Contracts - Cost-Plus-Percentage-of-Costs – Contracts - Time-and-Materials – Procurement – Permanent Work – Scope of Work – Direct Result of Disaster – Codes and Standards

Appeal Brief

Appeal Letter

Appeal Analysis

Background

Beginning in September 2009, severe storms inundated the City of Atlanta’s (Applicant) R.M. Clayton Water Reclamation Center (R.M. Clayton or Plant), a large wastewater treatment plant.  Ten to fifteen feet of water flooded the Plant and remained for several weeks.  Floodwater mixed with wastewater caused widespread contamination and damage to buildings and equipment.

In December 2009, FEMA obligated funding for Project Worksheet (PW) 594 for Plant emergency cleanup and decontamination work performed under a time and materials (T&M) contract by Clean Harbors Environmental Services, Inc. (Clean Harbors).[1]  At closeout in December 2014, FEMA reduced the eligible period of performance and deobligated associated costs, because the Applicant utilized a T&M contract for more than 70 hours of work.  FEMA allowed the first 14 days due to the nature of damage and safety issues associated with a nonfunctional wastewater treatment facility.[2]  

In January 2010, FEMA drafted PW 1883 Version 0 for the repair of one freight and four passenger elevators in three buildings.  FEMA initially estimated funding using the costs as indicated on quotations prepared by the Applicant’s elevator maintenance contractor, ThyssenKrupp Elevator Corporation (ThyssenKrupp).  Soon after the event, in November 2009, ThyssenKrupp assessed disaster damage for each elevator and related equipment by building, quoting scopes of repair and costs for each.^[3]    

In September 2010 prior to obligation, FEMA revised Version 0, disallowing some of the claimed repairs and reducing the amount of eligible funding.  FEMA determined that the Applicant upgraded the passenger elevator interiors in Buildings 7 and 64 using stainless steel components instead of cleaning and repairing the interiors which were originally constructed with wood/wood laminate.  FEMA also determined that damage to the passenger elevator in Building 54 was confined to a pole switch in the basement elevator pit, allowing $100.00 to replace the switch.  FEMA denied funding for all other claimed repairs for Building 54 elevator’s control system/equipment, indicating they were ineligible upgrades not related to disaster damage.  Additionally, FEMA noted that the project was not competitively bid.  Nonetheless, FEMA allowed the scope and cost quoted to repair the freight elevator in Building 7 and approved the exact same scope and costs to repair the passenger elevators in Buildings 7 and 64 (indicating the repairs were similar for the freight and passenger elevators in both buildings).[4]  FEMA explained that all work and costs would be subject to final inspection pursuant to the large project closeout process.  Table 1 below summarizes the changes in costs by elevator:

Table 1: PW 1883 Version 0 cost changes by elevator

The Georgia Emergency Management and Homeland Security Agency (Grantee) notified the Applicant of the obligation of Version 0 in correspondence dated May 4, 2011, which the Applicant received on May 9, 2011.[5] 

On December 12, 2014, FEMA processed multiple PW determinations in the same Emergency Management Mission Integrated Environment (EMMIE) grant award bundle (#0117).  In this bundle, FEMA awarded the closeout of PW 594 in addition to an insurance reduction from PW 1883.[6]  The Grantee forwarded the P.2 Report containing this information to the Applicant on December 15, 2014.

First Appeal

The Applicant first appealed FEMA’s reduction of costs claimed for PW 1883 on July 7, 2011 and supplemented the appeal with a cost validation on August 2, 2011.  The Grantee forwarded the appeal and cost validation to FEMA.[7]  The Applicant appealed the reduction again in addition to other items in a separate first appeal in 2015. 

In this separate first appeal, dated February 17, 2015, the Applicant disputed the insurance deobligation in addition to the amount disallowed for elevator repairs.  Through it, the Applicant incorporated by reference all arguments and documentation submitted previously with its 2011 appeal of PW 1883 (as such, all pertinent content is addressed collectively hereinafter).[8]  The Applicant also disputed the closeout and associated deobligation of PW 594 together with FEMA’s insurance determinations for several other PWs.[9]  

