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 1091
Date Signed	2021-01-02T17:00:00

Summary Paragraph

From October 4 through October 30, 2016, Hurricane Matthew caused damage to Hilton Head Public Service District’s (Applicant’s) equipment, fences and water storage tanks necessary for the function of its water treatment facilities.  FEMA prepared Project Worksheet (PW) 1091 to document repair work, engineering and design (A/E) services, hazard mitigation, and force account labor (FAL) DAC.  FEMA reduced costs based on anticipated insurance proceeds, denied all contractor costs for engineering and DAC, finding that the repairs were minor and therefore did not warrant A/E services, and found some FAL DAC to be excessive.  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 Administrator partially granted the appeal, determining that all FAL DAC was eligible, but found the contractor’s costs ineligible, as A/E services were not warranted: specifically the costs were not clearly separated between DAC, insurance claim support, and A/E services; and DAC was neither reasonable nor attributable to one PW.  On second appeal, the Applicant characterizes all of its contractor’s costs as DAC.  The Applicant also argues costs should be reinstated because insurance proceeds were allocated to an alternate project, a second deductible should be funded, and another facility did not receive insurance proceeds.

 

Authorities and Second Appeals

• Stafford Act §312.
• 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.
• FEMA cannot provide assistance for disaster-related losses that would duplicate benefits available to an applicant from another source, including insurance.  FEMA reduces the eligible costs of a grant by the amount of anticipated proceeds.
  • The Applicant’s claim constitutes an ineligible duplication of benefits. 

 

Conclusion

The Applicant has not separately identified or distinguished DAC from ineligible engineering and design, project management, or insurance claim support costs.  In addition, repair costs claimed by the Applicant, if funded, would be a duplication of benefits.  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) facilities.  FEMA prepared Project Worksheet (PW) 1091 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 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 $69,323.62 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 $2,429.15.  FEMA also reduced project costs by $39,313.92 in anticipated insurance proceeds.

 

First Appeal

In a letter dated October 30, 2018, the Applicant appealed, requesting that FEMA reinstate $83,916.14, including full DAC and the remainder of costs not covered by insurance.  The Applicant also resubmitted an earlier letter where it 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 (Public Assistance (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 20, 2018. 

FEMA issued a Request for Information (RFI) on June 6, 2019, asking for: (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).  In addition, the RFI requested the latest Statement of Loss, the insurance adjuster’s final estimates/settlements and documentation indicating the difference in cost between the PW estimate and settlement amount for various sites.[2]    

The Applicant responded in a letter dated July 28, 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 it 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 18, 2019, the FEMA Region IV Regional Administrator partially granted the appeal.  FEMA determined all FAL DAC to be eligible, reinstating $7,539.44 as the Applicant sufficiently explained the DAC tasks performed by its FAL staff.  However, FEMA denied $69,323.62 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 sufficiently demonstrate those costs were necessary or reasonable.  Finally, FEMA adjusted its initial estimate of anticipated insurance proceeds after finding the $1,000.00 deductible for this occurrence had already been applied to PW 1087.[3] 

 

Second Appeal

In a second appeal dated February 14, 2020, the Applicant requests $74,651.62 in CH2M DAC-related costs and repair costs not covered by insurance.  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.  Lastly, the Applicant asserts that the amount approved for insurance deductions should be increased from $1,725.08 to $7,053.08.[4]  The difference, $5,328.00, is due to the following: (1) there was an additional deductible as the “[Applicant] had two policies that required a $1,000.00 deductible each;” (2) $2,280.00 in reimbursements were attributed to a different PW (PW 1070) for segment 270 (site F27); and (3) $2,048 on segment 20 (site F67) was not reimbursed by insurance.[5]

FEMA sent an RFI on December 3, 2020 to the Applicant requesting documentation clarifying if the Insurer considered the events as a single occurrence under its policy.  The Applicant responded in a letter dated December 15, 2020 providing the Building and Property Coverage Policy in effect at the time of the event.[6]

 

Discussion

Direct Administrative Costs & Management Costs

FEMA provides Public Assistance (PA) funding for administrative costs related to managing the PA Program and projects.[7]  If an applicant tracks, charges, and accounts for these costs directly to a specific eligible project, the costs are eligible as DAC.[8]  Separately, 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.[9]  A/E services and construction inspections are also eligible provided the services are necessary to complete eligible work.[10]  When evaluating the eligibility of PM and A/E services, FEMA considers numerous factors, including project complexities and unexpected site conditions.[11]  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.[12]  To be eligible, all costs must be adequately documented and reasonable.[13]

