Procurement & Contracting Requirements – Allowable Costs & Reasonable Costs – Project Documentation and Closeout

Appeal Brief Appeal Letter Appeal Analysis

Appeal Brief

Disaster	4332
Applicant	Orangefield Independent School District
Appeal Type	Second
PA ID#	361-111F4-00
PW ID#	PW 2915
Date Signed	2021-05-03T16:00:00

Summary Paragraph

From August 23 to September 15, 2017, flooding from Hurricane Harvey damaged school facilities owned by the Orangefield Independent School District (Applicant).  The Applicant contracted with Belfor USA (Belfor) for mold remediation.  FEMA prepared Project Worksheet (PW) 2915 to document work under the Belfor contract, and obligated $2,475,542.53 for the project.  The Texas Division of Emergency Management (Grantee) reviewed the project and recommended FEMA deobligate $85,432.97 in contractor markups resulting from cost plus a percentage of cost (CPPC) provisions in the Belfor contract.  FEMA concurred and deobligated the funding.  The Applicant appealed, arguing that the Belfor contract was a properly procured time and materials contract and that the costs were reasonable.  FEMA subsequently identified additional CPPC provisions and related costs, as well as meal expenses that duplicated costs already charged through employee per diem.  The FEMA Region VI Regional Administrator (RA) denied the appeal in the amount of $124,007.06.  FEMA found that contractor’s markups were the result of ineligible CPPC provisions and that most of the meal expenses were ineligible duplicate costs.  The Applicant submitted a second appeal, reiterating its previous arguments and asserting that Section 705(c) of the Stafford Act applies.

Authorities and Second Appeals

• Stafford Act § 705(c).
• 2 C.F.R. §§ 200.323(d), 200.338, 200.403(a), 200.404.
• PAAPG, at 30, 63.
• FP 205-081-2, at 6.
• Collier (County), FEMA-4337-DR-FL, at 3-4.

Headnotes

• Federal procurement standards prohibit the use of the CPPC method of contracting.
  • Contractor’s markups in the Belfor contract were determined using a prohibited CPPC method in violation of federal procurement standards.  The associated costs are ineligible.
• Among other criteria, costs must be necessary and reasonable to be considered allowable under the Public Assistance (PA) grant program.
  • Costs for meals invoiced by Belfor are ineligible duplicate costs.  On first appeal, FEMA determined allowable costs in accordance with the RA’s enforcement authority.
• If FEMA determines that the purpose of the grant was not accomplished, or that an applicant did not incur reasonable costs, Stafford Act Section 705(c) does not apply.
  • The use of CPPC provisions in the Belfor contract meant that the purpose of the grant was not accomplished.  Additionally, the duplicate costs for employee meals are not reasonable.  Therefore, Section 705(c) does not apply.

Conclusion

The Applicant’s contract with Belfor utilized prohibited CPPC provisions to determine contractor’s markups for some items.  Associated costs totaling $111,445.61 are ineligible.  Additionally, meal expenses totaling $12,561.45 are ineligible because they are duplicate costs and therefore not reasonable.  Finally, Stafford Act Section 705(c) does not prevent FEMA from recouping PA funding.  Therefore, this appeal is denied.

Appeal Letter

Appeal Analysis

Background

From August 23 to September 15, 2017, flooding from Hurricane Harvey damaged school facilities owned by the Orangefield Independent School District (Applicant).  The Applicant contracted with Belfor USA (Belfor) to complete mold remediation work at several properties.  FEMA prepared Project Worksheet (PW) 2915 to document the work and costs associated with the contract, obligating Public Assistance (PA) funding totaling $2,475,542.53.  Subsequently, the Texas Division of Emergency Management (Grantee) recommended FEMA deobligate $85,432.97 in contractor markups resulting from cost plus a percentage of cost (CPPC) provisions in the Belfor contract.  FEMA concurred, deobligated the funding, and closed the project.  The Applicant received notice of the closure of the project and the deobligation from the Grantee on January 20, 2020.

 

First Appeal

The Applicant submitted a first appeal dated March 19, 2020, requesting FEMA restore PA funding in the amount of $85,432.97.  The Applicant asserted that the Belfor contract was a competitively procured time and materials contract that included a ceiling price, and stated that it implemented quality control measures resulting in reduced overall contract costs.  It stated that the amount in dispute was the total cost of contractor’s markups for a small tools allowance, subcontractor expenses, and reimbursable expenses.  The Applicant explained that the amount of each markup was determined using a percentage of costs.  It asserted that FEMA “did not consider the percentage-based components … unfair and/or unreasonable” when initially obligating PA funding for PW 2915.[1]  The Applicant argued that each disputed cost was based on customary contracting practices and should be considered reasonable.  In a letter dated April 8, 2020, the Grantee expressed support for the appeal.

