Private Nonprofit – Procurement – Net Small Project Overrun – Insurance – 705(c)

Appeal Brief Appeal Letter Appeal Analysis

Appeal Brief

Disaster	1551-1595
Applicant	Cordova Community Facilities Corporation, Perdido Housing Corporation, Emerald Coast Housing I, Emerald Coast Housing II, Blackwater Housing Corporation, Bayshore Housing Corporation
Appeal Type	Second
PA ID#	033-U4P2E-00,033-UMNE2-00,: 091-UAOE7-00,091-UMWNK-00,113-U47XR-00,091-U2G65-00
PW ID#	Multiple Project Worksheets
Date Signed	2019-03-12T00:00:00

Summary Paragraph

During Hurricanes Ivan and Dennis, in 2004 and 2005 respectively, strong winds and heavy rainfall caused damage to numerous facilities owned by the Applicants, which are Private Nonprofit (PNP) housing authorities.  In 2014, FEMA determined that in numerous Project Worksheets documenting damage and requested costs, eligibility issues caused the Agency to deobligate $2,369,116.23 in funding and also disallow $562,700.50 for cost overruns.  The Applicants appealed and argued that FEMA’s determinations relating to small project funding, insurance coverage, project management costs, and construction costs were incorrect.  The Regional Administrator (RA) denied the appeal on December 5, 2017, finding the Applicants did not submit their net small project overrun request within 60 days of completing all the small projects, and so the cost overruns could not be included in its appeal.  In addition, the RA determined FEMA’s deobligation relating to insurance proceeds was proper and the Applicants’ contracts with its project and construction management company (PMA), and construction company, were not procured in a manner providing open and free competition, and were impermissible cost-plus-a-percentage-of-cost contracts, that violated federal procurement regulations.  Finally, the RA determined Section 705(c) of the Stafford Act did not apply to this appeal because the Applicants are PNPs.  The Applicants appeal the RA’s decision, reiterating prior arguments, and further claiming the hurricanes caused a situation where they needed to contract as they did, no conflict of interest existed, FEMA improperly reduced funding associated with insurance, and they had been attempting for years to request small project netting.

 

Authorities and Second Appeals

• Stafford Act §§ 312, 316, 321, 325, 701(a)(1), and 705(c).
• 2 C.F.R. §§ 215.5, 215.42-46, 215.62; 44 C.F.R. §§ 11.75(c), 206.204(e)(1)-(2).
• PA Guide, at 76, 95, 113-114, 116; PA Policy Digest, at 22. 
• OMB Circular A-110
• Appeals Manual, Version 4, at 14.

• FEMA Second Appeal Analysis, City of Springfield, FEMA-1633-DR-IL, at 4; FEMA Second Appeal Analysis, City of Nome, FEMA-4050-DR-AK, at 6; FEMA Second Appeal, Community Action Program Committee, Inc., FEMA-1551-DR-FL, at 5; FEMA Second Appeal Analysis, Spanish Flat Water District, FEMA-1646-DR-CA, at 4; FEMA Second Appeal Analysis, Dep’t. of Transportation, FEMA-4068-DR-FL, at 5.
• RRP9525.3, Duplication of Benefits – Non Government Funds, at 2; DAFS9580.3, Insurance Considerations for Applicants, at 2.
• FP 205-081-2, Stafford Act Section 705, Disaster Grant Closeout Procedures, at 4-7.

 

Headnotes

• OMB Circular A-110, as codified in 2 C.F.R. Pt. 215, requires applicants to perform open and free competition and avoid use of cost plus percentage of cost (CPPC) contracts when procuring work reimbursed by federal funding.  In addition, no employee, officer, or agent of the grantee or applicant shall participate in selection, or in the award or administration of a contract supported by federal funds if a conflict of interest exists.
  • The Applicants’ procurement of PMA and ARS violated 2 C.F.R. § 215.43 open and free competition requirement; and additionally, their procurement of PMA also violated 2 C.F.R. § 215.44 CPPC requirement and § 215.42 requirement prohibited real or apparent conflicts of interest.

• An applicant may file an appeal to request cost overruns associated with small projects. It must do so within 60 days of the completion of its final small project and it must include proper documentation.
  • The Applicants have not requested a small project appeal that included the proper documentation within 60 days of completion of all its small projects.

• Applicants must make reasonable efforts to recover insurance proceeds that they are entitled to receive from their insurer(s) and need to provide information concerning insurance recoveries to FEMA, including copies of all applicable policies, and a Statement of Loss. 
  • The Applicants have not submitted documentation demonstrating that FEMA’s insurance reductions were improper.

Conclusion

The Applicants did not comply with federal procurement regulations, in that their contracts with PMA and ARS were not procured in a manner providing free and open competition.  In addition, the payment arrangements with PMA reflect a cost plus percentage of cost method of contracting prohibited by federal regulations and the contracts demonstrate impermissible conflicts of interest.  Moreover, the Applicants’ have not demonstrated that they submitted their small project appeals within the 60 day regulatory timeframe.  FEMA’s deobligations for insurance proceeds were also properly taken.  Finally, FEMA is not prohibited from deobligating costs previously awarded to the Applicants, as § 705(c) of the Stafford Act does not apply to PNPs. 

 

 

 

Appeal Letter

Appeal Analysis

Background

                                                                                       

During Hurricanes Ivan and Dennis, in 2004 and 2005 respectively, strong winds and heavy rainfall caused damage to numerous facilities owned by Bayshore Housing Corporation, Blackwater Housing Corporation (Blackwater), Cordova Community Facilities Corporation, Emerald Coast Housing I, Emerald Coast Housing II, and Perdido Housing Corporation, self-described as the Panhandle Six (Applicants).  The Applicants are Private Nonprofit (PNP) housing authorities, whose housing complexes suffered damage due to the Hurricanes.  Accordingly, FEMA awarded numerous Project Worksheets (PWs) for restoration of the Applicants’ damaged facilities.

