OIG Audit – Reasonable Costs

Conclusion:  Pursuant to 44 C.F.R. § 206.225, the labor charges incurred by the Applicant are not eligible costs because they reflect “down” or “standby” time when the Applicant’s employees and contractors were not performing eligible emergency work.  However, Section 705(c) prohibits FEMA from recovering the ineligible costs because all statutory requirements of the Section have been met.

Background

In September 2004, Hurricane Frances created hydrologic runoff and increased flows into South Florida Water Management District’s (Applicant) flood control canal system.  Implementing emergency protective measures, the Applicant used force account and contract labor to activate its emergency plan, support the Emergency Operations Center (EOC), and utilize emergency power systems.  FEMA drafted Project Worksheet (PW) 9338 to address the non-72 hour emergency response period in which the work was conducted and obligated PW 9338 for $2,684,174.55. 

In August 2012, the Department of Homeland Security (DHS) Office of Inspector General (OIG) issued Audit Report DA-12-26, FEMA Public Assistance Grant Funds Awarded to South Florida Water Management District Under Hurricane Frances.  The OIG Report included several findings, one of which was that the Applicant claimed a number of employees as having worked 22.5 to 24 hours each day for consecutive days.  The OIG concluded that it was not reasonable for a person to work that many hours without an extended rest period.  The OIG recommended, and FEMA agreed to, reduce the award by $15,460.00 in costs for standby time pursuant to FEMA Recovery Policy 9525.7, Labor Costs—Emergency Work.[1]  To arrive at the recommended $15,460.00 reduction, the OIG applied a methodology that adjusted all of the Applicant’s employees’ eligible work hours to sixteen hours per day (eight regular hours and eight overtime hours) after the first two days of emergency work. 

First Appeal

In an appeal letter dated April 17, 2013, the Applicant asserted that FEMA erred in deobligating funding based on the OIG recommendation because it relied upon a FEMA policy issued after the declared disaster date for Hurricane Frances.  The Applicant provided five reasons why FEMA should not have applied the 2006 policy: the policy was issued two years after the event and specifically precludes retroactive application; using the policy was contrary to the OIG’s audit methodology as stated in Audit Report DA-12-26; retroactive application of FEMA policy conflicts with a statement made by the FEMA Administrator in response to OIG audit report DD-12-17;[2] and retroactive application of policy violates principles of fundamental fairness.

In a July 15, 2014 first appeal determination, the Region IV Regional Administrator (RA) concurred with the Applicant that deobligation should not be based on the 2006 Recovery Policy.  However, the RA denied the appeal because, as he stated, FEMA had a longstanding practice predating the disaster to not reimburse costs for standby time.  In addition, the RA determined that the Applicant did not have a written policy in effect at the time of the disaster that authorized consecutive full-day payment, and the absence of a written policy precluded FEMA from reimbursing the requested labor costs.

Second Appeal

In an appeal dated September 25, 2014, the Applicant asserts that FEMA incorrectly characterized the hours in dispute as standby time.  The Applicant states that because it required its employees to work 24 hours or more, Federal regulations required payment of its employees for the entire time.  In addition, the Applicant asserts that it did not need to have an internal written policy in place because it operated in compliance with Federal labor law.

In a letter dated November 13, 2014, the Grantee raises an alternative argument for reimbursement of the questioned costs.  The Grantee argues that deobligation is precluded by the Stafford Act § 705(c) because FEMA obligated the charges in an approved agreement – the PW, the costs were reasonable, and the purpose of the grant was accomplished.

Discussion

Eligible Work

Pursuant to the Stafford Act § 403(a)(3), FEMA may reimburse a state or local government for work and services completed that are essential to saving lives and protecting property before, during, and immediately after a disaster.[3]  Title 44 of the Code of Federal Regulations (44 C.F.R.) § 206.225, which implements the Stafford Act, reflects that emergency protective measures to save lives, to protect public health and safety, and to protect improved property are eligible for FEMA reimbursement.[4]

The Applicant argues its staff was required to work at its EOC and certain pump stations in order to effectively prevent disaster-related flooding by pumping out the excess canal water.  The Stafford Act and its implementing regulations are explicit regarding what is eligible emergency work.  In order to be eligible for FEMA reimbursement, the work must be essential to save lives and protect property.  The labor charges claimed in PW 9338 cover several consecutive days where a number of employees logged 22.5 to 24 hours of work completed.  While the applicable Recovery Policy[5] does not preclude FEMA from reimbursing applicants for time worked over 16 hours, the Stafford Act and regulations do not allow for time charged where essential services are not being performed.  Absent proof to the contrary, it cannot be presumed that the Applicant’s employees were performing essential emergency work or services for 24 hours a day for multiple days with no extended rest period or down time.  Accordingly, FEMA practice has been to determine that a portion of the charges claimed are not eligible for reimbursement.[6]  Otherwise, some portion of federal reimbursement would fund standby which is prohibited under the Stafford Act and implementing regulations. 

To be eligible for FEMA reimbursement, costs must be necessary to accomplish the work.[7]  Force account labor costs associated with eligible work may be claimed at an hourly rate.[8]  The Applicant argues that federal labor laws require it to compensate its employees for the entire time they are on-call during an emergency event.  Although this may be true, it is important to note that not all costs incurred by the Applicant are eligible for reimbursement under the PA program.  While the Applicant may have been required by Federal labor laws to compensate its employees for being on 24-hour, on-call duty for several consecutive days, it does not mean these costs are eligible for reimbursement unless they can be linked directly to the performance of eligible work.[9]  In this instance, the charges claimed by the Applicant cannot be tied directly to eligible work, i.e. providing essential emergency services or work, because a portion of the time incurred was standby time.  Accordingly, FEMA cannot determine that the charges incurred during standby time were necessary to accomplish the work. 

FEMA agrees with the OIG’s methodology for calculating eligible costs.  The methodology is both fair and equitable for the type of work being performed.[10]  The OIG did not question labor costs incurred within the first two days of emergency work.  After the first two days, the OIG adjusted all of the employees’ eligible work hours to 16 hours per day – eight regular hours and eight overtime hours. 

Stafford Act § 705(c) Applicability

The Stafford Act § 705(c) 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 the costs, the costs were reasonable, and the purpose of the grant was accomplished.[11]  FEMA issued FP 205-081-2, Stafford Act Section 705, Disaster Grant Closeout Procedures, to establish the criteria necessary to implement section 705.[12]  If all of Stafford Act section 705(c)’s criteria are met, as delineated in that policy, FEMA is prohibited from recouping grant funds even if it later determines that it made an error in determining eligibility.^[13]