Direct Administrative Costs and Management Costs – Appeals

Appeal Brief

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) 10523 for $77,829.51 to fund the cost of diesel fuel deliveries and tank rental required to operate emergency generators.  On June 1, 2018, the Texas Division of Emergency Management (Grantee) notified FEMA that a financial compliance review revealed a net cost overrun due to a combination of additional eligible costs and ineligible and unsubstantiated direct administrative costs (DAC) and recommended that FEMA amend the PW to obligate an additional $2,482.24 and close the PW.  FEMA amended the PW to obligate an additional $2,482.24 comprised of $3,332.24 of additional costs offset by ineligible, unsupported DAC of $850.00 and notified the Grantee on July 20, 2018, which in turn informed the Applicant.

First Appeal

The Applicant appealed by letter dated February 8, 2019.  In its appeal, the Applicant asked that $3,788.63 (representing 5 percent of this PW’s total costs) be added to an all-inclusive Category Z (Cat Z) PW that would reimburse DAC for all of its Hurricane Ike projects, and argued that: (1) FEMA has not followed 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) 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 expressed support and forwarded the appeal on February 27, 2019.

FEMA issued a request for information (RFI) on April 25, 2019.  FEMA requested: documentation demonstrating that procurement of DAC contractors was performed in compliance with federal procurement requirements; copies of executed DAC contracts including scope of work (SOW) descriptions, qualifications of contractor personnel and hourly rates; and documentation identifying the specific direct administrative work performed and trackable to the PWs, and the skill levels of the personnel performing the work.  The Applicant responded by letter dated July 9, 2019.  The Applicant described the procurement process and provided copies of its DAC contract, a sample invoice showing rates charged and its DAC request with associated appeal documentation submitted previously.  It restated previous issues and contentions and acknowledged that it could not provide documentation identifying specific DAC tasks performed by its contractors relative to its PWs.[1]

The FEMA Region VI Administrator denied the appeal by letter dated September 27, 2019.  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 December 13, 2019 second appeal reiterates and expands on previous arguments, and argues FEMA’s decision is inconsistent with a provision of the Disaster Mitigation Act of 2000 (codified in Section 324 of the Robert T. Stafford Disaster Relief and Emergency Assistance Act) and a prior second appeal decision.  The Grantee supports the Applicant’s appeal by letter dated December 27, 2019.

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 and recommended that FEMA reduce costs associated with unsubstantiated DAC.  In its appeal, the Applicant asks that FEMA reimburse DAC at a fixed 5 percent rate ($3,788.63) to be added to an all-inclusive Cat Z PW for all of its Ike projects.  However, the PAAP-DAC allowance of up to 5 percent for eligible costs applies only to disasters declared on or after January 29, 2013.  The major disaster relative to this appeal was declared in 2008.  PAAP-DAC is not applicable or available to the Applicant; instead DAP 9525.9 applies.  In addition, the Applicant acknowledged that it cannot provide the necessary documentation to support its DAC claim in its RFI response.[7]  The Applicant requested 5 percent DAC for PW 10523, rather than submitting costs tracked, charged, and accounted for directly to PW 10523.  Because costs that cannot be accounted for directly to specific projects are indirect costs,[8] the 5 percent requested by the Applicant is ineligible for reimbursement as DAC.

Contrary to the Applicant’s arguments on second appeal, FEMA’s determination is not inconsistent with section 324 of the Stafford Act, or 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 as DAC.[9]  FEMA published DAP 9525.9 in March 2008, months before Hurricane Ike, and did not issue any guidance for Hurricane Ike inconsistent with that policy.  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.[10]  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.[11]  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 PW 10523.  Therefore, the costs are ineligible.

Appeals

The Applicant claims it never received a formal DM from either FEMA or the Grantee and cites FEMA Recovery Directorate Manual – Public Assistance Program Appeal Procedures.[12]  However, the Applicant received notice of its appeal rights[13] and of the applicable provisions of law and policy supporting FEMA’s determination.  The Applicant and Grantee both timely appealed, and neither has identified any additional information necessary for the appeal which FEMA has not already provided.  Therefore, any potential procedural error is harmless.[14] 

Conclusion

The Applicant’s documentation to support its DAC claim does not include costs that are accounted for directly to PW 10523, but rather are indirect costs which are ineligible for reimbursement as DAC.  As such, the appeal is denied.