FEMA issued a Request for Information to the Applicant in which it identified new eligibility issues with the Belfor contract and associated costs.  First, FEMA noted issues with procurement; it requested cost analysis and other documentation noted in the contract, which had not been previously provided.  Second, FEMA identified what appeared to be additional CPPC charges invoiced by Belfor, for employee per diem and lodging expenses.  FEMA requested copies of original invoices, if available, demonstrating the actual costs of the lodging expenses.  Finally, FEMA noted that Belfor had invoiced meal expenses for its work crews, potentially duplicating costs already charged through per diem.  FEMA requested information associated with the meal expenses.  With the additional costs, the amount in dispute increased to $126,676.65.

In response, the Applicant provided a cost analysis of the Belfor contract, as well as other clarifying information.  Regarding the potential CPPC provisions, the Applicant reiterated its first appeal arguments.  It emphasized its earlier assertion that the Belfor contract was an authorized time and materials contract, and argued that the amounts at issue were for Belfor’s overhead and profit, which are allowed.  Finally, regarding the cost of crew meals and per diem, the Applicant asserted that it was not possible for Belfor’s crews to obtain food in the local area during the workday.  It stated that meals had to be brought in from elsewhere to feed between 90 and 150 people, including critical workers, workers that did not receive per diem, and the Applicant’s own employees.  The Applicant asserted that, given these circumstances, the meal costs were reasonable and should be found eligible.

The FEMA Region VI Regional Administrator (RA) denied the appeal in the amount of $124,007.06 on November 19, 2020.  FEMA determined that significant elements of the Belfor contract met the criteria of a time and materials contract.  However, FEMA analyzed the disputed costs totaling $111,445.61 for the small tools allowance, subcontractor expenses, reimbursable expenses, per diem, and lodging.  It found that in each case Belfor charged a markup that was determined using a CPPC contracting method, and therefore the costs were ineligible under federal regulations.  Finally, FEMA analyzed the meal expenses and employee per diem claims, and found that $12,561.45 were duplicated costs, which were also ineligible.

 

Second Appeal

The Applicant submitted a second appeal dated January 18, 2021, requesting FEMA restore $126,676.65 in PA funding.  The Applicant reiterates its first appeal arguments regarding the Belfor contract.  Regarding the costs for the contractor’s markups ($111,445.61), the Applicant disputes FEMA’s finding that the costs resulted from a CPPC contracting method in that: (1) the ceiling price included in the Belfor contract made the contractor’s entitlement certain; and (2) the Belfor contract did not contain incentives for the contractor to increase its base costs, as demonstrated by the fact that actual costs for the project were well under the contract’s ceiling price.  Regarding potential duplicate costs for per diem and crew meals, the Applicant reiterates its previous arguments.  Finally, the Applicant asserts that Section 705(c) of the Robert T. Stafford Disaster Relief and Emergency Assistance (Stafford) Act prohibits FEMA from recouping the PA funding at issue.  In a letter dated February 3, 2021, the Grantee expresses support for the appeal.[2]

 

Discussion

CPPC Contract Provisions

FEMA provides PA funding for contract costs based on the terms of the contract if an applicant meets procurement requirements set forth in federal regulation.[3]  Applicants must comply with federal procurement standards as a condition of receiving PA funding for contract costs for eligible work.[4]  Federal procurement standards expressly prohibit the use of the CPPC method of contracting.[5]

At issue are provisions in the Belfor contract charging contractor’s markups for a small tools allowance, subcontractor expenses, reimbursable expenses, and employee per diem and lodging.[6]  On first appeal, FEMA analyzed the contract provisions and found that each used a CPPC method for determining costs.  On second appeal, FEMA affirms the earlier analysis.  The cited provisions in the Belfor contract use pre-determined percentage rates applied to costs that were uncertain at the time the contract was executed.  As such, in each case Belfor’s markup increased commensurately with increases to each cost, creating a potential incentive to increase profits by increasing expenses under the contract.  FEMA agrees that the provisions use a prohibited CPPC method and thus violate federal contract procurement standards.  Consequently, markups totaling $111,445.61 are ineligible for PA funding.

 

Allowable Costs for Meal Expenses

Among other criteria, costs must be necessary and reasonable to be considered allowable under the PA grant program.[7]  A cost is reasonable if, in its nature and amount, it does not exceed that which would be incurred by a prudent person under the circumstances prevailing at the time the decision was made to incur the cost.[8]

The Applicant’s contract with Belfor included a provision for daily employee per diem expenses of $40.00 per individual.  Belfor also charged the Applicant $15,231.04 for employee meals provided at the work site(s).  On appeal, the Applicant does not dispute that some Belfor employees received both per diem and on-site meals, but claims that the meal costs were reasonable under exigent circumstances.  However, FEMA policy prohibits funding both employee per diem and meal expenses.[9]  This is because the cost of on-site meals duplicates the meal allowance included with daily per diem.  Providing funding for both costs is not reasonable.

