Direct Administrative Costs & Management Costs

Appeal Brief Appeal Letter Appeal Analysis

Appeal Brief

Disaster	4323
Applicant	North Dakota Department of Emergency Services
Appeal Type	Second
PA ID#	000-UGSDX-00
PW ID#	PW 141
Date Signed	2021-05-03T16:00:00

Summary Paragraph

From March 23, to April 29, 2017, springtime flooding inundated ten counties in North Dakota.  The Grantee submitted DAC in Project Worksheet (PW) 141 for $422,600.16.  FEMA requested clarification on the different hourly contractor rates applied.  The Grantee replied that the “deployed” rate was applied to contractors who traveled overnight.  FEMA denied $48,587.50 in DAC as the deployed rate was an ineligible “blended” rate.  The Grantee appealed on September 19, 2019 stating the rate was to compensate for mobilization and working in high hazard areas, not travel costs.  FEMA issued a request for information (RFI) seeking support from the Grantee for not treating deployed rate as a blended rate.  FEMA reissued the RFI with an additional $53,663.14 in travel costs denied, as the costs benefitted multiple projects.  The Grantee responded to the reissued RFI citing 2 C.F.R. §200.405(d) to support its allocation of costs.  FEMA Region VIII Regional Administrator denied the first appeal, stating the “deployed” rate represented a “blended” rate incorporating indirect costs that could not be allocated to a single project.  Furthermore, FEMA found that 2 C.F.R. §200.405(d) had not been incorporated into policy.  The Grantee appealed on June 22, 2020, reiterating prior first appeal arguments regarding the “deployed” rate.  Furthermore, the Grantee noted that the mileage costs denied were in compliance with 2 C.F.R. §200.405(d).

Authorities and Second Appeals

• Stafford Act § 324.
• 2 C.F.R. § 200.405.
• 44 C.F.R. § 207.2, 207.6(b).
• PAPPG, at 38, 39, 40.

Headnotes

• Management costs means any indirect costs, administrative expenses, and any other expenses not directly chargeable to a specific project that are reasonably incurred by a grantee or subgrantee in administering and managing a PA grant award.  Blended rates, a labor rate plus a percentage of overall travel expenses, are not eligible as DAC, as labor and travel expenses must be tracked separately and shown to be directly related to a specific project.
  • The Grantee’s deployed rate is a blended rate as the criterion for the rate change is the contractor travelling from its primary business location.
• If a cost benefits two or more projects or activities in proportions that cannot be determined because of the interrelationship of the work involved, then the costs may be allocated or transferred to benefitted projects on any reasonable documented basis.
  • The proportions allocated cannot reasonably be determined due to the interrelationship of the costs claimed and therefore are not DAC in the Grantee’s circumstances.
• The PAPPG at 39, states that if incurred administrative costs are tracked, charged, and accounted for directly to a specific eligible project, the costs are eligible as DAC.  This includes travel expenses.
  • Mileage costs were tracked, charged and accounted for directly to specific eligible projects by the Grantee, and are eligible as DAC in this case. 

Conclusion

This appeal is denied in part and granted in part.  The $48,587.50 in claimed DAC for deployed labor is a blended rate and is ineligible as DAC.  A total of $46,709.72 in mileage costs were indirect costs and is denied.  The remaining $7,458.42 for the claimed mileage costs that were directly specific to an eligible project is eligible for funding.

Appeal Letter

Appeal Analysis

Background

From March 23 to April 29, 2017, spring flooding inundated ten counties in North Dakota.[1]  The North Dakota Department of Emergency Services (Grantee) submitted costs to FEMA for reimbursement on April 8, 2019, including $422,600.16 in claimed Direct Administrative Costs (DAC).  FEMA drafted Project Worksheet (PW) 1 for Management Costs and PW 141 for DAC.[2]  At the time the Grantee submitted the DAC claim for reimbursement, FEMA noted a higher rate was applied to contractors when they traveled overnight.  This “deployed” rate differed from the otherwise standard, “non-deployed” rate.  

