & Research.  The Texas Division of Emergency Management (Grantee) notified FEMA a financial compliance review revealed a cost underrun due, in part, to unsubstantiated repair costs and direct administrative costs (DAC) and recommended that FEMA amend the PW to deobligate $22,150.79 ($3,750.00 of which was DAC) and close the PW.  FEMA found no DAC eligible at closeout, amended the PW to deobligate $22,150.79, and notified the Grantee, which in turn informed the Applicant.  The Applicant appealed for $27,406.61, representing 5 percent of this PW’s costs, and also argued FEMA did not provide adequate notification of its eligibility determinations or guidance on DAC for its projects.  The FEMA Region VI Regional Administrator (RA) denied the appeal.  The RA determined the Applicant did not demonstrate that FEMA failed to provide correct and consistent information regarding DAC.  Additionally, the Applicant did not demonstrate that FEMA has the authority to provide alternative methodologies of assessing the eligibility of DAC for Hurricane Ike.  Finally, the documentation submitted does not include direct costs accounted for in PW 14742, but are instead indirect costs which are not eligible for reimbursement as DAC.  The Applicant’s second appeal reiterates that FEMA and the Grantee provided incorrect and inconsistent information regarding DAC, argues that FEMA is authorized to provide alternate methods of assessing eligible DAC, and questions whether Congress, through FEMA, provided the fullest extent of appellate review in accordance with the law.

 

Authorities and Second Appeals

• Stafford Act § 324.
• DAP 9525.9, at 2.
• Cent. Bradford Progress Auth., FEMA-4030-DR-PA, at 4.
• Univ. of Tex. Med. Branch, FEMA-1791-DR-TX, at 9-10.

Headnotes

• Stafford Act § 324 provides for establishment of management cost rates.  Management costs include any indirect cost, any administrative expense, and any other expense not directly chargeable to a specific project under a major disaster, emergency, or disaster preparedness or mitigation activity or measure.
• According to DAP 9525.9, indirect costs are incurred by the grantee or applicant for a common or joint purpose benefitting more than one cost objective.  DAC can be tracked, charged, and accounted for directly to a specific project, such as staff time to complete field inspections and preparation of a PW.  Such costs cannot be assumed eligible if not tracked and documented in a manner that enables FEMA to determine if they are reasonable, necessary, and appropriate.
  • The Applicant has not provided the necessary documentation to support its DAC claim because the costs cannot be accounted for directly to specific projects.

Conclusion

The Applicant’s documentation to support its DAC claim does not include costs that are accounted for directly to PW 14742, but rather are indirect costs which are ineligible for reimbursement as DAC.  As such, the appeal is denied.

 

Appeal Letter

Appeal Analysis

Background

Between September 7 and October 2, 2008, Hurricane Ike struck Texas with high winds, heavy rains, and storm surge.  Memorial Hermann Hospital System (Applicant) sustained damage to its facilities.  FEMA prepared and obligated Project Worksheet (PW) 14742 for $570,283.00 to fund repairs to the Institute for Rehabilitation & Research building.  On July 26, 2019, the Texas Division of Emergency Management (Grantee) notified FEMA that a financial compliance review revealed a cost underrun due, in part, to unsubstantiated repair and direct administrative costs (DAC) and recommended that FEMA amend the PW to deobligate $22,150.79 ($3,750.00 of which was DAC) and then close the PW.  FEMA agreed, finding no DAC eligible at closeout.  On January 21, 2020, FEMA notified the Grantee that the unsubstantiated DAC had been deobligated and the PW had been closed.  On January 30, 2020, the Grantee informed the Applicant of the deobligation.

 

First Appeal

The Applicant appealed by letter dated April 1, 2020.  In its appeal, the Applicant asked that $27,406.61 be added to a Category Z PW that would reimburse DAC for all of its Hurricane Ike projects, and argued that: (1) FEMA did not follow its procedures for issuing Determination Memoranda (DM); (2) FEMA and the Grantee provided incorrect and inconsistent information regarding DAC; (3) FEMA creatively addressed DAC for other applicants yet refused to do so in this case; and, (4) FEMA developed Public Assistance Alternative Procedures for DAC (PAAP-DAC)[1] which demonstrates innovation and also that prior DAC procedures were burdensome.  The Applicant attached materials including previous appeals and appeal responses, Requests For Information (RFI) and RFI responses, to be added to the Administrative Record.  The Grantee supported and forwarded the appeal on April 16, 2020.

By letter dated May 26, 2020, the FEMA Region VI Regional Administrator denied the appeal.  FEMA found that the Applicant did not demonstrate that FEMA failed to provide adequate notification of its eligibility determinations, or that FEMA failed to provide correct and consistent information regarding DAC.  Additionally, the Applicant did not demonstrate that FEMA has the authority to provide alternative methodologies of assessing the eligibility of DAC for Hurricane Ike.  Finally, the Applicant acknowledged in its RFI response that it could not provide the documentation needed to support its DAC claim.[2]

 

Second Appeal

The Applicant’s August 27, 2020 second appeal reiterates that FEMA and the Grantee provided incorrect and inconsistent information regarding DAC, states that FEMA is authorized to provide alternate methods of assessing eligible DAC, acknowledges that it cannot provide documentation to support its DAC claim, and questions whether Congress, through FEMA, provided the fullest extent of appellate review in accordance with the law.The Grantee supported the appeal in a September 9, 2020 letter.