 

In 2014, the Florida Division of Emergency Management (Grantee) requested, on behalf of the Applicants, cost adjustments on multiple PWs.  In response, FEMA disallowed $562,700.50 for the requested cost overruns and also deobligated a total of $2,369,116.23 in funding, due to various eligibility issues identified in a determination letter.[1]  Specifically, FEMA first found that several of the projects[2] that the Applicants requested cost overruns on (totaling $206,147.20) were obligated and completed as small projects and therefore additional funding could only be requested through the net small project overrun appeal process outlined in Title 44 of the Code of Federal Regulations (44 C.F.R.) § 206.204(e)(2). 

 

Next, in reviewing “Statement of Loss” (SOL) documents, FEMA found that construction costs for all repair work were fully insured and paid out, minus certain out-of-pocket costs that FEMA had already funded in existing PWs.  Therefore, FEMA disallowed $269,423.15 in funding for requested construction costs and de-obligated an additional amount of previously funded costs to avoid a duplication of benefits.  FEMA also noted that SOL documents from the insurance company for Blackwater showed the insurance carrier waived multiple deductibles that FEMA had previously provided funding for and so FEMA applied an additional insurance reduction for the PWs associated with Hurricane Dennis to avoid a duplication of benefits.[3]    

 

In their cost adjustment request, the Applicants also sought project and construction management (PCM) fees on multiple PWs incurred by their agent Progressive Management of America (PMA).  However, FEMA determined federal grant regulations only allowed for the cost of professional and consultation services rendered by persons who were not officers or employees of the Applicants.  FEMA noted its review of the contracts with PMA and the Applicants’ contractor, Alpha Restoration Services, Inc. (ARS), indicated that several of the same individuals held positions in each of the three entities.  For example, FEMA noted that the same individual was simultaneously the President of PMA and a registered agent for several of the Applicants, and another individual was simultaneously PMA’s maintenance/rehabilitation manager and ARS’s President (though not employed or an agent of the Applicants).  In addition, FEMA determined the Applicants’ arrangement with PMA created another conflict of interest, as PMA’s 10 percent PCM fees increased as the underlying construction costs increased.  Accordingly, FEMA deobligated $1,909,980.00 for previously funded project management fees and disallowed an additional $87,130.14 for requested project management fees. 

 

FEMA noted in its response to the cost adjustment request that it appeared the Applicants entered into sole source contracts with ARS that resulted in ARS receiving the exclusive right to perform all of the construction work for the Applicants.  In addition, FEMA observed invoices containing: (1) project construction costs, (2) a percentage (10 percent) of the project construction costs for overhead, and (3) a percentage (10 percent) of the project construction costs for profit.  FEMA stated that Federal grant procurement regulations prohibit percentage of construction costs contracts because they incentivize the contractor to increase project costs, as higher costs result in higher profits and overhead.  For this reason, FEMA indicated it was in the process of reviewing 113 PWs to determine if the Applicants procured the construction services through open and free competition.

 

First Appeal

 

The Applicants appealed in a letter dated June 6, 2014, asserting their disagreement with FEMA’s determinations relating to small project funding, insurance coverage, PM fees, and construction costs.  Specifically, regarding the small projects, the Applicants claimed they requested small project netting in 2010 and the decision on those requests was placed on hold by FEMA and the Grantee until 2013.

 

Regarding FEMA’s denial of the Applicants’ claimed overrun of construction costs for insurance-related reasons, the Applicants stated that almost all the PWs contained a note that they were submitted without detailed damage descriptions or a scope of work (SOW) developed by the FEMA project officer, so FEMA needed to rely on the data provided by the Applicants’ insurance adjuster.  The note further stated that the lack of a detailed damage description or SOW raised eligibility concerns, and therefore any SOW change or repair work that varied from the PW’s description would require the Applicant to notify the Grantee and FEMA.  Accordingly, the Applicants argued that throughout the years, they notified the Grantee and FEMA multiple times that items beyond the original SOW needed to be performed, and were advised that it would be taken care of at closeout for all projects (including costs associated with mold remediation that their insurance did not cover). 

 

FEMA determined that the additional repair work was not eligible for funding, in part because that work was fully insured.  However, the Applicants claimed that their documentation demonstrated otherwise.  Citing mold remediation costs as an example, the Applicants contended that the insurer’s mold remediation responsibility was limited to $15,000.00 aggregate, and therefore additional costs relating to this work were eligible for Public Assistance (PA) funding.  However, the Applicants did note that most of the PWs also stated that no FEMA mold specialist had the opportunity to substantiate this condition.  The Applicants then stated that deductibles had not been waived, and requested the documentation FEMA had relied on to determine otherwise. 

 

The Applicants next claimed that no employees of PMA were officers or employees of the Applicants.  The Applicants went on to explain that in 1997 and 1999, their Board of Directors (Board), which was the same for all the PNPs, tasked PMA with a contractual agreement to provide PCM.  The Applicants attested PMA’s President made no decisions without the express consent of the Board through written approval.  They also stated that although this individual served as a registered agent for several of the PNPs, a registered agent is merely a person who accepts service of process on behalf of a business entity, but has no voice in the business of the Applicants.  Therefore, the Applicants argued he was not an “agent” as prescribed in the federal regulations, since a registered agent cannot be employed by the entity. 