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.[14]  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.[15] 

FEMA policy distinguishes between DAC, costs for PM and A/E, and an Applicant’s costs to pursue insurance claims, and outlines separate eligibility considerations for each of these costs.[16]  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.  Without this documentation, FEMA cannot determine which of these costs are reasonable or otherwise eligible.[17] 

 

Insurance

Section 312 of the Robert T. Stafford Disaster Relief and Emergency Assistance (Stafford) Act prohibits FEMA from duplicating benefits from other sources, including insurance.[18]  FEMA therefore reduces otherwise eligible costs by actual and anticipated insurance proceeds, and requires applicants to make reasonable efforts to recover insurance proceeds that they are entitled to receive.[19]

After reviewing the insurance documentation, FEMA notes that site F67 was covered under the Applicant’s insurance policy and should have been reimbursed by the insurance provider.  The Applicant did not show that it presented these costs to the insurer or responded to the insurer’s Statement of Loss.  As such, the $2,048.00 reduced for anticipated insurance proceeds was valid.[20]  The Applicant claims that one site which received proceeds, site F27, had $2,280.00 of the $28,558.28 received from the insurance provider allocated to PW 1070, a debris removal project.[21]  After review, FEMA found $2,280.00 for site F27 was claimed on PW 1070, however the cost settlement breakdown does not include costs for debris removal.[22]  As such, the reinstatement of $2,280.00 to PW 1091 would constitute a duplication of benefits. 

Lastly, the Applicant claims a second deductible should be considered due to two policies being in effect during the disaster.  However, upon review of the insured’s “Building and Property Coverage policy,” which applies to this claim, FEMA finds that standard deductible applies to each occurrence.[23]  Per the Declarations page for this policy, the Applicant’s deductible is $1,000.00 per occurrence.  The documentation provided by the Applicant has not clearly supported that a second deductible should be considered for this event.  The deductible has been applied already to PW 1087, therefore funding an additional $1,000.00 would represent a potential duplication of benefits.    

 

Conclusion

The Applicant has not separately identified or distinguished DAC from ineligible engineering and design, project management, or insurance claim support costs.  In addition, repair costs claimed by the Applicant, if funded would be a duplication of benefits.  Therefore, the Applicant’s second appeal is denied.

 

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

[2] Additional sites requested in the RFI include, F-1, F-22, F-27, and F-67 (which showed no proceeds received). 

[3] Of the $40,313.92 amount of anticipated insurance proceeds, FEMA found actual insurance proceeds totaled $36,504.84, which left a $3,773.08 balance.  For one of the sites in the PW, identified as F-67, coverage in the amount of $2,048.00 was included in the deduction.  FEMA deemed the remaining balance of $1,725.08 to be eligible, ultimately reinstating $9,264.52 in total eligible costs.

[4] Letter from Fin. Manager, Hilton Head PSD, to Dir., SCEMD, at 2 (Feb. 14, 2020) [hereinafter Applicant’s Second Appeal].

[5] Id.

[6] Letter from Fin. Manager, Hilton Head PSD, to Dir., SCEMD, at 1-13 (Dec. 15, 2020).  Note: RFI response was received on December 21, 2020.  The remaining 38 of 51 pages of documentation was already reviewed under the Applicant’s insurance policy binder in EMMIE.

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

[8] Id. at 37.

[9] Id. at 36.

[10] Id.

[11] Id.

[12] Id. at 39.

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

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

[15] 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). 

[16] 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).

[17] 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).  

[18] Robert T. Stafford Disaster Relief and Emergency Assistance (Stafford) Act § 312, 42 U.S.C. § 5155 (2012); Title 44 Code of Federal Regulations (44 C.F.R.) § 206.250(c) (2016).

[19] 44 C.F.R. § 206.250(c); PAPPG, at 39 (Jan. 1, 2016); Recovery Policy 206-086-1, Public Assistance Policy on Insurance, at 9 (June 29, 2015); see also 2 C.F.R. § 200.406 (2016).

[20] FEMA reviewed documentation provided by the Applicant on all claimed points with an Insurance specialist to assess validity of the claim against the insurance policy.

[21] See Applicant Second Appeal, at 2.

[22] See Project Worksheet 1070, Hilton Head Public Svc Dist., Version 1 (Apr. 11, 2017).

[23] S.C. State Fiscal Accountability Auth. Ins. Reserve Fund, Building and Personal Property Coverage Form PD04 (7/08), at 4 (undated).