Allowable Costs and Reasonable Costs, Financial Accounting and Reconciliation, Section 705

Appeal Brief

Appeal Letter

Appeal Analysis

Background

From October 7-19, 2018, Hurricane Michael caused devastating winds, torrential rain, and tidal surge, resulting in extensive damage throughout the Panhandle of Florida.[1] The School Board of Bay County (Applicant) requested Public Assistance (PA) funding to address damages to the R. L. Young Transportation Center Buildings 2 and 3 (Facilities), including the roofs, concrete masonry walls, lighting, exhaust fan pipes, drop light line, safety mirrors, steel double doors, compressors, aluminum downspouts, and ceilings. In support of its claim, the Applicant provided the work order cost report, building inspection reports, photographs, and cost estimates prepared using RS Means software. 

FEMA prepared Grants Manager Project (GMP) 112308 for the Facilities. The Applicant provided a scope of work (SOW), work order cost and inspection reports, photographs, and cost estimates for the Facilities totaling $6,598,303.50. FEMA conducted initial reviews of the Applicant’s documentation and performed a reasonable cost validation analysis. FEMA issued a Request for Information (RFI) to the Applicant on March 4, 2021, seeking documentation to support the costs submitted and work completed as well as providing comments on the Applicant’s cost estimate. The Applicant did not provide additional documentation but revised its total cost estimate to $5,592,870.68 in response to FEMA’s comments. FEMA reviewed the Applicant’s revised cost estimates and completed a final validation on March 24, 2021. 

On June 8, 2021, FEMA issued a Determination Memorandum (DM) approving its validated costs of $4,556,626.94 for the Facilities and denying $1,036,243.74 of the Applicant’s cost estimate as ineligible for PA funding because the Applicant did not adequately document these costs for eligible work. On August 19, 2021, FEMA obligated $5,085,047.67 for GMP 112308.[2]

First Appeal 

The Applicant submitted a first appeal, dated August 6, 2021, seeking an additional $1,063,460.95. The Applicant argued that FEMA omitted allowances for increased costs of construction work on the Facilities required as a result of COVID-19. Additionally, the Applicant disagreed with FEMA’s decision to only fund repairs for Building 3, arguing that it was condemned and could not be repaired. On September 22, 2021, the Florida Division of Emergency Management (Recipient) transmitted the appeal with its supporting letter.

On July 22, 2022, after it reviewed the first appeal and found that the DM did not adequately communicate all applicable eligibility issues, specifically cost documentation for contracted and completed work, FEMA issued a request for information (RFI) seeking documentation demonstrating the work requested was required due to disaster-related damage. This request sought documentation relating to the total removal and replacement of the Facilities, documentation detailing the specific work performed with associated costs, and purchase documentation for repair materials. In addition, FEMA sought clarification on whether the Facilities had been replaced, or merely repaired, and what the repair status and work completion dates were. On September 20, 2022, the Applicant responded, again revising its claim, confirming the Facilities were repaired, and providing the project manual, construction contracts and change orders, duplicates of the building inspection reports and photographs, a summary of the scope and costs, and Payment Application Number 12.

On January 20, 2023, the FEMA Region 4 Regional Administrator denied the appeal finding that the Applicant’s documentation lacked a detailed SOW and design criteria and did not provide a repair status or establish that the completed work and costs, including soft costs, were solely attributable to disaster-related damage. Specifically, FEMA could not determine if completed work was limited to the repair of eligible damage because costs were based on lump sum amounts, invoicing was completed using a schedule of values developed after the contract was signed and a deduction taken for Applicant-purchased materials, and the Applicant claimed costs for Building 1, which was not included in the project. 

FEMA also compared the invoiced costs now claimed with the previously approved SOW and eligible costs from FEMA’s prior validation as part of the review process. FEMA determined that only $3,073,001.22 of the previously approved $5,085,047.67 in costs for the Facilities was reasonable and eligible for PA funding. Consequently, FEMA found an underrun of $2,012,046.45 and determined that Section 705(c) of the Robert T. Stafford Disaster Relief and Emergency Assistance Act did not bar deobligation and recovery of the underrun amount. As such, FEMA processed the deobligation of those funds. 

Second Appeal

The Applicant submits a second appeal dated March 21, 2023, for $1,661,955.19, the difference between actual costs it claims it incurred for eligible work and the amount granted in the First Appeal Determination. The Applicant repeats previous arguments and provides additional documentation, including subcontractors’ bid packages for work, packages which it contends demonstrate costs for work were competitively procured and therefore reasonable. Finally, the Applicant argues that FEMA is barred from deobligating funding under Section 705(c) because payment was authorized by the Project Worksheet, costs were reasonable, and the buildings were restored to pre-disaster condition, and therefore all three criteria of Section 705(c) are satisfied. On May 4, 2023, the Recipient transmitted the second appeal with its letter recommending approval.

Discussion

FEMA provides PA funding to eligible applicants for the repair, restoration, reconstruction, or replacement of facilities damaged or destroyed by disasters.[3] Final costs for large projects are based on the actual documented cost of the completed eligible work.[4] To be eligible, costs must be directly tied to the performance of eligible work and be adequately documented.[5] The burden to fully substantiate appeals with documented justification falls exclusively to the Applicant and hinges upon the Applicant’s ability to produce not only its own records but to clearly explain how those records are relevant to the appeal.[6] FEMA is barred from deobligating payments made for a project to a state or local government 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.[7]

The Applicant provided documentation including a work order cost report, building inspection reports, and cost estimates, as well as a one-page overview of lump sum costs broken down into large, generalized categories. However, this documentation does not show how the costs at issue are directly tied to eligible disaster-related work, nor demonstrate where the work associated with the costs at issue took place to verify it occurred at the Facilities. FEMA’s previous cost validation analysis found that $2,012,046.45 was ineligible because the Applicant failed to adequately document a portion of the claim. Despite multiple requests from FEMA, the Applicant did not provide supporting documentation showing a breakdown of contracted and invoiced costs for completed work that could be correlated with the approved SOW. Absent such documentation, the Applicant has not established that the $1,661,955.19 in costs claimed on second appeal are eligible for PA funding. 

Further, with respect to the deobligation under Section 705(c), payment has occurred when the recipient draws down funds obligated for the completion of the approved scope of work through the Payment Management System, regardless of whether the recipient has disbursed funds to the applicant. Here, the Recipient has not drawn down funds for the project through the Payment Management System, and therefore, no payment has been made in accordance with the first prong. As this project does not meet all Section 705(c) conditions, FEMA is not barred from deobligating previously awarded ineligible costs.

Conclusion

The Applicant has not substantiated through documentation that the costs claimed are directly tied to the performance of completed, eligible work. Further, Section 705(c) does not bar FEMA from deobligating the previously awarded funds. Therefore, this appeal is denied.