Procurement & Contracting Requirements; Allowable Costs & Reasonable Costs; Project Management and Design Services; Project Documentation and Closeout

Appeal Brief Appeal Letter Appeal Analysis

Appeal Brief

Disaster	1603
Applicant	Holy Cross School
Appeal Type	Second
PA ID#	071-U1Z17-00
PW ID#	PW 12965, 13136, 13237. 13333
Date Signed	2021-07-07T16:00:00

Summary Paragraph

During Hurricane Katrina, the Holy Cross School’s (Applicant) campus flooded.  The Applicant elected to relocate, combining several buildings in the process.  FEMA prepared multiple Project Worksheets (PWs), which approved relocation; but stated that FEMA would obligate actual costs once the Applicant completed construction  and submitted all documentation.  In 2011, the Applicant completed construction.  The Department of Homeland Security Office of Inspector General audited the Applicant in 2015, found procurement noncompliance, and recommended FEMA deobligate $82.4 million out of $89 million.  FEMA deobligated $7,998,081.00 from the projects on appeal and closed them on May 30, 2019.  The Applicant filed a first appeal, disputing FEMA’s use of RS Means to determine reasonable costs, and stated that additions were not improvements and should thus be eligible.  FEMA partially granted the Applicant’s first appeal, revising calculations of square footage for one facility and addressing omissions in costs, but FEMA determined most items were outside the approved scope of work (SOW).  Furthermore, without actual costs, FEMA said its use of RS Means was appropriate.  The Applicant filed its second appeal, reiterating its first appeal arguments and stating that Stafford Act section 705(c) prohibited FEMA from deobligating funds.

Authorities and Second Appeals

• Stafford Act §§ 406, 705(c).
• 2 C.F.R. §§ 215.44, 215.45, 215.48, 215.62
• 44 C.F.R. §§ 13.36, 13.43(a), 206.206(a), 206.226(d).
• OMB Circular A-122, att. A § 3.
• PA Guide, at 34, 75, 115.
• FP 205-081-2, at 4-7.
• St. Tammany Par. Sch. Bd., FEMA-1603-DR-LA, at 6.
• Public Assistance Cost Estimating Format for Large Projects, Instructional Guide, Version 2, at 10.

Headnotes

• FEMA may fund the costs of repairing, restoring, reconstructing, or replacing an eligible PNP facility on the basis of the design, function, and capacity of the facility as it existed immediately prior to the major disaster.
  • The Applicant included multiple items of work/components in the SOW that were not required by any applicable code or standard, as such FEMA appropriately deobligated.
• When an applicant fails to comply with procurement procedures, FEMA may award reasonable costs that are adequately documented.
  • The Applicant has not shown through documentation that it complied with procurement conditions on the projects in question.  FEMA exercised its discretionary remedy authority by awarding reasonable costs.
• Stafford Act §705 does not apply to PNPs.
  • The Applicant, as a PNP, is not afforded §705 protections.

Conclusion

The Applicant made improvements to the Facilities that were not required by any code or standard.  In addition, regarding eligible items of work, the Applicant did not follow procurement standards, so FEMA exercised its discretion to award reasonable costs using RS Means.  Finally, as the Applicant is a PNP, Stafford Act section 705(c) does not apply.  Accordingly, this appeal is denied.

 

Appeal Letter

Appeal Analysis

Background

During Hurricane Katrina, Holy Cross School (Applicant), a Private Nonprofit (PNP), was severely impacted by flooding in its campus buildings (Facilities).  FEMA prepared Project Worksheets (PWs) 12965 for the Applicant’s high school, 13136 for its central services building, 13237 for its middle school, and 13333 for its administration building, eventually approving estimated replacement costs to restore the Facilities to their predisaster design, function, and capacity.  The Applicant completed construction of the new Facilities by 2011.

