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) 9894 for $2,378,359.14 to fund repairs to the Applicant’s Heart Vascular Institute building.  On June 10, 2014, the Texas Division of Emergency Management (Grantee) notified FEMA that a financial compliance review revealed a cost overrun due to additional contract costs and unsubstantiated direct administrative costs (DAC).  On January 2, 2019, the Grantee recommended that FEMA amend the PW to obligate additional funding for the net cost overrun, offset by ineligible, unsupported DAC in the amount of $5,000.00 and then close the PW.  FEMA agreed, finding no DAC eligible at closeout.  In February 2019, FEMA amended the PW to deobligate $5,000.00 and notified the Grantee.  The Grantee informed the Applicant of FEMA’s findings in a letter dated February 22, 2019.

First Appeal

The Applicant appealed by letter dated April 26, 2019.  In its appeal, the Applicant asked that $123,628.20 (accounting for 5 percent of the costs for the project at issue) 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 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) which demonstrates innovation and also that prior DAC procedures were burdensome.  The Applicant asked that FEMA amend the Administrative Record with attached documentation including previous appeals and appeal responses, Requests for Information (RFI) and RFI responses.  The Grantee expressed support and forwarded the appeal on April 26, 2019.

FEMA did not issue an RFI specifically for PW 9894, instead considering the Applicant’s RFI response to another appeal with the identical issue to be part of the record.  In that RFI, 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; 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’s response to the RFI 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 Regional Administrator denied the appeal by letter dated October 22, 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 for 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 January 3, 2020 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 Stafford Act) and a prior second appeal decision.  The Grantee supports the Applicant’s appeal by letter dated January 10, 2020.

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 to unsubstantiated DAC, that FEMA reduce costs in the amount of $5,000.00, and FEMA did.  In its appeal, the Applicant asks that FEMA reimburse DAC at a fixed 5 percent rate ($123,628.20) 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 applied 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 9894, rather than submitting costs tracked, charged, and accounted for directly to PW 9894.  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.[8]

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 a specific project.  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 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 procedural error is harmless.[13] 

Conclusion

The Applicant’s documentation to support its DAC claim does not include costs that are accounted for directly to PW 9894, but rather are indirect costs which are ineligible for reimbursement as DAC.  As such, the appeal is denied.