 

Finally, the Applicants claimed the contracts for work completed at their housing complexes were procured at a firm fixed price — capped at the insurance proceeds.  They stated their contractor, ARS, agreed if a dispute arose with the insurance adjusters, that it would accept the amounts awarded by the adjusters.  They noted that in 2008, ARS and the insurance adjusters met and the insurance carrier issued an additional check for more than $600,000.00.  Moreover, the Applicants argued the PCM contract with PMA was likewise a firm fixed contract — capped at the cost fee of the project times 10 percent (which equaled the same percentages outlined in FEMA’s cost estimating format (CEF) process).

 

The Grantee concurred in a letter dated June 19, 2014.  The Grantee then submitted a supplemental letter to FEMA on February 10, 2015, arguing that Section 705(c) of The Robert T. Stafford Disaster Relief and Emergency Assistance Act[4] (Stafford Act) prohibited FEMA from deobligating funding. 

 

FEMA sent the President for PMA and the Grantee a Final Request for Information (RFI) on January 5, 2017.  FEMA stated that the current administrative record was insufficient to support the Applicants’ assertions that FEMA should reverse its deobligation and disallowance of costs.  Accordingly, FEMA requested additional information concerning: (1) project overrun claims on eligible small projects; (2) insurance coverage for construction costs; (3) proof of compliance with federal grant requirements that grantees and applicants maintain a written code of standards of conduct of employees engaged in the award and administration of contracts with respect to the PCM fees, and proof of compliance with federal grant requirements which prohibit the use of cost-plus-a-percentage-of-cost (CPPC) methods of contracting regarding the PCM costs; and (4) proof of compliance with federal grant requirements that all procurement transactions concerning construction costs (expended by ARS) were conducted in a manner providing full and open competition.

 

The Applicants responded in a February 27, 2017 letter.  The Applicants asserted project overruns on small projects were incurred in the performance of eligible work and there was a net eligible overrun on all the Applicants’ small projects.[5]  In addition, the Applicants stated that FEMA omitted eligible PCM and contract labor costs associated with the PWs from the original scope of work, incorrectly deducted anticipated insurance proceeds, misconstrued contract labor as force account labor, and did not include eligible damaged elements in the PWs.  The Applicants further claimed their insurance policy did not cover the construction costs for all repair work; for instance, the policy did not cover mold remediation costs above $15,000.00.  Finally, the Applicants argued PCM fees complied with federal regulations, as neither a member nor an employee of the Applicants’ management company (that engaged in the PCM or oversight of completion of PWs) was an officer or employee of the Applicants and CPPCs were not utilized for the construction costs or the PCM costs.  In addition, they asserted the PCM costs followed FEMA’s CEF tool pricing and guidelines.  Last, they stated their procurement of ARS’s services also complied with federal regulations as the Applicants ideally sought to award contracts to bidders that would accept the proceeds paid by their insurance carriers, and only one company was willing to work within these financial constraints — ARS.

 

The FEMA Region IV Regional Administrator (RA) denied the appeal on December 5, 2017.  The RA first found that 44 C.F.R. § 206.204(e)(2) required the Applicants to submit any appeals for additional funding for their small projects within 60 days following the completion of all projects.  However, neither the Grantee nor the Applicants submitted an appeal within 60 days and as such, FEMA could not consider and approve the requested net small project cost overrun in the appeal.  The RA also noted that the Applicant failed to specify a monetary amount in dispute pursuant to 44 C.F.R. § 206.206(a).

 

The RA next determined that the Applicants’ construction costs for ARS were fully insured according to the SOL submitted to FEMA, and the insurance carriers paid all costs the Applicants submitted.  Accordingly, the RA found FEMA correctly deobligated funding that it found was covered by insurance to avoid a duplication of benefits as prescribed by the Stafford Act § 312.  In addition, though FEMA funded the Applicants’ deductibles, the Agency noted it subsequently determined that the insurance carrier waived multiple deductibles; therefore the RA determined the Agency appropriately reduced funding.

 

The RA also reviewed the Applicants’ PCM contract with PMA and concluded it was a sole source contract that the Applicants unanimously awarded to PMA.  FEMA’s review of the Applicants’ contracts with PMA and ARS also showed several of the same individuals held positions in at least two of the three entities.  For example, the RA noted that PMA’s maintenance/rehabilitation manager from 1993 until 2005 was the President of ARS, and later returned to PMA in 2010 as the Community Association Manager, even though PMA was directly involved in the Applicant’s sole source selection of ARS.  In addition, the President of PMA was also the registered agent for the Applicants.  Therefore, the RA reasoned that the award of the sole sourced contracts to PMA and ARS constituted an unallowable conflict of interest (real, apparent, and organizational). 

 

Furthermore, the RA found that the Applicants executed a sole source contract with ARS in which the contract costs appear to be based on invoices containing: (1) project construction cost, (2) a percentage (10 percent) of the project construction costs for overhead, and (3) a percentage (10 percent) of the project construction costs for profit.  The RA determined this was an impermissible CPPC contract pursuant to 2 C.F.R. § 215.44(c) and therefore these costs were not eligible for PA funding.  Similarly, the RA found the contract with PMA for PCM appeared to be a CPPC because PMA charged an additional 10 percent for project management on top of the percentage of construction costs.  Consequently, the RA concluded that 2 C.F.R. § 215.44(c) also prohibited this type of contract, resulting in the costs not being eligible for PA funding. 

 

Finally, the RA found that § 705(c) of the Stafford Act only applied to states, tribal, or local governments, and does not extend such protections to PNPs.  Accordingly, the RA upheld FEMA’s April 2, 2014 determination, finding that FEMA properly deobligated the previously awarded funding and disallowed the requested additional costs.  