The Department of Homeland Security’s Office of Inspector General (OIG) issued a report dated April 14, 2015, stating that the Applicant did not follow Federal procurement standards for its permanent work construction projects, finding that it could not determine that those costs were reasonable.  OIG cited to Federal procurement regulations that require: (1) certain contract provisions, such as those relating to termination for cause and compliance with Equal Employment Opportunity (EEO) and labor laws, and the prohibition of kickbacks;[1] (2) efforts to utilize small business, minority-owned firms, and women’s business enterprises whenever possible;[2] and (3) a cost or price analysis in connection with the procurement.[3]  As a result of the audit, OIG questioned approximately $62.6 million associated with the projects on appeal.  

In response to the OIG’s report, FEMA performed a detailed analysis to determine if the claimed costs were reasonable.  Through this review, FEMA identified several items of ineligible work/improvements that the Applicant incorporated into the construction of the Facilities which the Agency found were not eligible for Public Assistance (PA) funding. 

FEMA noted the new construction for PW 12965 now included a new atrium.  FEMA considered this to be an enhancement and subsequently reduced hard costs associated with atrium finishes as well as corresponding soft costs for architectural and engineering (A&E), project management (PM), and construction management (CM) fees.  Similar to PW 12965, the Agency also reduced hard and soft costs for PW 13237 based on atrium finishes that constituted an ineligible improvement.  For PW 13136, FEMA determined that costs related to heating, cooling, and air conditioning (HVAC) and electrical work went beyond that which existed predisaster.  Accordingly, FEMA reduced the costs to the system requirements, which then proportionally reduced the associated A&E, PM, and CM costs. 

Lastly, for PW 13333, FEMA reduced costs associated with: (1) a new cupula (i.e., a dome-like structure that sits on top of the administration building); (2) an additional five-story tower ; (3) library finishes that exceeded the predisaster design of the facility and offered no value over lower cost alternatives; (4) an additional three dormers; (5) outfitting a new performing arts center that went beyond typical classroom finishes; (6) the finish and design of one set of stairs that exceeded what existed predisaster and does not provide any additional function or capacity over lower cost alternatives; and (7) an additional two sets of architectural double doors.

During the project closeouts for PWs 12965, 13237, and 13333, FEMA noted that the Applicant had not provided the necessary supporting documentation for FEMA to separate the ineligible work/costs from the eligible work/costs despite numerous requests by FEMA for additional documentation.  The Agency also noted that the closeout documentation from the Governor’s Office of Homeland Security and Emergency Preparedness (Grantee) did not provide a line-item-by-line-item reconciliation of the claimed total project costs.  Therefore, FEMA relied on RS Means[4] to calculate the estimated hard costs generally associated with some of the ineligible items.  As the identified work was ineligible, FEMA deemed the corresponding costs also unreasonable.  In total, FEMA deobligated almost $7,998,080.84 for the ineligible work/improvements and associated soft costs.

 

First Appeal

The Applicant filed a first appeal and supporting memoranda through the Grantee, who forwarded the appeal and recommended approval of $7,998,080.84.  The Applicant first addressed the atrium finishes documented in both PWs 12965 and 13237.  While the Applicant accepted that the work constituted an improvement and acknowledged it was unable to show the actual cost,[5] the Applicant nonetheless disputed FEMA’s calculation for this work and stated it was eligible as a cost-saving mechanism.   

Next, for PW 13136, the Applicant asserted that FEMA erred in the amount of capacity (i.e., square footage (sf)) found to be eligible in its central services building.  In addition, the Applicant contested the accuracy of FEMA’s cost evaluation.  The Applicant recommended using the actual costs to determine eligible price per sf rather than the Cost Estimating Format that FEMA used at closeout.         