In objecting to PW 594’s partial deobligation, the Applicant presented three main arguments.  First, it argued that FEMA’s decision to limit funding to the first 14 days was arbitrary because federal regulations do not provide a strict time limit for use of a T&M contract.  Furthermore, the Applicant asserted that it demonstrated, in accordance with FEMA regulation and policy, that using a T&M contract was appropriate under the circumstances because it was not possible to estimate the extent or duration of the scope of work (SOW) which continued to evolve throughout dewatering and cleanup, and no other type of contract was suitable.  It referenced an affidavit from its Plant foreman attesting to exigent and emergency circumstances and the urgency of completing work as quickly as possible due to a number of risk factors related to a nonfunctional, critical waste water treatment plant.^[10]  The Applicant objected to the total denial of all costs incurred after the first 14 days, since it was not until after this period had ended when it began treating wastewater, but was unable to operate within permitted effluent limits for another 3 months.[11]

Second, the Applicant maintained that its actual contract costs were reasonable and consistent with federal cost principles and guidance.  Further, that it acted prudently in contracting with Clean Harbors because the contractor was prequalified and fully equipped to handle hazardous materials, the specialized nature of the work, and had prior knowledge of the Plant and its systems.[12]  Additionally, the Applicant referenced samples of Clean Harbors’ daily reports as demonstrative of active measures it enforced to closely monitor and track all work that was performed, thereby ensuring its efficiency and helping to control costs.  It also established a demobilization date in December, which when considered with its other measures, it argued, provided the same benefit as imposing a cost ceiling since it set a hard stop for the completion of all contract work.[13] 

Third, the Applicant stated that through closeout, FEMA did not question the reasonableness of any of the costs, even when deobligating funding for work performed after the first 14 days.  However, the Applicant argued, if FEMA since questioned the amount paid as unreasonable, in lieu of denying all costs for the duration of the contract, the Applicant requested that FEMA independently assess and provide “funding equal to the reasonable costs of Clean Harbors’ work.”[14]  Alternatively, the Applicant asked for the opportunity to provide a market analysis to demonstrate reasonable costs. 

For PW 1883, the Applicant maintained that FEMA should fund all costs as claimed to restore the five elevators, and incorporated by reference, all previous arguments and support documentation included with its 2011 appeal.  Contrary to FEMA’s assertion, the Applicant stated that its contract with ThyssenKrupp (for elevator maintenance) was bid competitively prior to the disaster.  It explained that ThyssenKrupp assessed the disaster damage and quoted costs for repairs under this same contract.  Moreover, the quotes for repair noted important differences distinguishing the nature of damage, design aspects, and elements required to repair each elevator.  After it received the draft PW for the quoted cost, the Applicant accepted the quotations and notified ThyssenKrupp to proceed with work.[15]  However, despite using the quotes as the means to estimate funding, the Applicant indicated that FEMA, when first drafting the PW, failed to bring forward these variations in damage and work required for each elevator.  The Applicant indicated further, that failing to transfer the necessary detail from the quotations onto the PW is what led FEMA to later question whether some of the work included on the quotations was necessary, and ultimately to deny eligible work, when the PW was revised for less than the quoted costs.[16] 

The Applicant claimed, due to the differences in damage, design features, and extent of repairs it cost considerably more to restore the passenger elevators.  Further, it argued that FEMA erred in using the scope of repair and cost quoted for the freight elevator for the passenger elevators because the freight cab was not flooded.  Therefore, it was repairable and could be used after cleaning.  Additionally, it explained the freight elevator’s manual door mechanism and control system were simpler and cost less to repair.  Whereas, the passenger elevators were no longer operational and required replacement because they were submerged in contaminated floodwater for several days.[17]  The Applicant noted the passenger elevators had automated door mechanisms and assemblies, call stations, and were equipped with more complex electronics and lighting.  It noted further, that the quotes also specified replacement for one automated door mechanism and assembly for Building 7’s passenger elevator, whereas both elevators in Building 64 required replacement of three automated door mechanisms, assemblies and related equipment. 

Specific to costs disallowed for the passenger elevators in Buildings 7 and 64, the Applicant argued that its decision to replace materials rendered unusable due to their absorption of contaminated wastewater, should not be viewed as an upgrade by FEMA.  It also objected to FEMA’s assertion that the difference in overall repair cost of the freight elevator and the overall repair cost of the passenger elevators was due to the installation of steel cabs.  FEMA did not account for the freight elevator’s lesser damage nor its simpler design.  Furthermore, correspondence from ThyssenKrupp demonstrated that the estimate for replacing the cabs with steel would require less time and cost less than cleaning and reinstalling the preexisting material (i.e., even if salvaging preexisting materials were possible, approximately 3 extra days would have been necessary to treat, repair, and modify existing cabs for reuse, costing $1,592.00 more per elevator than replacing the cabs with steel).[18]  As such, FEMA should allow the estimated replacement as the least costly option.