FEMA contacted the Grantee on May 28, 2019, requesting clarification on the methodology of the differing rates.  The Grantee emailed FEMA on June 11, 2019, explaining the difference between the deployed and non-deployed rate.  The Grantee clarified that deployed status was based on the contractors being away from their primary place of business overnight.[3]  FEMA, in a Determination Memo dated July 24, 2019, denied $48,587.50 of DAC funding as those costs were based on the “deployed rate.”[4]  FEMA determined the deployed rate was a “blended” rate as it incorporated travel expenses that were not tracked separately or attributed to individual projects.  FEMA reduced DAC for deployed contract employees by applying the same rates the Grantee used for non-deployed contract employees.

 

First Appeal

In a letter dated September 19, 2019, the Grantee appealed FEMA’s determination that a portion of the costs were ineligible as a blended rate.  The Grantee stated that it stopped paying for travel expenses (except for mileage) due to previous denials by FEMA.  In addition, the deployed rate was to compensate contractors for mobilizations and working in high hazard areas, not for travel costs.

FEMA sent a Request for Information (RFI), dated December 4, 2019, requesting information that demonstrated how the deployed rate vs. non-deployed labor rates were not blended rates incorporating a percentage of travel costs.  The RFI stated that, per FEMA policy, when contract employees “commute to a centralized location for the purpose of developing PW’s, the mileage and associated labor cost may be eligible for federal reimbursement as a Management Cost, but not as DAC, whether the expense is documented indirectly as travel and per diem or changed into employees’ labor rates.”[5]  

In a final RFI dated January 10, 2020, FEMA notified the Grantee that an additional $61,995.22[6] in mileage and labor costs, not in the original determination, was ineligible as DAC, bringing the total denial to $110,282.73.[7]  The Grantee requested clarification on the new costs questioned, and FEMA responded with an email on January 16, 2020 clarifying that it found mileage and labor costs to be ineligible as DAC where any single trip benefited multiple PWs.

The Grantee, in a letter dated February 10, 2020, responded to the reissued RFI.  The Grantee stated that the $61,695.22 deemed ineligible as DAC was “identified as being for site inspections or represented work that corresponded directly to a specific project.”[8]  The Grantee then cited Office of Management and Budget (OMB) regulations at Title 2 Code of Federal Regulations (2 C.F.R.) §§ 200.405, 200.413 and 200.404 to justify its cost methodology.[9]  2 C.F.R. §200.405 outlines how certain costs can be allocated to a Federal award if it can be assigned to that award.  The Grantee also stated that, “[a]lthough contractors that were ‘deployed’ into the field received an additional $10 per hour, that was fair compensation for their time spent away from the office and working in potentially hazardous areas.”[10]  Furthermore, the Grantee notified FEMA that some of the deductions were incorrectly calculated and required revision.  After review, FEMA recalculated and revised the ineligible costs to $102,250.64.[11]

FEMA Region VIII’s Regional Administrator, in a letter dated April 23, 2020, denied the Grantee’s appeal.  FEMA concluded that the deployed pay rate was a blended rate, finding that the triggering factor in the increase in pay rate was the contractors’ overnight stay outside of their place of business.  FEMA considered the mobilization factor a means of paying for travel.  Furthermore, FEMA stated the costs were not documented in a way that could be tracked to a single project, and the Grantee in its RFI response conceded that “contractors worked on numerous projects each day.”[12]  Furthermore, FEMA stated that although the Grantee cited 2 C.F.R. § 200.405(d), that was not incorporated into policy.  

 

Second Appeal

The Grantee, in a letter dated June 22, 2020, appealed FEMA’s denial of the $102,250.64 in DAC, broken out between $48,587.50 in deployed rate costs and $53,663.14 in travel labor and mileage costs.[13]  The Grantee states the mileage expenses denied by FEMA were properly tracked in compliance with 2 C.F.R. § 200.405(d).  This was achieved by allocating “labor time and mileage incurred while contractors traveled to their deployed locations … to the first project they worked on,” and “the labor time and mileage incurred while contractors traveled to their deployed lodging location or primary office … to the last project they worked on that day.”[14]  Furthermore, the Grantee stated that the cited OMB regulations were in effect at the time of this 2017 disaster.[15]