Lastly, the Applicant addressed each item denied under PW 13333.  The Applicant did not dispute the cupula, three dormers, and additional two sets of double doors exceeded the predisaster condition of the facility, but argued for eligibility because they were negotiated trade-offs/concessions.  Further, the Applicant stated the doors complied with State of Louisiana’s fire and safety codes and the American Disabilities Act.  The Applicant then stated the tower was eligible as it was necessary to fulfill the legal obligation to mount the Cabrini cross at the highest point of that structure.  Next, the Applicant asserted that the library finishes were eligible as they were the current modern-day equivalent to the predisaster facility’s library finishes.  Regarding the performing arts center, the Applicant contended this deobligation was in error as costs were allocated in different PWs and therefore, never previously obligated for this project.  Finally, the Applicant stated the finish and design of one set of stairs were eligible as they were a modern equivalent and less costly alternative to replacing-in-kind the 100-year-old materials that were present in the predisaster facility.

On December 9, 2020, the FEMA Region VI Regional Administrator (RA) partially granted the appeal.  For PW 13136, FEMA acknowledged that the RS Means’ estimate included a typographical error and omission which resulted in an incorrect calculation for the square feet of the central services building.  Furthermore, FEMA found that a portion of the costs related to the HVAC and electrical systems were eligible based an evaluation of the capacity of the predisaster versus replacement facilities.  Finally, for PW 13333, FEMA reinstated the costs associated with the finish and design of the stairs because it determined they were constructed in a manner consistent with the overall function and design of the original facility, just using present day materials and methods.  Therefore, FEMA approved $2,403.183.80 for the above hard costs, and $755,801.30 for the proportional soft costs, totaling $3,158.985.10 in reasonable costs.[6]

FEMA denied the remaining $4,829,095.90 in requested PA funding.  FEMA concluded the Applicant did not follow Federal procurement regulations for its construction contracts.  FEMA also determined the Applicant’s completed work exceeded the condition of the predisaster Facilities and the approved SOW allowing for restoration.  Additionally, FEMA found the Applicant did not properly separate the ineligible costs from eligible ones.  Accordingly, for PWs 12965, 13237, and 13333, FEMA utilized RS Means to determine the estimated amount associated with the ineligible work.[7]  For PW 13136, the Agency denied the remaining portion of the actual costs because it determined the chilled water system exceeded the predisaster capacity by 15 percent and the electrical components exceeded the predisaster capacity by 11 percent. 

 

Second Appeal

The Applicant files its second appeal to the Grantee via letter and memorandum dated February 9, 2021.  The Applicant asserts that deobligating costs for the items outside the approved SOW from the projects unfairly causes the Applicant to pay twice for them.  The Applicant maintains that, notwithstanding the OIG audit, all contracts were properly procured or exempt from procurement requirements, and that all costs were reasonable.  For each PW at issue, the Applicant reiterates prior appeal arguments for the components FEMA denied or adjusted based on reasonable costs.[8]  The Applicant also argues that all of the projects were intended to meet necessary codes and standards required by the State of Louisiana.  Further, the Applicant argues that the professional fees incurred were reasonable and necessary and should not be deobligated after services were rendered.  Finally, the Applicant asserts FEMA is prohibited from deobligating funding under section 705(c) of the Robert T. Stafford Disaster Relief and Emergency Assistance (Stafford) Act.[9]        

The Grantee forwarded the appeal on April 8, 2021, providing additional analysis supporting the Applicant’s position.  For PW 13136, the Grantee claimed that FEMA was aware of the expanded space (accounted for in PW 12753) and that no costs in the PW on appeal were used for that project and, thus, should not be deobligated.  Additionally, it asserts the use of RS Means for calculating reductions was inappropriate based on two grounds.  First, the Grantee states that the instructional book for RS Means recommends using the software during the early stages of project planning but cautions that it should not be relied upon once full details of the design are available.  Second, the Grantee states that a recent Civilian Board of Contract Appeals’ decision supports the position that the use of RS Means to calculate cost reductions can lead to questionable results because in that decision, two different parties, acting in good faith, obtained significantly different estimates when calculating the cost of construction using RS Means.[10]

 

Discussion

Codes and Standards

FEMA may fund the cost of repairing, restoring, reconstructing, or replacing an eligible PNP facility on the basis of the design, function and capacity of the facility as it existed immediately prior to the major disaster.[11]  For costs that change the predisaster construction of a facility to be eligible, the standards must satisfy five different prongs laid out in Title 44 of the Code of Federal Regulations (44 C.F.R.) § 206.226(d).