 

Second Appeal

 

In their second appeal dated February 2, 2018, the Applicants reiterate their first appeal arguments and additionally contend that none of their actions concerning their procurement of contracts with PMA and ARS were intended to result in either a conflict of interest or impermissible contracting.  They state that they made every effort to incorporate and follow FEMA policy, and though they may not have followed federal procurement guidelines exactly, the Applicants followed their customary procedures to be good stewards of finances.  The Applicants claim there is no conflict of interest in any of the contracts or awarding procedure.  They state that although there are three different entities with persons that were associated with at least two of the entities at various times, these associations were all at arms-length.  The Applicants explained that the disasters caused construction forces to be overwhelmed and as a result construction supplies skyrocketed in price.  The Applicants state they knew the contractors would be drying up.  Whereas PMA could not procure any construction contractors to work within the Applicants’ funding limits, ARS offered to perform the work under the funding arrangement.  They state that the Board then asked PMA for concurrence on the decision to contract with ARS.  While the President of PMA provided concurrence, though the Applicants point out the Board action would have happened regardless, as PMA’s President had no authority over the Board, and ARS was still the only willing contractor available.

 

The Applicants next contend that they met with FEMA personnel in 2010 and FEMA agreed that additional funding was eligible on the Applicants’ small projects, including costs for PCM, specific omissions of initial estimates, mold remediation, and overruns for construction.  The Applicants state that FEMA agreed to complete large project closeouts and then write one PW for the additional costs on the small projects at closeout.  However, because the final large project closeout was not completed, the Applicants state the small project closeout PW was never written either.  In addition, the Applicants claim that FEMA informed them that insurance proceeds could be reallocated to reimburse many of the small projects for their overruns, and therefore the need for a small project netting would not be necessary at closeout. 

 

Finally, the Applicants disagree with the RA’s conclusion that their construction costs for all repair work were fully insured based on the SOL.  Rather, the Applicants argue that the construction costs and soft costs exceeded policy limits including the limit of $15,000.00 for mold remediation, and $4,500,000.00 in law and ordinance for upgrades.[6]  Accordingly, the Applicants conclude that no duplication of benefits existed for costs exceeding those limits.  The Applicants also note that following two disasters in 2008, an adjustment of insurance proceeds recognized mold damages, increased insurance funding, and included deductibles, but that FEMA’s insurance specialist relied on a SOL produced by the insurance company prior to the adjustment, which did not identify deductibles or mold damages.

 

The Grantee submitted the Applicants’ appeal to FEMA on April 3, 2018.  However, the Grantee does not recommend that FEMA grant the appeal.  The Grantee states there is no evidence that the Applicants submitted a small project appeal within 60 days of completing its small projects.  The Grantee also explains that the Applicant used insurance proceeds from other projects to zero out the small projects to avoid small project netting and the need to request small project overruns, which in turn created overruns in the large projects the proceeds were taken from.  The Grantee notes that although the Applicants permissibly used insurance proceeds to balance the obligated amount to the actual cost of small projects to avoid a small project netting overrun, this reallocation does not in turn create an overrun in the large projects.  The Grantee also noted the Applicants did not offer evidence to show that they incurred certain costs toward insurance deductibles.

 

In addition, the Grantee determined that while PMA’s personnel were not employees or officers of the Applicants, the President was an agent, which is defined by 2 C.F.R. § 180.910 as “any person who acts on behalf of, or who is authorized to commit a participant in a covered transaction.”  The Grantee claims this is evidenced by the agreements between the Applicants and PMA where PMA is authorized to be the exclusive agent and “make and execute all contracts, leases, and all other documents…”[7]  Other evidence cited by the Grantee includes PMA listed as the named policy holder on the Applicants’ insurance policies, and PMA’s role in negotiating a binding insurance settlement agreement.  Accordingly, the Grantee concludes that since there was a principal-agent relationship prior to the disasters, a conflict of interest existed in procuring PMA to conduct PCM.  The Grantee also states that the Applicants were also required to document their procurement process through records sufficient to detail the significant history of procurement, and they have not shown they attempted to competitively procure for a contractor to perform PCM or that the sole source contracts were only available from a single source.

 

Similarly, the Grantee points out that ARS was awarded a sole source contract, as the Applicants claim they could not find any other contractor to do the work at the time.  However, the Grantee notes that the Applicants have not shown that they attempted to competitively procure any other contractor.  Additionally, the Applicants claimed an emergency existed in which they had to fix the roofs of the damaged buildings to prevent further damage.  Yet, the Grantee argues that even if that instance qualified as an exigency or emergency situation, once the emergency period ended, the Applicants should have transitioned to a full and openly awarded contract. 

 

The Grantee also reviewed the PMA contract with the Applicants, which provided for a 10 percent entitlement to PMA of the total amount of construction and related costs.  The Grantee notes PMA’s entitlement increased with the construction costs.  According to the Grantee, had the contract based its percentage on the estimated costs, it would have complied with federal requirements under the CEF policy, because it would have been a fixed amount; but that is not what occurred in this instance.  Moreover, the Grantee claims the invoices submitted by ARS also appear to contain a 10 percent charge of the project construction costs for overhead, and 10 percent of the project construction costs for profit.  Though the Applicants argue this is customary, they do not cite to any federal statute or regulation that would make standard industry practices eligible.  The Grantee does however contend that Stafford Act § 705(c) precludes FEMA from deobligating funds that are subject to the appeal.[8]

 

Discussion

 

Procurement

 