The Applicant contended Building 54’s passenger elevator sustained more than minor damage, requiring major repairs including code-mandated work.  Though the cab was not submerged, over four feet of water flooded the basement which has the same elevation as the elevator pit.  Flood-damaged electronic components inside the pit required replacement.  The basement elevator machine room had over two feet of water which destroyed the elevator’s control panel and infiltrated the hydraulic system.[19]  Because the damaged control panel model was proprietary and only the original manufacturer had access to parts, ThyssenKrupp had to substitute generic equipment which triggered permit requirements and required upgrades to be performed for current code compliance.[20]  As a result, the Applicant had to install operating devices for fire/safety service and hoist way access.

The Applicant stated that FEMA challenged the recommended SOW and whether items were repairable or replaceable, not the reasonableness of the quoted costs (noting that FEMA obligated reasonable costs for all passenger elevators except for Building 54’s based on the freight elevator’s quotation).  The Applicant contended it acted prudently in accepting ThyssenKrupp’s recommendation, a licensed expert in the field.  It also found it unnecessary to solicit specific bids for the disaster work since its maintenance contract with ThyssenKrupp was procured competitively.  As ThyssenKrupp would have been responsible for maintenance even after repairs were made, choosing a different contractor for repairs would risk liability and warranty issues.  It cited the federal provision restricting when sole source contracting is allowable and contended due to its stated concerns, use of ThyssenKrupp’s quotations is permissible.[21]  It later supplemented its appeal with a cost analysis to demonstrate reasonableness of the sole-source quotations pursuant to regulation.[22]  The Grantee concurred and forwarded the appeal to FEMA in a letter dated February 27, 2015. 

First Request for Information – Aug. 28, 2017

In a Request for Information (RFI) dated August 28, 2017, FEMA Region IV alerted the Grantee and Applicant that the record lacked information supporting the Applicant’s work and costs.  Specifically, FEMA requested for PW 594: records demonstrating the Applicant timely appealed FEMA’s determination; for PW 1883: (1) justification for replacing Building 7’s and 64’s passenger elevator cab interiors with steel in lieu of the previously installed paneling; (2) the code and standard requiring installation of isolated smoke sensory systems, limit switches, and other additional operating devices for the repaired elevators; and (3) invoices and proof of payment supporting the actual costs of elevator repairs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

In a response letter dated September 12, 2017, the Applicant provided documentation to substantiate it timely appealed PW 594.  Regarding PW 1883 and the use of steel, the Applicant: reiterated it previously demonstrated it was cheaper to replace the damaged cabs with steel rather than repairing them with previous materials; stated that any variation in the cost of materials was likely insignificant; and explained it was advised by ThyssenKrupp that steel would make the repaired elevators resistant to staining and easier to maintain.[23]

The Applicant also forwarded the American Society of Mechanical Engineers (ASME) code and standard documentation in addition to information documenting when they were locally adopted for use, to support its first appeal statement that substitution of generic parts for Building 54’s elevator control panel triggered an upgrade to the current ASME code version.  As further validation, it cited a letter submitted with its 2011 appeal wherein ThyssenKrupp explained that use of comparable equipment in repairing Building 54’s elevator control system required replacement of the operating devices necessary to comply with the current codes.  Other documentation attached to its 2011 appeal also established that it had to obtain a permit from the Georgia Department of Labor for the elevator repairs, who later inspected the work upon its completion as required.[24]  Moreover, per ThyssenKrupp, Georgia inspectors required installation of the additional operating devices for all elevators, including isolated smoke sensory systems and limit switches. 

According to ThyssenKrupp’s explanation, the Applicant stated “limit switches are a part of the control system, with umbilicals going to other areas – different levels and controls for elevator operation.  These operating devices are connected by a wire to the control system and are part of the control system furnished by the manufacturer.”[25] 

The Applicant submitted invoices and proof of payment to its contractors.  For the elevator repairs, it claimed actual costs based on ThyssenKrupp’s invoiced amount ($454,563.80).  Additionally, it forwarded invoices and claimed actual expenses for direct administrative costs (DAC) and project management (PM) services provided by another contractor ($12,914.00).   

