Allowable Costs & Reasonable Costs

Appeal Brief

Appeal Letter

Appeal Analysis

Background

From September 7 through October 2, 2008, Hurricane Ike struck Texas with high winds, heavy rains, and storm surge. The disaster caused roof damage to Stafford Municipal School District’s (Applicant) elementary/primary school (Facility). High winds and driving rain from the hurricane tore one skylight off the Facility’s flat roof and caused water to enter the building, resulting in additional damage to the walls, ceilings, flooring, lighting, roof, flashing, vinyl baseboard, and fire alarm system. The Applicant requested Public Assistance (PA) funding for costs associated with the Facility repairs. FEMA prepared Project Worksheet (PW) 1992 to capture the scope of work (SOW) and associated cost to repair the damaged Facility at a contracted cost of $120,092.34 for repairs, $335.52 for equipment rental, and $3,605.84 in associated direct administrative costs (DAC). Total project costs were $124,033.70.

On August 3, 2020, a Financial Compliance Review (FCR), prepared by the Texas Division of Emergency Management’s (Recipient) auditor, recommended that FEMA deobligate all the funds because the Applicant had not provided cancelled checks to substantiate the costs and had not provided documentation to show it had followed competitive procurement procedures. In contrast to its auditor’s recommendation, the Recipient submitted a Large Project Closeout Request to FEMA on February 3, 2022 that instead recommended FEMA approve $120,092.34 in contract costs, noting that the Applicant was unable to obtain copies of the cancelled checks due to its bank’s policy of not maintaining records longer than seven years. The Recipient stated that although the Applicant was not able to provide proof of payment for the items the auditor sampled in the FCR, the Applicant was able to submit its 2008 requisition reports and the corresponding invoices. The Recipient also noted that the project was initially written at 99 percent completion. The Recipient recommended that FEMA prepare an amendment to deobligate $335.52 in equipment rental costs and $3,605.84 in DAC to accurately capture the Applicant’s costs to complete the project. 

On July 1, 2022, FEMA prepared an amendment to PW 1992, deobligating $120,427.86 for the Facility repairs and $3,605.84 in DAC because the Applicant did not have source documentation for submitted invoices. In the PW, FEMA noted the Applicant lacked documentation to show it had followed proper procurement procedures and lacked source documentation to support its costs, including DAC.[1] FEMA stated that it could not determine whether the costs were reasonable or whether the Applicant had accomplished the purpose of the grant.[2]

First Appeal 

The Applicant appealed via letter dated September 9, 2022, stating the FEMA deobligation was inconsistent with federal law, regulations, and FEMA policy. The Applicant stated that it complied with the record retention schedules mandated by the Texas State Library and Archives Commission and federal regulation. The Applicant also stated that requiring it to pay back the funds would cause it financial hardship. The Recipient transmitted the appeal along with an October 5, 2022 letter of support. In a March 15, 2023 decision, the FEMA Region 6 Regional Administrator denied the appeal, finding the Applicant did not provide adequate documentation, such as cancelled checks, to support the claimed costs.

Second Appeal

The Applicant submitted a second appeal on May 12, 2023, reiterating its first appeal arguments and also stating that FEMA was untimely in issuing its first appeal decision. The Recipient transmitted the appeal on May 23, 2023, along with a letter of support.[3]

Discussion

FEMA has discretionary authority that it exercises on a case-by-case basis to resolve issues of noncompliance with procurement requirements.[4] The range of authorized actions include disallowing all or part of the cost of the activity or action not in compliance.[5] While enforcement action taken by FEMA is discretionary, the action selected must be appropriate given the circumstances.[6] To the extent FEMA agrees to allow funding, FEMA first determines whether costs are reasonable.[7] For costs to be allowable and therefore reimbursable, under a PA award, the costs must be, among other requirements, reasonable and adequately documented.[8] 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.[9] 

Given the Applicant’s procurement noncompliance,[10] FEMA previously disallowed the contract costs at issue because it was unable to determine reasonable costs without documentation such as cancelled checks, payrolls, and time/attendance records, which the Applicant states it did not maintain. However, FEMA can also use other information, including paid invoices, to help determine reasonableness.[11] Here, the invoices contained within the Administrative Record provide sufficient detail to directly tie the claimed costs of $120,427.86 to associated work in PW 1992 and show that those costs are reasonable. The descriptions in the invoices are specific enough for FEMA to evaluate the eligibility of the work and costs, and the multiple invoices from multiple companies are date-stamped and contain contemporaneous notations confirming that work was complete and detailing the costs.[12] The SOW included in the PW was 99 percent complete and the PW itself was written based on actual contract costs.[13] Although FEMA did not make a reasonable cost determination in the project at that time, FEMA has now performed a reasonable cost analysis as part of its second appeal review and determines that PA funding totaling $120,427.86 represents reasonable costs a prudent person would incur for the work at issue. For example, on second appeal, FEMA reviewed an invoice for labor for journeyman electrical work to install, repair and rewire lights, billed at $65.00 per hour, and finds the costs to be fair and equitable for the type of work being performed. Thus, FEMA finds that the Applicant has provided documentation to reinstate $120,427.86 in deobligated funding for the completed repairs.[14] However, FEMA affirms its earlier finding that the record lacks any supporting documentation for DAC, a finding with which the Recipient concurred in its Large Project Closeout Request recommendation and upholds its deobligation of $3,605.84 in DAC.[15]

Conclusion

FEMA finds the Applicant has substantiated through documentation that $120,427.86 of the requested costs for completed work are reasonable and directly tied to the performance of eligible work. In contrast, the Applicant did not demonstrate that $3,605.84 in claimed DAC was eligible. FEMA awards reasonable costs of $120,427.86 for the completed work. Therefore, this appeal is partially granted.