In addition to the Stafford Act, the PA program is governed by a myriad of laws, regulations and policies,[9] including the Office of Management and Budget (OMB) Circular A-110.  OMB Circular A-110, Uniform Administrative Requirements for Grants and Agreements with Institutions of Higher Education, Hospitals, and Other Nonprofit Organizations, as codified at 2 C.F.R. Pt. 215, establishes standard requirements for federal grants awarded to PNPs and is applicable to all federal agencies.[10]  Adherence to federal procurement laws is required to receive grant assistance.[11]  In addition, PNPs must maintain records sufficient to detail that some form of cost or price analysis was made and documented in the procurement files in connection with the procurement action.[12]  These records will include, but are not limited to: rationale for the method of procurement; selection of contract type; contractor selection or rejection; and the basis for the contract price.[13]  PNPs must perform a cost or price analysis in connection with every procurement action in excess of the simplified acquisition threshold, including contract modifications, and the method and degree of analysis depends on the facts surrounding the particular procurement situation.[14]  In addressing non-compliance, FEMA may disallow all or part of the cost of the activity or action not in compliance.[15]  

 

On appeal, the Applicants claim that their contracts with PMA and ARS were properly procured and were free of any conflicts of interest, were not CPPC, and met the requirements of full and open competition.

 

1. Cost-Plus-a-Percentage-of-Cost Contracts
    

A CPPC contract is a cost reimbursement contract containing some element that obligates the subgrantee to pay the contractor an amount (in the form of either profit or cost), undetermined at the time the contract was made and to be incurred in the future, based on a percentage of future costs.[16]  Unlike other disfavored but allowable contract mechanisms, CPPC contracts are strictly prohibited under Title 2 Code of Federal Regulations (2 C.F.R.) § 215.44(c).[17]  Furthermore, nothing in 2 C.F.R. Pt. 215 permits the use of CPPC contracts in exigent circumstances.[18]  This type of contract is prohibited because there is no incentive for the contractor to keep its incurred costs low.[19]  Instead, there is a reverse incentive for the contractor to continue to incur additional costs in order to drive the contractor’s percentage of costs up.[20]  In other words, increased spending by the contractor will yield higher profits.[21]  By contrast, FEMA’s cost estimating practice allows the Agency to grant funds during project formulation for project management using a percentage of the construction cost.[22]  Percentages are derived from FEMA cost curves, and the percentage can be multiplied by the estimated construction cost to determine an appropriate project management cost estimate.[23]  Costs for managing a project may be included if the project is sufficiently large or complex to require them.[24]

 

Here, PMA’s payment is made on a pre-determined percentage rate which is impermissibly applied to the actual performance cost, instead of estimated costs as may be permissible.  The property management agreements with the Applicants describe the services and costs that are to be payable to the contractor and the basis for the compensation, stating that PMA will be paid an additional fee for administration and supervision of reconstruction required as a result of a disaster.[25]  This agreement states that the fee will be 10 percent of the amounts received to repair said damage.[26]  The Applicants claim their PMA contract is consistent with FEMA’s cost estimating process at a firm fixed price capped at the cost fee of the project times 10 percent (or the same as the percentages outlined in FEMA policy).  However, their contracts with PMA charged an additional 10 percent for project management, on top of the percentage of construction costs.  In contrast, FEMA’s cost estimating formula allows for a variable percentage amount for PM based on the complexity of the project.  Here, no such variability exists; rather it is a 10 percent amount regardless of the complexity of the work, which incentivizes the project manager to allow the construction contractor to continue to incur costs to drive the percentage of costs up.  Accordingly, those costs are ineligible. 

 

1. Free and Open Competition

 

All procurement transactions using federal funds must also be conducted in a manner providing free and open competition.[27]  Moreover, 2 C.F.R. § 215.45 requires some form of cost or price analysis and documentation in the procurement files in connection with every procurement action—the implication being that the cost/price analysis is done at the time of procurement. 

An applicant should begin its record keeping process before a disaster is declared and should ensure that work performed both before and after a disaster declaration is well-documented.  Potential applicants should maintain accurate disbursement and accounting records to document the work performed and the costs incurred.[28] 

 

The Applicants claim that they could not find any other contractor to do the work at the time of the disasters because the hurricanes overwhelmed construction forces and caused construction supplies to skyrocket in price.  The Applicants state they knew the contractors would be drying up and PMA could not procure any construction contractors to work within the Applicants’ funding limits.  ARS then offered to perform the work under the funding arrangement with the insurance carriers.  However, the Applicants have not provided documentation to support their assertion that no other construction contractors were available, nor have they claimed that they attempted to open a bid for the contract.  Similarly, no claims were made as to the availability or opening up for bidding for a property/construction manager.  Finally, no documentation has been submitted to FEMA demonstrating any cost or price analysis was conducted relating to ARS’s construction contracts.  In addition, no substantiating documentation has been submitted nor have the Applicants explained how PMA’s contract was procured and what, if any, price or cost analysis was conducted in procuring a PCM contractor.  As such, FEMA affirms Region IV’s findings that the Applicant’s sole source contracts with PMA and ARS were not executed in a manner providing open and free competition and therefore do not comply with procurement regulations.[29]  Accordingly, FEMA Region IV should take an enforcement action that it deems appropriate with regard to the Applicants’ contracts with ARS and the procurement violations that the Region found.

 

1. Organizational Conflict of Interest

 

Federal regulation provides that an entity shall be alert to organizational conflicts of interest as well as noncompetitive practices among contractors that may restrict or eliminate competition or otherwise restrain trade.[30]  No employee, officer, or agent of the grantee or applicant shall participate in selection, or in the award or administration of a contract supported by federal funds, if a conflict of interest, real or apparent, would be involved.[31]

 

The agreements between the Applicants and PMA authorize PMA to be the exclusive agent and “make and execute all contracts, leases, and all other documents…”[32]  In addition, PMA is the named policy holder on the Applicants’ insurance policies.  Moreover, as the RA noted, several of the same individuals held positions in at least two of three entities (the Applicants, PMA, and ARS).  For example, PMA’s maintenance/rehabilitation manager, from 1993 until 2005, was the President of ARS, and later returned to PMA in 2010 as the Community Association Manager.  Moreover, the President of PMA was also the registered agent for the Applicants.  Accordingly, since there was a principal-agent relationship prior to the disasters, a conflict of interest existed in procuring PMA to conduct PCM. 