 

Discussion

Direct Administrative Costs & Management Costs

Funding under the PA program is available for Management Costs, which are administrative expenses and any other expense not directly chargeable to a specific project under a major disaster.[16]  Indirect costs may not be charged directly to a project or reimbursed separately, but rather are considered to be eligible management costs.[17]  In addition to these management costs, FEMA will reimburse DAC incurred by recipients that are tracked, charged, and accounted directly to a specific eligible project.[18]  Costs associated with travel may be eligible as DAC if they are related to only one project; travel costs related to multiple projects are classified as indirect costs and may be eligible as management costs.[19]

 

Blended Labor Rates

Blended rates, which consist of a labor rate plus a percentage of overall travel expenses, are not eligible DAC, as labor and travel expenses must be tracked separately and shown directly related to a specific project.[20]

Here the Grantee applied a different rate, deployed vs non-deployed, to contract employees based on a criterion outlined in the service contract for DR 4323. [21]  This criterion, referred to by the Grantee as mobilization, is that “the contractor must have an overnight stay outside of their primary . . . business address area.[22]  This will qualify the day of and the day after the overnight stay as deployed.”[23]  This overnight stay being the trigger for the rate increase suggests that travel costs are being reimbursed by this rate.  This is further supported by the Grantee’s own affirmation that the rate addresses “effort and cost of performing work away from one’s primary place of business.”[24] 

The non-deployed rate, which is provided to contractors working on location, does not compensate for any costs of travel as none are incurred.  Therefore, with travel being the only factor triggering the increase in cost between these rates, that is the cost being compensated to the contractor.  As travel and labor expenses were not separated and shown as directly related to a project, this deployed rate is a blended rate of direct and indirect costs and cannot be reimbursed as DAC.  The determination on first appeal that the deployed rate was ineligible, reducing DAC by $48,587.50, was appropriate.

 

Travel Costs

The direct cost allocation principles in 2 C.F.R. § 200.405(d), as cited by the Grantee, state that if a cost benefits two or more projects or activities in proportions that can be determined without undue effort or cost, the cost must be allocated to the projects based on the proportional benefit.[25]  Furthermore, if instead a cost benefits two or more projects or activities in proportions that cannot be determined because of the interrelationship of the work involved, then the costs may be allocated or transferred to benefitted projects on any reasonable documented basis, provided that they are not being allocated for certain impermissible reasons specified in regulation.[26]  These principles apply to direct costs; FEMA policy states that travel costs are only eligible as direct costs when related to only one project.[27]  Travel costs benefitting multiple projects are considered indirect costs.

Here the Grantee charged morning travel costs to the first project worked on each day.  At the end of the day, travel expenses related to returning to office or lodging were charged to the last project worked that day.  This is corroborated on review of the spreadsheet of the contractor expenses with the charges being tied to specific eligible projects.[28]  The travel costs from the office location to Grantee sites, and those heading from there to the office at the end of the day are considered DAC in the amount of $7,458.42.  These costs were tracked, charged, and accounted to specific eligible projects.  Therefore, the costs claimed are eligible for reimbursement as DAC.

For the remaining amount to be considered, $46,709.72, FEMA found that travel expenses benefited more than one project despite being accounted to specific projects, and the Grantee has not demonstrated otherwise on appeal.  For example, travel to and from Joint Field Office or Forward Field Office locations likely benefited multiple projects, but those travel costs were each attributed to a single project without further explanation to refute FEMA’s findings.  Travel expenses incurred for a single trip for the benefit of multiple projects are not eligible as DAC, but instead may be eligible as indirect costs in accordance with FEMA policy.[29]   Because these are indirect costs, 2 C.F.R. §200.405(d) does not apply.     

 

Conclusion

This appeal is partially granted.  The $48,587.50 in claimed DAC for deployed labor is a blended rate and is ineligible as DAC.  In addition, $46,709.72 in mileage costs were indirect costs and are also denied as ineligible DAC.  The remaining $7,458.42 for the claimed mileage costs that were directly specific to an eligible project is eligible for funding.