Second RFI – Sep. 27, 2017

In a second RFI, FEMA Region IV asked the Applicant to identify the specific ASME code provision triggering the elevator upgrades in PW 1883; for PW 594: (1) explain the “cost plus” column appearing on one of its contractors, Clean Harbors’ invoices; (2) provide proof of authorization to use emergency procurement procedures in response to the disaster in accordance with local ordinance; (3) explain its “typical” competitive bidding process; and (4) demonstrate the amount of time it would need under its process to competitively bid a contract for work similar in scope to PW 594.

The Applicant provided the requested documentation in a response dated October 23, 2017.   

Therein, it emphasized the sequence of events set in motion by the disaster that triggered code-mandated upgrades, which were only required for repairs in Building 54.[26]  Because flooding did not reach the first floor, neither the elevator’s cab nor landings sustained flood damage.  The basement elevator pit and control panel were flooded and inoperable.  Since a manufacturer in Argentina built the control equipment, the Applicant’s contractor used generic equipment, and in so doing, triggered code-mandated replacement of related operating devices.  The Applicant explained “for all elevators where new control systems were installed”[27] state inspectors required installation of additional operating devices, including isolated smoke sensory systems and limit switches.  It also clarified that “… the installation of limit switches that feed information to the control system through umbilicals are not work triggered by the elevator code.”[28]

The Applicant asserted that the substitution of a new type of control system constitutes an alteration or repair of its existing elevator, and as such, triggered the applicability of the ASME A17.1/CSA B44 (2007);[29] and the code required replacement of the additional operating devices, including smoke sensory devices and related communications equipment.  With respect to the code’s specific triggering provision, the Applicant identified the rule requiring that “fire alarm initiating devices … shall be located (a) at each floor served by the elevator (b) in the associated elevator machine room, control space, or control room (c) in the elevator hoistway, where sprinklers are located in those hoistways.”[30]  Thus arguing, it was necessary to install smoke detectors and communications systems in order to comply with ASME code requirements.[31]

Regarding PW 594, it reiterated its contention that, pursuant to its T&M contract, Clean Harbors’ markup charges provided reasonable administrative and overhead costs for services that were not pre-priced on equipment rate sheets.  It stated the cost-plus column of Clean Harbors’ invoices shows the total actual cost incurred for the unscheduled items inclusive of the 15 percent markup.[32]  The Applicant submitted excerpts and description of its emergency and standard procurement processes, in addition to the emergency purchasing authorization enabling it to contract with Clean Harbors to decontaminate Plant facilities.  It also provided an example of a 2006 construction project for various Plant improvements, indicating it required 85 days for a competitive process.

First Appeal Decision

On April 12, 2018, the Regional Administrator (RA) partially granted the appeal and acknowledged that the matter of timeliness was resolved.  The RA explained that FEMA would respond to insurance-specific items in a separate decision and addressed the remaining programmatic and eligibility issues concerning appealed work and costs.[33]  The decision emphasized, when permissible and for necessary work immediately following the event, FEMA may authorize reimbursement of T&M costs for a limited period (typically the first 70 hours). 

For PW 594, the RA found, though the Applicant demonstrated beginning the decontamination process under the noncompetitive T&M was warranted and compliant with its own procurement standards, once the work was underway, to comply with federal rules, it should have competitively bid a new fixed-price or unit cost contract for disaster work.  FEMA previously allowed 14 days to competitively bid the work, or the minimum timeframe required to advertise the project under the Applicant’s procurement standards for sealed bidding.[34]  The RA acknowledged that FEMA did not account for additional time necessary to complete all the procurement steps.  However, the Applicant’s competitive procurement process did not specify a minimum amount of time for steps occurring after advertisement.  Moreover, though the 2006 construction project example provided by the Applicant proposed an 85-day competitive procurement schedule, the project addressed permanent construction of preplanned improvements for the Plant and was dissimilar in type and complexity of work.  Therefore, it could not be used as a comparison to establish a reasonable procurement timeframe for the emergency work at issue. 