 

Net Small Project Overrun Request

 

During the execution of approved work, an eligible applicant may find that actual project costs exceed the approved PW estimate, resulting in a cost overrun.[33]  When this occurs, an applicant must evaluate each cost overrun and, when justified, submit a request for additional funding through the grantee to the RA.[34]  However, cost overruns for small projects are not handled on a project-by project basis; rather an applicant may request supplemental funding for a net cost overrun on all small projects by submitting an appeal through the grantee to FEMA.[35]  The appeal must be submitted within 60 days of the completion of all of that applicant’s small projects, and must include documentation of actual costs of all the projects, including projects with underruns as well as those with overruns.[36] 

 

On September 9, 2010, several of the Applicants submitted small project netting requests to the Grantee.  The Grantee’s responsive email advised that in order to meet small project netting request requirements, the projects should have been completed on July 11, 2010 or later (i.e., within 60 days of the requests) and they needed to have valid time extensions to cover the construction period, as the original deadlines for completion had long expired.[37] 

 

Applicants are allowed 18 months to complete permanent work, with an additional 30 month extension allowed, for a total of 48 months.[38]  The hurricanes struck in 2004 and 2005, and as such, the work needed to be completed by 2008 or 2009, but no mention of a small project netting was made until July 2010.  To date, no extensions were requested in any of the small projects nor was any request to appeal received by FEMA.  Additionally, the Grantee’s 2010 email to FEMA does not satisfy the documentation requirements under FEMA policy as it did not provide actual costs of all the projects, including projects with underruns as well as those with overruns.  Accordingly, the Applicants have not demonstrated that they submitted their net small project requests to FEMA within 60 days of completing all of their small projects.

 

Insurance

 

The Stafford Act states that “no . . .  person, business concern, or other entity [suffering losses as a result of a major disaster or emergency] will receive [Federal agency] assistance with respect to any part of such loss as to which he has received financial assistance under any other program or from insurance or any other source.”[39]  Accordingly, disaster assistance will not be provided for damages covered by insurance because assistance provided by FEMA is intended to supplement assistance from other sources.[40]  Thus, insurance proceeds should be an applicant’s first avenue for disaster assistance.[41]  Before receiving a PA award, an applicant must first seek out and maximize the potential benefits from applicable insurance policies.[42]  Additionally, an applicant needs to provide information concerning insurance recoveries to FEMA, including copies of all applicable policies, and SOLs.[43]  FEMA reviews the insurance information and determines whether the settlement appears proper in terms of the policy provisions.[44]  However, the burden to substantiate appeals with “documented justification” falls exclusively on the applicant and hinges upon the applicant’s ability not only to produce its own records, but to clearly explain how those records support the appeal.[45]

 

Although the Applicants provided a SOL from 2012, as well as other insurance documents, showing proceeds, deductibles, and mold damages, they reallocated these proceeds between PWs and among two different disasters, and then failed to provide specific supporting documentation to track how these proceeds were reallocated.  What the documentation does show is that the insurance carrier reimbursed all costs covered under the policy.[46]  FEMA found that the actual insurance proceeds received were sufficient to cover the eligible costs documented in the PWs’ approved SOW.  (For example, the approved SOW did not include remediation for unsubstantiated mold damages, whether or not these costs were covered by insurance.)  Therefore, FEMA deobligated funding and disallowed cost overruns to avoid a duplication of benefits.  If the Applicants chose to allocate any of those proceeds to cover other ineligible costs, including project management fees and CPPC contract costs, FEMA still treated them as a duplication of benefits. 

 

Accordingly, the Applicants did not demonstrate the deobligated funding or claimed overrun of costs was uninsured, was excluded, or exceeded limits of coverage.  The Applicants have the burden to not only provide the documentation, but to also explain where the work was excluded and why its insurer denied those costs, and to submit them to FEMA for funding, which they have not done.  Instead, the Applicants relied on the total sum they submitted as an overrun after work was completed, and FEMA cannot now verify if the costs are eligible or what was or should have been covered by insurance. 

 

Further, a portion of the insurance reductions taken at closeout relate to higher than anticipated insurance proceeds, due to lower than anticipated deductibles (either because the deductibles were waived or inadvertently included in an initial insurance review).  FEMA affirms these reductions on second appeal.

 

In sum, the Applicants have not demonstrated whether the discrepancies in the insurance proceeds received are due to additional construction costs, mold remediation costs that were not covered, reallocations of insurance proceeds to cover ineligible costs, or waived deductibles.  Accordingly, the costs requested are not eligible for funding and FEMA affirms Region IV’s insurance-related disallowances and deobligations.

 

Lastly, during review, the FEMA Region IV closeout team determined that in addition to the insurance-related deductions identified in the determination and first appeal decision, $182,475.06 was deducted from PW 2073 (DR-1551) to avoid a duplication of benefits, and $281,424.00 was deducted from PW 3291 (DR-1551) due to the Applicants’ not performing anticipated hazard mitigation measures.[47]  Accordingly, FEMA Region IV is directed to reconcile those costs and determine if the additional funding was deobligated in error.  If not, the Applicants retain the right to appeal those specific deobligations to the Region within 60 days of receiving notice of FEMA’s determination.