The information available in the administrative record does not contain enough detail to determine precisely which Belfor employees received both per diem and the on-site meals.  In the first appeal decision, FEMA compared daily meal invoices and the number of Belfor employees claiming per diem.  As a result of this analysis, FEMA denied $12,561.45 as ineligible duplicate costs but funded $2,669.59 in invoiced meal expenses.  On second appeal, FEMA affirms the earlier analysis.  Given the circumstances described by the Applicant and the information available, FEMA’s determination of allowable costs was made in accordance with the RA’s discretionary enforcement authority.[10]  Consequently, the Applicant’s claim for $12,561.45 in on-site meal costs remains ineligible for PA funding.

 

Stafford Act Section 705(c)

Stafford Act Section 705(c) provides that a state or local government is not liable for reimbursement or any other penalty for any payment made under the Stafford Act if: (1) the payment was authorized by an approved agreement specifying the costs; (2) the costs were reasonable; and (3) the purpose of the grant was accomplished.[11]  However, if FEMA determines that an applicant failed to comply with a post-award term or condition of the award such as federal requirements for procurement, the purpose of the grant was not accomplished and FEMA is not prohibited by Section 705(c) from recovering payments as a remedy.[12]  Additionally, if FEMA determines that the applicant did not incur reasonable costs in performing the approved scope of work, Section 705(c) does not apply, and FEMA will take all appropriate actions to recover payments made for disallowed costs or overpayment, including if there was also a project eligibility error.[13]

The Applicant asserts that Stafford Act Section 705(c) prevents FEMA from recouping PA funding for the costs in dispute.  However, PA funding totaling $111,445.61 is associated with prohibited CPPC provisions in the Belfor contract.  Inclusion of these provisions in the Belfor contract represents a failure to comply with federal procurement standards.  Therefore, Stafford Act Section 705(c) does not prevent FEMA from recouping funding for the contractor’s markups because the purpose of the grant was not accomplished.  Additionally, PA funding totaling $12,561.45 is associated with meal expenses that duplicate costs of the per diem payments provided to Belfor employees.  Because this is explicitly prohibited by FEMA policy,[14] the meal expenses are not reasonable costs.  Consequently, because the Applicant did not incur reasonable costs, Stafford Act Section 705(c) does not apply, and FEMA may recoup funding for the meal expenses at issue.

 

Conclusion

The Applicant’s contract with Belfor utilized prohibited CPPC provisions to determine contractor’s markups for some items.  Associated costs totaling $111,445.61 are ineligible.  Additionally, meal expenses totaling $12,561.45 are ineligible because they are duplicate costs and therefore not reasonable.  Finally, Stafford Act Section 705(c) does not prevent FEMA from recouping PA funding.  Therefore, this appeal is denied.

 

[1] Letter from Superintendent, Orangefield Indep. Sch. Dist., to Tex. Div. of Emergency Mgmt. (TDEM), at 6 (Mar. 19, 2020).

[2] Both the Applicant and Grantee misstate the amount in dispute; see, e.g., Letter from Superintendent, Orangefield Indep. Sch. Dist., to TDEM, at 1 (Jan. 18, 2021).  On first appeal, FEMA did not deny the entire amount of the meal expenses invoiced by Belfor.  The correct amount in dispute on second appeal is $124,007.06.  Additionally, the Applicant asserts that the disputed costs for per diem and lodging that FEMA identified in the Request for Information are presently on first appeal; Id. at 1-2.  However, FEMA properly identified its concerns with the eligibility of these costs, and received the Applicant’s response, prior to the issuance of the first appeal decision.  The Applicant has been afforded its full appeal rights; all matters in dispute are presently on second-level appeal.

[3] Title 2 Code of Federal Regulations (2 C.F.R.) Part 200 (2017); Public Assistance Program and Policy Guide, FP 104-009-2, at 30 (Apr. 1, 2018) [hereinafter PAPPG].

[4] PAPPG, at 30.

[5] 2 C.F.R. § 200.323(d) (“[t]he cost plus a percentage of cost and percentage of construction cost methods of contracting must not be used”).

[6] Belfor USA, Work Authorization (Commercial and Industrial), at Exhibit C-1 (Sept. 7, 2017).

[7] 2 C.F.R. § 200.403(a).

[8] Id. at § 200.404.

[9] PAPPG, at 63 (“Provision of meals … for employees and volunteers engaged in eligible Emergency Work … is eligible provided the individuals are not receiving per diem”).

[10] See 2 C.F.R. § 200.338; cf. FEMA Second Appeal Analysis, Collier (County), FEMA-4337-DR-FL, at 3-4 (Feb 2, 2021).

[11] Robert T. Stafford Disaster Relief and Emergency Assistance Act § 705(c), 42 U.S.C. § 5205(c) (2017).

[12] Recovery Policy FP 205-081-2, Stafford Act Section 705, Disaster Grant Closeout Procedures, at 6 (Mar. 31, 2016).

[13] Id. at 7.

[14] PAPPG, at 63.