As such, the RA explained that the timeframe for eligible T&M work would be based on FEMA’s determination of a reasonable amount of time to complete the bidding process.  Based on the information provided, the RA approved an additional 35 days (14 days for the pre-award phase activities and 21 days for the evaluation and selection phase) as a reasonable amount of time during which the Applicant should have been able to award a competitively bid contract.  This extended the eligible period for T&M work from September 23 through November 11, 2009, for a total of 49 days (including the 14 days previously awarded).[35]  Of the $2,256,408.41 in invoiced costs for work completed between September 23 and November 11, 2009, the RA authorized $1,603,601.58 in additional funding.  

The decision also discussed two other instances of noncompliance with federal procurement regulations pursuant to Title 44 of the Code of Federal Regulations (44 C.F.R.) § 13.36.  First, the contract lacked a cost ceiling.  Second, the RA found that the 15 percent markup charged for the unscheduled rented equipment was an ineligible cost plus a percentage of cost (CPPC) charge.  For failing to comply with federal regulations, as an enforcement action, the RA denied funding for costs incurred after November 11, 2009.[36]  The RA also deducted the prohibited CPPC charges from costs for work during the eligible T&M period (disallowing $12,280.02).[37]

For PW 1883, the RA indicated that it may not have been possible for the Applicant to have cleaned and repaired the elevator cabs since the interior wood/wood laminate material may have absorbed contaminated flood water.  Moreover, FEMA did not question the decision to replace or repair the cabs but whether in replacing preexisting materials with steel, the Applicant upgraded the cabs beyond their predisaster design.  Though the Applicant asserted it found the difference in material cost to be insignificant, it did not present documentation substantiating this claim.  Therefore, the RA determined the stainless-steel upgrades did not comply with 44 C.F.R. § 206.226 requirements,[38] and further, that costs associated with the work were not reasonable.  Additionally, because FEMA could not distinguish costs for ineligible upgrades from eligible repairs based on records of invoices and repair orders, the RA upheld using the freight elevator’s cost estimate as a reasonable valuation of the eligible work required for the passenger elevators in Buildings 7 and 64. 

Furthermore, since the contractor’s quotation for the freight elevator included necessary repairs for the isolated smoke sensory system, and FEMA used the freight elevator’s quotation as the basis for the passenger elevators’ eligible funding, the RA asserted that the PW had previously included funding for the isolated smoke sensory system work for all four elevators.  Since it was also unclear based on invoices, whether repair costs for smoke sensory system components varied by elevator, there was no reason to change the estimate.  Likewise, the PW funded costs for limit switches for the four elevators since the freight estimate included repair/replacement costs for them.  Lastly, the RA also denied additional funding for Building 54, maintaining the disaster caused only minimal damage to the elevator pit switch.  Due to the lack of damage to the cab, the Applicant was not required to complete interior repairs that would have triggered the ASME code.[39]

Second Appeal

In a June 8, 2018 second appeal, the Applicant requests additional funding totaling $599,947.81 for PWs 594 ($395,524.92) and 1883 ($204,422.89).[40]  For PW 594, the Applicant seeks reimbursement of its remaining contract costs for Plant cleanup and decontamination.  First, it argues that denial of all costs incurred after November 11, 2009 is incorrect and contrary to FEMA policy.  It rejects the rationale used to limit the eligible T&M period to 49 days, asserting the first appeal decision imposed an unrealistic schedule based on the presumption that it could have competitively procured a new contract for the remaining work.  Furthermore, Clean Harbors would have finished working in the time it would have taken the Applicant to complete the additional steps and start work under a new competitively procured contract.  Not only is the timeframe unrealistic, the Applicant argues it is also not required by regulation which permits noncompetitive procurement in an emergency where urgent action is required. 