 

Stafford Act Section 705(c)

 

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 by an approved agreement specifying costs, the costs were reasonable, and the purpose of the grant was accomplished.[48]  FEMA implemented this statutory provision through Recovery Policy FP 205-081-2.[49]  If all three prongs of Stafford Act § 705(c) are satisfied, FEMA is prohibited from recovering grant funds even if it later determines it made an error in determining eligibility.[50]  However, this provision of the Stafford Act does not apply to PNPs.[51] 

 

The Grantee argues that FEMA is prohibited by § 705(c) from deobligating funding from the Applicants.  However, in the promulgation of law, Congress excluded PNPs from the protections provided by § 705(c).[52]  Consequently, FEMA is not prohibited from deobligating costs previously awarded to the Applicants.[53]

 

Conclusion

 

The Applicants did not comply with federal procurement regulations, in that their contracts with PMA and ARS were not procured in a manner providing free and open competition, and FEMA Region IV should take an enforcement remedy that it deems appropriate with regard to the Applicants’ contracts with ARS.  In addition, the payment arrangements with PMA reflect a CPPC method of contracting prohibited by federal regulations and the contracts demonstrate impermissible conflicts of interest.  Moreover, the Applicants have not demonstrated that they submitted their net small project overrun request within the 60 day regulatory timeframe.  Additionally, the Applicants have not demonstrated whether the discrepancies in the insurance proceeds received are due to additional construction costs, mold remediation costs that were not covered, reallocations of insurance proceeds to cover ineligible costs, or waived deductibles.  Finally, FEMA is not prohibited from deobligating costs previously awarded to the Applicants, as § 705(c) of the Stafford Act does not apply to PNPs.  Accordingly, the appeal is denied

 

[1] Letter from Dir. Recovery Div., FEMA Region IV, to Dir., Fla. Div. of Emergency Mgmt. (Apr. 2, 2014) [hereinafter Determination Letter] (stating that the Applicants requested adjustments for multiple Project Worksheets (PW) associated with both Hurricane Ivan and Hurricane Dennis).

[2] Id. (noting that the small projects included PWs 1995, 2246, 2544, 1214, and 3275).

[3] The total insurance reduction for Hurricane Dennis was incorrectly listed as $84,443.53 in the determination letter and on first appeal due to Region IV inadvertently including a $7,602.51 deduction in PW 1218 (DR-1595) that was never actually taken.  The correct amount for the total deduction is $76,841.02.

[4] Robert T. Stafford Disaster Relief and Emergency Assistance (Stafford) Act § 705(c), 42 U.S.C. § 5205(c) (2000).

[5] In support, the Applicants attached spreadsheets outlining the overruns for the small projects, which listed significantly more small projects than the five small projects outlined in FEMA’s Determination Letter.

[6] The Grantee clarified that under the law and ordinance terms of the Applicants’ insurance policy, there was a total policy limit of $5,000,000 (not $4,500,000.00) for all buildings that required total replacement.  The Applicant’s insurance mold remediation limitation modified its Ordinance or Law coverage, which stated that the insurer would not pay for the enforcement of laws that require demolition, repair, or replacement due to contamination by the presence or growth of mold or costs associated with ordinance or law which requires testing, monitoring, or clean up.

[7] Letter from Rep., on behalf of Dir., Fla. Div. of Emergency Mgmt., to Asst. Adm’r., Recovery Div., FEMA, at 6 & n.3 (Apr. 3, 2018) (quoting PMA’s Property Mgmt. Agrmt., Doc. 55 in Admin. Rec.).

[8] The Applicant submitted a rebuttal to the Grantee’s second appeal transmittal through a letter dated April 10, 2018.  The Applicants expressed their frustration with FEMA Region IV taking over the projects in 2012, stating the Region demonstrated an unwillingness to listen to the Applicants’ pleas for understanding.  The Applicants also state that they began requesting small project closeouts as early as 2006, but FEMA ignored the emails submitted on first appeal reflecting the instances the Applicant reached out. 

[9] See Stafford Act §§ 316, 321, 325, and 701(a)(1) (2000 & Supp. II 2002), 42 U.S.C. §§ 5159, 5164, 5165c, and 5201(a)(1) (2000 & Supp. II 2002) (mandating adherence to other statutory requirements and authorizing FEMA to implement Stafford Act provisions through regulation and policies).  

[10] Office of Mgmt. & Budget, Exec. Office of the President, OMB Circular A-110, Uniform Administrative Requirements for Grants and Agreements with Institutions of Higher Education, Hospitals, and Other Nonprofit Organizations (1999) (codified at Title 2 of the Code of Federal Regulations (2 C.F.R.) Pt. 215 (2003, 2004)).

[11] 2 C.F.R. § 215.5.

[12] Id. at § 215.45.

[13] Id. at § 215.46.       

[14] Id. at § 215.45.

[15] Id. at § 215.62; See FEMA Second Appeal Analysis, City of Springfield, FEMA-1633-DR-IL, at 4 (Dec. 28, 2012) (concluding that the costs questioned by the Office of the Inspector General represented “a form of CPPC contract, and since CPPC contracts are prohibited…, these costs are ineligible for reimbursement under FEMA’s [PA] Program.”); see also FEMA Second Appeal Analysis, City of Nome, FEMA-4050-DR-AK, at 6 (Sept. 28, 2016) (determining that the Applicant did not comply with federal procurement requirements; therefore, costs associated with contract work were not eligible for PA funding).

[16] See Muschany v. United States, 324 U.S. 49, 61-62 (1945) (“The danger guarded against by the Congressional prohibition was the incentive to a government contractor who already had a binding contract with the Government for payment of undetermined future costs to pay liberally for reimbursable items because higher costs meant a higher fee to him, his profit being determined by a percentage of cost.”).

[17] 2 C.F.R. § 215.44(c) (stating “[t]he ‘cost-plus-a-percentage-of-cost’ or ‘percentage of construction cost’ methods of contracting shall not be used”) (emphasis added).