The Applicant constructed/installed multiple items that did not exist in the predisaster Facilities, including, the atrium finishes, the cupula, the additional tower, the additional three dormers, and two additional sets of architectural double doors.  The Applicant also installed mechanical components, library finishes, and performing arts center items that either exceeded the predisaster design or capacity.  The Applicant argues that all of the projects were intended to meet necessary codes and standards required by the State of Louisiana.  However, as the Applicant has neither cited to, nor supplied copies of, specific codes, specifications, or standards that satisfy all five prongs of 44 C.F.R. § 206.226(d) for any of the claimed work, FEMA finds the Applicant has not demonstrated the costs were required by codes/standards upgrades.[12]

 

Procurement & Contracting Requirements; Allowable Costs & Reasonable Costs

Applicants must comply with a variety of grant administrative requirements to receive PA grants.[13]  When securing a contract for federally-funded work, an applicant is required to comply with the procurement requirements set forth in 2 C.F.R. Part 215.[14]  If an applicant materially fails to comply with procurement procedures, FEMA may award reasonable costs for items that would have otherwise been eligible for PA funding.[15]  A cost is reasonable if, in its nature or 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 costs and adequately documented.[16] 

Although the Applicant states all contracts were properly procured, it has not provided any documentation to demonstrate it followed procurement standards for the construction contracts pertaining to the PWs on appeal.[17]  Additionally, the Applicant was unable to provide documentation to support actual costs that distinguish between eligible and ineligible work.  As such, in determining what reasonable costs it may fund despite non-compliance with procurement procedures, FEMA appropriately relied on RS Means to estimate reasonable costs.[18]

The eligibility of the soft costs (A&E, PM, and CM) for these projects are directly and proportionally tied to the eligible hard costs.  FEMA previously adjusted these costs based on the approved reasonable hard construction costs found on first appeal.  As no additional hard construction costs are found eligible through this second appeal, FEMA’s first appeal determination of the amount of eligible reasonable costs for this issue stands.

 

Project Documentation and Closeout

Section 705(c) of the Stafford Act provides that a state or local government is not liable for reimbursement or any other penalty for any payment made pursuant to the Stafford Act if the payment was authorized in an approved agreement specifying costs, the costs were reasonable, and the purpose of the grant was accomplished.[19]  FEMA policy clarifies that section 705 does not apply to PNPs.[20]  Here, the Applicant cites section 705(c) as a reason for barring FEMA from recouping funding for these projects.  However, as the Applicant is a PNP, section 705(c) of the Stafford Act is not applicable.  Therefore, FEMA applied an appropriate remedy in deobligating costs and is not prohibited from recovering payments.  

 

Conclusion

The Applicant made improvements to the Facilities that were not required by any code or standard.  In addition, regarding eligible items of work, the Applicant did not follow procurement standards, so FEMA exercised its discretion to award reasonable costs it estimated using RS Means.  Finally, as the Applicant is a PNP, Stafford Act section 705(c) does not apply.  Accordingly, this appeal is denied.

 

[1] Title 2 Code of Federal Regulations (C.F.R.) § 215.48 and Appendix A to Part 215 (2005).

[2] 2 C.F.R. § 215.44(b).

[3] Id. § 215.45.

[4] RS Means is a construction cost estimator software that FEMA uses to develop reasonable construction cost estimates.

[5] Supplemental Memorandum from Counsel, Holy Cross School, to Assistant Deputy Dir., Governor's Office of Homeland Security and Emergency Preparedness (GOHSEP), at 2 (Sept. 24, 2019).

[6] FEMA used the soft cost percentages previously approved for these projects – A&E costs at 8 percent of the eligible hard costs; PM costs at 6 percent of the eligible hard costs; and CM costs at 17.45 percent of the eligible hard costs.

[7] The only exception was the tower in PW 13333 as the Applicant provided actual costs.