The Applicant further claims that FEMA used a narrow interpretation of its discretionary authority, under 44 C.F.R. § 13.43, to justify disallowing all costs for the last phase of emergency work.  Doing so, the Applicant contends, is inconsistent with FEMA’s policy to allow reasonable costs for eligible work, and numerous second appeal decisions where FEMA reimbursed reasonable costs as an enforcement action, even when claimed costs were incurred under noncompliant contracts.  It cites examples of second appeals involving procurement issues where some amount of funding was provided upon determining reasonable costs.  It contends that denying any funding for eligible work without having ever questioned the reasonableness of costs goes against FEMA’s practice.  Thus, the Applicant asks FEMA to “exercise its authority to reinstate full eligibility for its reasonable costs” for all contract work.[41]

Second, the Applicant disputes the finding that its request included prohibited CPPC charges.  It also notes that FEMA understated the amount associated with the 15 percent markup.  It argues, when properly accounted for, that reasonable direct costs for materials which are necessary to execute the grant are allowable.[42]  The Applicant maintains it incurred the costs based on its T&M agreement with Clean Harbors, contending it is distinguishable from a CPPC-type contract.  To support this assertion, it cites court cases where four criteria have been applied as a test when deciding whether a federal contract is a CPPC contract.[43]  The Applicant also asserts that prices for rentals were not loaded prior to the application of the contractor’s markup; and reiterates that the markup covered the costs of handling transactions tied to renting any equipment that was not specified on rate sheets.  Lastly, it states that there is no rule specifying that a T&M contract becomes a prohibited CPPC contract when it includes markup for handling materials or that such fees are improper.[44]

For PW 1883, the Applicant argues that FEMA erred in using the freight repair cost to unfairly cap eligible costs incurred for repairing passenger elevator cabs and controls.  It reemphasizes the differences in damage, design, construction and operation of passenger and freight elevators.  In addition, it states that predisaster design is defined as the size and capacity of a facility, arguing that there is no statutory or regulatory requirement that limits use of material in the repair of damage.  For Building 54, the Applicant questions how FEMA determined months after the event and after repairs had been completed, that damage to the elevator system was limited to a single switch.  It contends the administrative record documents its claim for additional damage for which FEMA ultimately denied eligible funding with no basis in regulation or policy.  On June 15, 2018, the Grantee forwarded the appeal, concurring with the Applicant’s arguments. 

Discussion

Noncompliance with Federal Procurement Requirements (PW 594)

In order for the costs of contract work to be eligible for reimbursement, applicants must comply with federal procurement standards found in 44 C.F.R. § 13.36.[45]  Federal standards require applicants to maintain records detailing the significant history of a procurement, including but not limited to, the rationale for the method used, selection of contract type, and the basis for the contract price.[46]  Generally, all procurement transactions must be conducted in a manner to ensure full and open competition.[47]  

Regulations permit noncompetitive procurement of an award (e.g., solicitation of a proposal from a single source) after other competitive methods are found infeasible, provided at least one of the required circumstances applies, such as the public exigency or emergency for the requirement will not permit a delay resulting from competitive solicitation.[48]  However, a cost analysis is necessary to establish price reasonableness when adequate price competition is lacking and for sole source procurements.[49]  An applicant may utilize a T&M contract only after a determination that no other contract is suitable and if the contract includes a ceiling price that the contractor exceeds at its own risk.[50]  These procurement standards also prohibit certain contract pricing structures from being used such as the CPPC method of contracting.[51] 

1. T&M

The Applicant demonstrated it was necessary to utilize a T&M contract because at the time the decision was made, it was not possible to accurately estimate the extent or duration of the work that was necessary or to reasonably anticipate associated costs.  However, because the contract lacks the required not to exceed provision, the Applicant did not comply with 44 C.F.R. § 13.36(b)(10). 

Though the Applicant has argued that careful monitoring of all work and other actions taken to contain costs achieved the same purpose as including a cost ceiling in the contract, FEMA does not find this to be persuasive.  To support this argument, the Applicant cited to the Affidavit, which summarized the Plant Manager’s account of events and insight into the decisions made under the circumstances and provided Clean Harbors’ daily activity logs describing some of the emergency work performed at various sites and buildings throughout the Plant.  This documentation illustrates the broad, varied, and critical nature of activity that took place during the earlier phase of work, and viewed collectively, demonstrates the urgency of beginning the work immediately on a T&M basis.  Though the activity logs describe the work and indicate a level of oversight in that there is a pattern of reporting certain tasks as they progressed, the sample provided does not adequately represent the full period of contract work for which funding is sought.[52]  Regardless, even if FEMA found this argument to be persuasive and supported by the record, the requirement to comply with the regulatory provision would remain.