[18] Unlike 44 C.F.R. § 13.36(d)(4)(i)(B) which permits non-competitive procurement when the award of a contract is infeasible under a competitive procurement mechanism and “[t]he public exigency or emergency for the requirement will not permit a delay resulting from competitive solicitation,” no such condition-precedent exists in 2 C.F.R. Pt. 215.  In addition, the 44 C.F.R. defines “procurement by non-competitive proposals” as “procurement through solicitation of a proposal from only one source, or after solicitation of a number of sources, competition is determined inadequate.” 44 C.F.R. § 13.36(d)(4). 

[19] See Decision of the Comptroller General, B-119292, 1954 U.S. Comp. Gen. LEXIS 649 (Oct. 8, 1954) (“Section 4(B) of the Armed Services Procurement Act of 1947 prohibits the use of the cost-plus-a-percentage-of-cost system of contracting. The intent of Congress in opposing this system is clearly discernible in the legislative history of this and other acts regulating government procurement. Conditions which it sought to prevent are those which provide an incentive and an opportunity for a contractor or subcontractor to increase his profit by increasing his costs at the expense of the government.”); see also FEMA Second Appeal Analysis, Community Action Program Committee, Inc., FEMA-1551-DR-FL, at 4 (Feb. 27, 2018).

[20] Id.

[21] Id.

[22] Public Assistance Guide, FEMA 322, at 76 (1999) [hereinafter PA Guide].

[23] Id.

[24] Public Assistance Policy Digest, FEMA 321, at 22 (Oct. 2001).

[25] See e.g., Property Management Agreement between Emerald Coast Housing Corp. and Progressive Mgmt. of America, Inc., at Section 6.01(c) [hereinafter Property Management Agreement] (also noting that this fee “is a normal and customary calculation by insurance adjusters as an integral part of claims for damage repairs.”  This distinction is not relevant to the purpose of this regulation, because the prohibition applies to all contracts procured with federal funding as outlined in FEMA Second Appeal Analysis, Spanish Flat Water Dist., FEMA-1646-DR-CA, at 4 (May 22, 2012); and City of Springfield, FEMA-1633-DR-IL, at 4).

[26] Property Management Agreement, at Section 6.01(c).

[27] 2 C.F.R. § 215.43.

[28] PA Guide, at 113-114.

[29] Community Action Program Committee, Inc., FEMA-1551-DR-FL, at 5 (stating “[t]he Applicant stated that it chose RMC as constructor because of the shortage of available contractors in the area, but has not provided documentation to support its assertion or that it even attempted to open a bid for the contract.  The Applicant’s sole source contract with RMC was not executed in a manner providing open and free competition and therefore does not comply with procurement regulations.”).

[30] 2 C.F.R. § 215.43.

[31] 2 C.F.R. § 215.42.

[32] Property Mgmt. Agrmt., Doc. 55 in Admin. Rec.

[33] 44 C.F.R. § 206.204(e)(1) (2003).

[34] Id. § 206.204(e)(2).

[35] PA Guide, at 116.

[36] Id.

[37] Email from Planner, Fla. Div. of Emergency Mgmt., to Rep., FEMA (Sept. 21, 2010 2:29 pm).

[38] 44 C.F.R. § 206.204(c).

[39] Stafford Act § 312(a), 42 U.S.C. § 5155(a) (2000).

[40] FEMA Response and Recovery Directorate Policy RRP9525.3, Duplication of Benefits-Non Government Funds, at 2 (July 24, 2007).

[41] Id.

[42] FEMA Disaster Assistance Fact Sheet DAFS9580.3, Insurance Considerations for Applicants, at 2 (May 29, 2008).

[43] PA Guide, at 95.

[44] Id.

[45] FEMA Second Appeal Analysis, Dep’t of Transp., FEMA-4068-DR-FL, at 5 (Aug. 5, 2016).

[46] Letter from Rep., Ins. Office of America, to Pres., Progressive Mgmt. of America, Inc. (Dec. 10, 2009) (this letter from the Applicants’ insurance company to PMA on December 10, 2009 states that “no additional insurance claim funds are available related to [Hurricane Ivan].  All property damage was inspected by adjusters retained by the insurance carriers and funds paid for this damage met or exceed allowable policy coverage limits.”  The final proof of loss was approved at a mediation between the carrier and Applicants and an independent accounting firm retained by the insurance carrier to verify all contract documents, and “[a]ll parties agreed to the total damage amount by property to settle the claim. Insured coverage limits for each damaged building, including ordinance or law coverage, were paid to the maximum amounts allowed under the policies.”).

[47] Because Region IV did not discuss this hazard mitigation issue in its determination or first appeal decision, it is unclear whether any portion of the $281,424.00 deduction in PW 3291 is related to the insurance-related deductions that FEMA is affirming on second appeal. 

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

[49] FEMA Recovery Policy FP 205-081-2, Stafford Act Section 705, Disaster Grant Closeout Procedures, at 4-7 (Mar. 31, 2016).

[50] Id. at 4.

[51] Stafford Act § 705(c), 42 U.S.C. § 5205(c); FP 205-081-2, Stafford Act Section 705, Disaster Grant Closeout Procedures, at 1.

[52] See Stafford Act §§ 102(4), 102(6), 102(9), 42 U.S.C. §§ 5122(4), 5122(6), 5122(9) (defining “state,” “local government,” and “private nonprofit facility,” respectively); Stafford Act § 705(c), 42 U.S.C. § 5205(c) (exempting only a “State or local government” from liability for “reimbursement or any other penalty” under certain conditions).

[53] 44 C.F.R. § 13.43(a) (“Remedies for Noncompliance”).