 

[1] The flooding resulted in a federal major disaster declaration FEMA-4323-DR-ND on July 12, 2017.

[2] The first appeal referenced Project Worksheet (PW) 1, however, in EMMIE PW 141 is the project specifically referring to DAC and has received the reduction identified on appeal.  The Grantee does not identify either PW on second appeal.

[3] Email from Bus., Manager, N.D. Dep’t of Emergency Servs., (NDDES), to FEMA Region VIII, (June 11, 2019.  06:05 MDT).  See also NDDES, Disaster Support Services Contract, at 1 (effective July 24, 2017) [hereinafter NDDES Contract].  Specifically, the Grantee specified also that the pay differential is meant to primarily address two factors common in contract work.  The first may be referred to in some contracts as mobilization, compensation for the effort and cost of performing work away from one’s primary place of business.  Second, the differential compensates contractors for working in high hazard areas.

[4] Letter from Recovery Div. Dir., FEMA Region VIII, to Dir., NDDES., at 6, (July 24, 2019).  

[5] Letter from Reg’l Adm’r, FEMA Region VIII, to Dir., NDDES, at 1 (Dec. 4, 2019).

[6] $61,695.22 was the correct figure, $61,995.22 was mistakenly stated in this correspondence.

[7] Letter from Reg’l Adm’r, FEMA Region VIII, to Dir., NDDES, at 1 (Jan. 10, 2020).  NDDES had not yet responded to the original RFI when this was sent.   

[8] Letter from Dir., NDDES, to Reg’l Adm’r, FEMA Region VIII, at 1 (Feb. 10, 2020) [hereinafter Grantee RFI Response]. 

[9] The three sections cited deal with allocable, direct and reasonable costs respectively.

[10] Grantee RFI Response at 2.

[11] FEMA First Appeal Analysis, N.D. Dep’t of Emergency Servs., FEMA-4323-DR-ND, at 2 [hereinafter First Appeal Determination].   

[12] Id. at 3 (citing Grantee RFI Response, at 2).   

[13] Letter from Dir., NDDES, to Reg’l Adm’r., FEMA Region VIII (June 22, 2020) [hereinafter Grantee Second Appeal].  The appeal was not transmitted to FEMA HQ until Oct. 20, 2020.    

[14] Id.

[15] Id.

[16] Robert T. Stafford Disaster Relief and Emergency Assistance (Stafford) Act, § 324, Title 42 United States Code (42 U.S.C.) § 5165b (2012); Title 44 Code of Federal Regulations (44 C.F.R.) § 207.2 (2016).  Note: Disaster Recovery Reform Act (DRRA) along with certain memoranda was referenced as being in effect at the time of the disaster.  As the disaster was declared in July 2017, that was not the case.

[17] 44 C.F.R. § 207.6(b) (2016). 

[18] Public Assistance Program and Policy Guide, FP 104-009-2, at 39 (Apr. 1, 2017) [hereinafter PAPPG].

[19] Id. at 38-39.

[20] PAPPG, at 40. 

[21] NDDES Contract, at 1.

[22] Id.

[23] Id.

[24] Grantee Second Appeal, at 2. 

[25] Title 2 Code of Federal Regulations (2 C.F.R.) § 200.405(d) (2017). 

[26] Id.

[27] Requirements for how to allocate direct costs are only triggered after a determination has first been made to classify the costs at issue as “direct costs.”  Guidance to making that determination is not found in 2 C.F.R. § 200.405(d) but rather in 2 C.F.R. §§ 200.412-200.414.  Of particular note is 2 C.F.R. § 200.412’s language that, “[t]here is no universal rule for classifying certain costs as either direct or indirect under every accounting system.  A cost may be direct with respect to some specific service or function, but indirect with respect to the Federal award or other final cost objective.”  As these costs are classified as indirect costs in accordance with the PAPPG, at 38-39, 2 C.F.R. § 200.405(d)’s direct cost allocation principles have not been triggered.

[28] This analysis was based on review of the locations traveled to and from.  The “office” location for contractors referred to the Devil’s Lake location. 

[29] PAPPG, at 38-39.