[8] In addition, the Applicant asserts the tower was required per a review under section 106 of the National Historic Preservation Act.  The Applicant has not provided further documentation to support this assertion.

[9] Title 42, United States Code (U.S.C.) § 5205(c) (2000).  

[10] Letter from Assistant Deputy Dir., GOHSEP, to Assistant Adm’r., FEMA, at 6 (Apr. 8, 2021); citing Roman Catholic Church of the Archdiocese of New Orleans, La., CBCA 6469-FEMA at 7 (Apr. 8, 2020). 

[11] The Robert T. Stafford Disaster Relief and Emergency Assistance (Stafford) Act § 406(a)(1)(B), 42 U.S.C. § 5172(a)(1)(B) (2000).

[12] See 44 C.F.R. § 206.206(a) (2004) (requiring an appellant to submit documented justification supporting its appeal); FEMA Second Appeal Analysis, St. Tammany Par. Sch. Bd., FEMA-1603-DR-LA, at 6 (Aug. 1, 2017).

[13] 2 C.F.R. § 215.1.

[14] The Applicant must comply with the Federal procurement requirements found at 2 C.F.R. Part 215 (for institutions of higher education, hospitals, and other private nonprofit organizations).  Although FEMA applied the requirements found at 44 C.F.R. § 13.36 (for States, local, and Indian tribal governments) in adjudicating the first appeal, this error is inconsequential because the Applicant failed to comply with similar procurement requirements located in 2 C.F.R. Part 215.

[15] See 2 C.F.R. § 215.62(a) (stating that FEMA may take an enforcement action as a remedy for procurement noncompliance but not imposing a mandatory legal obligation on FEMA to do so).

[16] Office of Mgmt. & Budget, Exec. Office of the President, OMB Circular A-122, Cost Principles for Non-Profit Organizations, Attachment A, Section (A)(3) (2004); Public Assistance Guide, FEMA 322, at 34 (Oct. 1999) [hereinafter PA Guide].    

[17] The Applicant does not provide documentation to demonstrate it: (1) included contract language that allowed for termination for cause and required compliance with EEO laws and the Copeland “Anti-Kickback” Act; (2) undertook the positive efforts to utilize small businesses, minority-owned firms, and women's business enterprises, whenever possible; or (3) performed a cost or price analysis as required by Federal regulation.  Additionally, while the Applicant alternatively argues on second appeal that it was exempt from procurement requirements due to emergency/exigent circumstances, it has not cited any specific law, regulation, or policy that excuses the specific violations stated above for the permanent construction contracts.  It has not documented that its contracting fell within any of the exceptions to Federal procurement regulations.

[18] Although the Grantee relies on a CBCA decision to dispute usage of RS Means, pursuant to 48 C.F.R. § 6106.613 (2019), a CBCA decision is primarily for the parties, is not precedential, and should concisely resolve the dispute.  Therefore, the decision does not have any bearing on the current appeal decision.  Furthermore, the decision in question took issue with costs selected in the calculation, not the usage of RS Means.  Regarding RS Means, the decision stated “[it] is [a] generally accepted method of calculating building costs.”  Roman Catholic Church of the Archdiocese of New Orleans, La., CBCA 6469-FEMA, at 7.   See also Public Assistance Cost Estimating Format for Large Projects, Instructional Guide, Version 2, at 10 (Nov. 1998) (“If the applicant does not have appropriate average weighted unit price data (meaning that the data does not apply to the eligible scope of work), the [project officer] should use the most current available RS Means cost data.”) (emphasis in original).

[19] Stafford Act § 705(c), 42 U.S.C. § 5205(c). 

[20] FEMA Recovery Policy FP 205-081-2, Stafford Act Section 705, Disaster Grant Closeout Procedures, at 1 (Mar. 31, 2016).  (“The language of Section 705, if applicable, only prohibits FEMA from recovering certain payments from state, Indian tribal governments, or local governments, and does not extend such protections to private-non-profits.  See 42 U.S.C. § 5205.”).