Direct Administrative Costs & Management Costs – Project Management and Design Services

Appeal Brief

Summary Paragraph

During October 4–30, 2016, Hurricane Matthew caused damage to the South Island Public Service District’s (Applicant’s) facilities, including damages to underground assets and appurtenances dedicated to water distribution and wastewater collection, which were documented in Project Worksheet (PW) 1177.  In PW 1177, the Applicant requested $164,639.08 in Public Assistance (PA) funding, including $94,893.47 in repair costs, $9,989.94 in Force Account Labor (FAL) Direct Administrative Costs (DAC), and $59,755.67 in contract costs from CH2M HILL Engineers, Inc. (CH2M) for work documented on invoices as “engineering services.”  FEMA denied all CH2M costs, finding that the repairs were minor and therefore did not warrant engineering and design services.  FEMA also found some DAC to be excessive and took an anticipated insurance proceed deduction, bringing total project costs to $5,244.67.  On appeal, the Applicant justified its FAL DAC and explained that services provided by CH2M were not limited exclusively to engineering and design services, but also included disaster-related consulting services such as project management (PM), construction observation, document management, coordination with FEMA and the South Carolina Emergency Management Division, and efforts to pursue the Applicant’s insurance claims from its insurance carrier.  In a Request for Information, FEMA asked the Applicant to distinguish CH2M’s costs incurred for DAC, from those incurred for engineering and design and insurance claim support, but the Applicant did not do so.  In a first appeal decision, FEMA granted all FAL DAC, but continued to find CH2M’s costs ineligible, as engineering and design services were not warranted, costs were not clearly separated between DAC, insurance claim support, and engineering and design services, and DAC was not reasonable or attributed to one PW.  On second appeal, the Applicant now characterizes CH2M’s costs as DAC, but also continues to tie costs to insurance claim support.

Authorities and Second Appeals

• PAPPG, at 21, 36-37, 39.
• Cameron Parish Sch. Bd., FEMA-1607-DR-LA, at 3-4.

Headnotes

• Administrative costs related to managing the PA Program and PA projects, if tracked, charged, and accounted for directly to a specific eligible project, are eligible as DAC.
• 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.  Engineering and design 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.
  • The Applicant provided inconsistent descriptions of its contractor’s services and did not separately identify or distinguish DAC from engineering and design, PM, or insurance claim support costs referenced throughout the appeal process.
     

Conclusion

The Applicant has not separately identified or distinguished DAC from engineering and design, PM, or insurance claim support costs.  Therefore, the Applicant has not demonstrated the costs are reasonable or otherwise eligible as DAC, and the Applicant’s second appeal is denied.

Appeal Letter

Appeal Analysis

Background

During October 4–30, 2016, severe high winds, rain, power outages, high water tides, and flooding from Hurricane Matthew caused damage to the South Island Public Service District’s (Applicant’s) facilities.  FEMA prepared Project Worksheet (PW) 1177 to document damages to the Applicant’s underground assets and their appurtenances – including pipelines, valves, hydrants, and meters – dedicated to water distribution and wastewater collection.  The Applicant requested $164,639.08 in Public Assistance (PA) funding, including $94,893.47 in repair costs, $9,989.94 in Force Account Labor (FAL) Direct Administrative Costs (DAC), and $59,755.67 in contract costs from CH2M HILL Engineers, Inc. (CH2M) for work documented on invoices as “engineering services.”[1]

In the determination memo, FEMA approved all costs for repairs as eligible, but denied all contract engineering costs, finding that the repairs were minor and therefore did not warrant engineering and design services.  FEMA also determined that $5,245.27 in excess DAC was ineligible and deducted $94,393.47 to avoid duplicating anticipated insurance proceeds, bringing total project costs to $5,244.67.

First Appeal

In a first appeal dated November 6, 2018, and transmitted by the South Carolina Emergency Management Division (Grantee) on November 19, 2018, the Applicant contested FEMA’s denial of $59,755.67 for CH2M’s contract costs and $5,245.27 in FAL DAC.  In an attached letter, the Applicant explained that the services provided by CH2M “were not limited exclusively to engineering design 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 Grantee, and its insurance carrier.[2]  It also explained that a significant portion of CH2M’s costs represented necessary efforts to pursue the Applicant’s insurance claims from its insurer, and these costs may offset insurance reductions according to FEMA policy.  Finally, the Applicant contended that any excessive DAC was due to excessive and redundant documentation demands from FEMA.