1. CPPC method of contracting

Pursuant to 44 C.F.R. § 13.36(f)(4), FEMA prohibits applicants from using a CPPC method of contracting.  The purpose is to prohibit contracts that incentivize a contractor to increase its profits by increasing costs of performance.^[53]  FEMA follows the Federal courts in using a four-part test to determine whether a contract specifies reimbursement of costs based on a CPPC: (1) payment is on a pre-determined percentage rate; (2) the pre-determined percentage rate is applied to actual performance costs; (3) the contractor’s entitlement is uncertain at the time of contracting; and (4) the contractor’s entitlement increased commensurately with increased performance costs.[54]

The Applicant acknowledges that federal regulations prohibit use of the CPPC method, shows it understands the rationale behind the prohibition, and references the four-part test.  It argues that FEMA should allow the costs because FEMA referred to its agreement with Clean Harbors as a T&M contract.  Additionally, it states that the regulation does not specify that a T&M contract is converted to a CPPC contract when it includes a 15 percent markup for materials-handling fees.  However, the regulation specifies that “the cost plus a percentage of cost and percentage of construction cost methods of contracting shall not be used” and does not limit the prohibition to CPPC contracts.  Rather, it prohibits usage of CPPC methods of contracting.[55]

Here, the Applicant had a T&M contract with fully loaded rates established.  It later agreed to a 15 percent markup for equipment and materials not included on the contract rate sheet.  This portion of the agreement meets the four-part test to determine reimbursement is based on a CPPC-method of contracting, as it (1) included payment based on a predetermined rate of 15 percent; (2) applied a rate to actual rented equipment and material costs; (3) the equipment and material costs were unknown at the time of contracting; and (4) the contractor’s cost increased with additional rented equipment and material costs.  Therefore, the inclusion of the CPPC provision obligated the Applicant to pay the contractor an amount undetermined at the time the contract was awarded and to be incurred in the future, based on a percentage of future costs.^[56]  As such, the RA properly identified and denied funding for any costs that were charged based on the ineligible CPPC provision through November 11, 2009, which concludes the eligible period of work authorized by the first appeal decision.[57] 

The first appeal decision approved a total of $2,041,607.84.  However, the second appeal review supports adjusting the final amount based on documented actual costs through the last day of eligible work.  Based on invoices, the Applicant incurred a total of $2,161,343.98 through November 11, 2009.  After deducting the CPPC expenses, the total eligible amount is $2,145,777.65.  Therefore, FEMA will obligate $104,169.81 in additional funding for PW 594.

Enforcement Actions

If an applicant materially fails to comply with any term of an award, including federal procurement requirements, the awarding agency has discretionary authority to take an enforcement action appropriate to the circumstances to remedy an instance of noncompliance, including disallowing all or part of the cost of the activity or action not in compliance.^[58]  In addressing noncompliance, FEMA has discretion to determine appropriate enforcement actions for each instance on a case by case basis.  At times, FEMA may exercise its discretion and award reasonable costs or disallow funding.[59]

The Applicant argues that FEMA narrowly interpreted 44 C.F.R. § 13.43’s enforcement provision to justify denial of funding for work beyond the eligible T&M period.  It cited policy guidance and second appeals as evidence that FEMA often evaluates and awards reasonable costs as a remedy for procurement noncompliance, and asks FEMA to do so here, instead of disallowing all costs incurred for work outside of the eligible T&M period.

Upon review, FEMA finds that the RA acted within her discretion to apply a reduction of costs despite the nature of the work, because the contract under which work was performed does not comply with federal procurement requirements pursuant to 44 C.F.R. § 13.36.  Since the RA had the authority to act on each instance of noncompliance, all funding could have been denied pursuant to § 13.43 as a result.  Instead, the RA awarded costs found reasonable for most of the work, less the reduction taken as an enforcement remedy for the Applicant’s failure to transition to a competitively bid fixed price or unit cost contract, and for using a T&M contract with prohibited cost-plus charges without a required cost ceiling.  Moreover, the Applicant has not demonstrated that the RA’s enforcement action was inappropriate or unreasonable based on the circumstances.