 

Discussion

Direct Administrative Costs and Management Costs

In accordance with FEMA Disaster Assistance Policy (DAP) 9525.9, Section 324 Management Costs and Direct Administrative Costs, DAC includes costs incurred by a grantee or applicant “that can be tracked, charged, and accounted for directly to a specific project, such as staff time to complete field inspections and preparation of a PW.”[3]  Eligible DAC is limited to actual reasonable costs incurred for a specific project.[4]  Such costs cannot be assumed eligible if not tracked and documented in a manner that enables FEMA to determine if they are reasonable, necessary, and appropriate.[5]  To allow FEMA to evaluate DAC, applicants must provide information about each activity performed in sufficient detail.[6] 

The Grantee completed a financial compliance review and determined, due, in part, to unsubstantiated DAC, that a cost underrun existed in the amount of $3,570.00.  The Grantee recommended that FEMA deobligate $3,570.00 to account for the underrun, and FEMA did.  In its appeal, the Applicant asks that FEMA reimburse DAC at a fixed 5 percent rate ($27,406.61) to be added to an all-inclusive Category Z PW for all of its Ike projects.  However, an allowance of up to 5 percent of eligible costs is not applicable or available to the Applicant; instead DAP 9525.9 applies.[7]  In addition, the Applicant acknowledged that it cannot provide the necessary documentation to support its DAC claim.[8]  The Applicant requested 5 percent DAC for PW 14742, rather than submitting costs tracked, charged, and accounted for directly to PW 14742.  Because costs that cannot be accounted for directly to specific projects are indirect costs, the 5 percent requested by the Applicant is ineligible for reimbursement as DAC.[9]

Contrary to the Applicant’s arguments on second appeal, FEMA’s determination is not inconsistent with any prior FEMA guidance or second appeal decision that the Applicant has identified.  Section 324 of the Stafford Act includes indirect costs and administrative expenses as potentially eligible management costs (which are separate from DAC), but does not require FEMA to reimburse an applicant’s costs on appeal as DAC.  FEMA published DAP 9525.9 in November 2007, months before Hurricane Ike, and did not issue any guidance for Hurricane Ike inconsistent with that policy.[10]  The policy plainly states DAC includes costs incurred “that can be tracked, charged, and accounted for directly to a specific project,” and this policy applied even if FEMA did not respond to alternate requests from the Applicant.[11]  Finally, in the University of Texas Medical Branch second appeal decision cited by the Applicant, FEMA denied funding when the applicant did not track costs directly to a specific project or substantiate the eligibility of DAC, consistent with FEMA’s decision here.[12]  As noted above, the Applicant has acknowledged that it cannot provide the necessary documentation to support its DAC claim, as costs cannot be accounted for directly to a specific project.  Therefore, the costs are ineligible.

 

Conclusion

The Applicant’s documentation to support its DAC claim does not include costs that are accounted for directly to PW 14742, but rather are indirect costs which are ineligible for reimbursement as DAC.  As such, the appeal is denied.

 

[1] Recovery Policy, Public Assistance Alternative Procedures for Direct Administrative Costs, at 2 (Oct. 25, 2017).

[2] Letter from Dir. FEMA, to Chief, Tex. Dep’t of Emergency Mgmt., Assoc. VP. Fin., Mem’l Hermann Health Sys., (Oct. 10, 2017); Letter from Assoc. VP. Fin., Mem’l Hermann Health Sys., to Chief, Tex. Dep’t of Emergency Mgmt., at 1 (Nov. 30, 2017) [hereinafter RFI Response]...

[3] Disaster Assistance Policy DAP 9525.9, Section 324 Management Costs and Direct Administrative Costs, at 5 (Nov. 13, 2007).

[4] Id.

[5] FEMA Second Appeal Analysis, Cent. Bradford Progress Auth., FEMA-4030-DR-PA, at 4 (Feb. 29, 2016) (citing FEMA Second Appeal Analysis, City of Cedar Rapids, FEMA-1763-DR-IA, at 3 (May 9, 2014)).

[6] Id.

[7] Prior appeal responses on this topic stated that PAAP DAC applied to disasters declared on or after January 29, 2013, which is the period of applicability for PA Alternative Procedures per Section 428 of the Stafford Act.  PAAP DAC applied to disasters declared on or after August 23, 2017.  This date does not affect the applicability of the policy to this appeal and prior decisions on this topic.

[8] See RFI Response; Letter from Assoc. VP. Fin., Mem’l Hermann Health Sys., to Chief, Tex. Div. of Emergency Mgmt., at 17 (Aug. 27, 2020). Specifically, “If we were able to meet what FEMA eventually decided was its standards for DAC – we would have never been forced into a position to appeal.”..

[9] See Disaster Assistance Policy DAP 9525.9, Section 324 Management Costs and Direct Administrative Costs, at 2 (Nov. 13, 2007).

[10] In prior second appeals for this Applicant on DR-1791, the month and year the DAP was published was incorrectly cited as March 2008.  The corrected date does not affect the applicability of the policy to this appeal and prior decisions on this topic.

[11] DAP 9525.9, at 5.

[12] FEMA Second Appeal Analysis, Univ. of Tex. Med. Branch, FEMA-1791-DR-TX, PWs 1001, 10638 and 12128, at 9-10 (Sept. 21, 2017) (denying costs ineligible as DAC, including any costs that were awarded in error earlier).