On June 14, 2019, FEMA issued a Request for Information (RFI) raising concerns about engineering and design and DAC work descriptions and asking that the Applicant: clarify and distinguish between CH2M’s engineering and design, DAC, and insurance claim support costs; provide explanation and justification for the Applicant’s decision to contract an engineering firm to complete engineering and design, DAC, and insurance claim support; and provide additional clarification on DAC activities performed.  In emails dated August 2 and 6, 2019, the Applicant and its engineer provided more detailed explanation of specific DAC activities questioned in the RFI, and explained that the Applicant did not have engineers on staff to design and plan major projects or repairs, and did not have the staff or expertise to navigate the complicated process of filing claims with FEMA, the Grantee, and insurance companies, which is why it engaged CH2M for these tasks.  The Applicant did not respond directly to FEMA’s request to distinguish between CH2M’s engineering and design, DAC, and insurance claim support costs.  The RFI response also requested that additional documentation and email correspondence be added to the administrative record.

On November 22, 2019, FEMA Region IV’s Regional Administrator (RA) issued a decision partially granting the Applicant’s first appeal but denying the majority of appealed costs.  The RA found all FAL DAC to be eligible, as the Applicant had sufficiently explained DAC tasks performed by its FAL staff.  However, the RA found that engineering and design services were not warranted for the type of minor repair work performed, including fire hydrant, water line, and sewer line repairs.  In addition, the Applicant did not clarify which of CH2M’s costs were for engineering and design, DAC, or insurance claim support as FEMA had requested.  Were the costs to be claimed as DAC, the RA found they would still be ineligible as they appeared unreasonable and could not be solely attributed to a single PW.  Finally, FEMA incorporated the requested email correspondence into the administrative record, but noted the Applicant did not explain how any additional documentation should be applied in support of the appeal.

Second Appeal

The Applicant submitted a second appeal dated January 15, 2020, and transmitted by the Grantee by letter dated March 13, 2020, requesting $59,755.67 for PW 1777.  The Applicant now characterizes CH2M’s costs as DAC, incurred as a result of FEMA’s and its insurer’s extensive documentation requirements.  It also continues to cite policy allowing FEMA to offset insurance reductions with the Applicant’s costs to pursue claims to recover insurance proceeds.  The Applicant further states that CH2M’s costs are documented in the same format as the FAL DAC that FEMA approved.

Discussion

FEMA provides PA funding for administrative costs related to managing the PA Program and PA projects.[3]  If an applicant tracks, charges, and accounts for these costs directly to a specific eligible project, the costs are eligible as DAC.[4]  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.  Engineering and design services and construction inspection are also eligible provided the services are necessary to complete eligible work.  When evaluating the eligibility of PM and engineering and design services, FEMA considers numerous factors, including project complexities and unexpected site conditions.[5]  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.[6]  To be eligible, all costs must be adequately documented and reasonable.[7]

The Applicant requests reimbursement for services provided by its contractor CH2M.  However, the Applicant has offered inconsistent descriptions of CH2M’s services throughout the appeal process.  On second appeal, the Applicant claims CH2M’s costs as DAC.  However, in the invoices and spreadsheets submitted in support of its request, the costs are characterized as pertaining to engineering services.  On first appeal, the Applicant clarified that the costs were not “limited exclusively to engineering design services,” but also included disaster-related consulting services such as PM, construction observation, and document management.[8]  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.[9] 

FEMA policy distinguishes between DAC, costs for PM and engineering and design, and an Applicant’s costs to pursue insurance claims, and outlines separate eligibility considerations for each of these costs.[10]  For example, FEMA determined that no engineering and design services were eligible because the complexity of repairs were minor, but that some DAC was eligible for this PW.  FEMA therefore asked the Applicant to separately identify the costs for CH2M’s various services to determine eligibility.  However, the Applicant did not respond to this specific request and did not separately identify or distinguish DAC from engineering and design, PM, or insurance claim support costs, so FEMA cannot determine which of these costs are reasonable or otherwise eligible.  Therefore, the Applicant has not demonstrated the costs are eligible as DAC.

Conclusion

The Applicant has not separately identified or distinguished DAC from engineering and design, PM, or insurance claim support costs.  Therefore, the Applicant has not demonstrated the costs are reasonable or otherwise eligible as DAC, and the Applicant’s second appeal is denied.