Though the Applicant cites second appeal decisions wherein FEMA has approved reasonable costs for eligible work despite procurement infractions, FEMA’s practice is to consider the facts of each case separately.  In the cited decisions, FEMA either denied the cost or was in a position to assess reasonableness due primarily to cost-specific documentation presented by the applicant.[60]  Here, the Applicant wants FEMA to independently determine and award reasonable costs for a broad scope of work completed under a noncompetitively bid T&M contract without submitting a cost analysis or any other cost records for comparison to document market pricing for the work around the time of the agreement.  It did not submit a cost analysis despite demonstrating awareness of its responsibility to substantiate reasonableness of costs claimed for work performed under a sole source contract, as evidenced by the cost documentation submitted with its appeal of PW 1883, which was brought forward to validate the reasonableness of costs incurred under a different contract that the Applicant utilized to solicit sole-source quotations for disaster repairs.  Therefore, because the Applicant did not submit a cost analysis which is required for all sole-source awards and the other reasons discussed above, the facts of this scenario do not support awarding reasonable costs beyond what FEMA has already approved.[61] 

Permanent Work Eligibility (PW 1883)

FEMA is authorized to provide funding for work that is necessary to restore damaged eligible facilities to their predisaster design, function, and capacity, in accordance with current applicable codes, specifications and standards.[62]  FEMA will fund the net eligible cost of such repair.^[63] 

It is the applicant’s burden to identify damage and submit costs for work that is required as a direct result of the disaster.[64]  The PW is the mechanism for funding and documents the design of the damaged facility in addition to the eligible damage, SOW, and costs.[65]  FEMA policy emphasizes the fundamental importance of describing damage in terms of the facility, features, or items requiring repair with enough detail to quantify and clearly define the dimensions of all damaged elements.[66]  The scope of eligible permanent work is what is necessary to repair the disaster damage to a facility and must correspond directly to the cause of damage.^[67]  This is especially important when permanent repairs for multiple facilities are combined onto a single PW such as PW 1883.

Here, the Applicant has demonstrated a direct relationship between the disaster damage and the additional work claimed.  The Applicant sufficiently demonstrated in its 2011 first appeal, that FEMA neglected to include relevant damage detail from quotations which varied based on the type and design of the elevators and the amount of damage sustained due to where they were located when flooding first occurred.  This information was identified by ThyssenKrupp on the individual elevator repair quotes.  In formulating the PW, FEMA’s omission of relevant detail resulted in an inaccurate damage description, which informed the development of both the eligible repair scope and estimate, for each facility.  FEMA also erred in using the proposed scope of repair and cost estimate for Building 7’s freight elevator to frame the scope and estimate for Building 7 and 49’s passenger elevators, because the freight elevator functioned differently and had manual doors, simpler lighting, and sustained less damage to the cab because the elevator was on a higher floor. 

In using the freight estimate as the basis for funding, FEMA thereby omitted eligible scope and costs necessary to restore the passenger elevators, related equipment and controls in Buildings 7 and 64.  While the freight estimate contained repair items that were common across all elevators, it was nonetheless intended to be used to restore only the freight elevator and could not adequately address several differences, including but not limited to the following examples:[68]

• Because the freight estimate called for the installation of new sliding guide assemblies, FEMA allowed replacement of sliding guide assemblies for all four elevators.  However, the quotes for the passenger elevators in Building 7 and the two passenger elevators in Building 64 specified installation of a new set of guide roller assemblies, which function with moveable parts, to accommodate automatic doors. 
• The disaster flooded Building 7’s passenger cab and, in addition to the door assembly, the automated door mechanism on the ground floor required replacement.
• Building 64 sustained the most damage overall.  Its passenger elevators were flooded including the cabs.  Three floors/stops were flooded.  This required replacement of three door mechanisms, call stations, and associated electronics (e.g., smoke sensors).

• The passenger elevators in Building 7 and 64 required the cabs to be replaced, which included replacing interior panels, lighting, fans, car doors and front returns.  Since the freight estimate was used instead and its cab was not damaged to the same extent, the necessary work to restore passenger cabs in Buildings 7 and 64 was excluded.
• Building 7 and 64 passenger elevators required replacement of door operating mechanisms, door clutches, and infrared reopening safety devices.  Due to manual door design differences, the freight estimate did not include any of this work.
• The quotes for all passenger elevators recommended installation of new car top operating and inspection stations whereas the freight quote did not.
• The freight estimate included replacement of hoist-way limit switches on the lower floor of Building 7.  However, Building 64 called for replacement of all limit switches because all floors were flood-damaged.
• The freight estimate included installation of new door operating chains, linkage rods, guide shoes, interlock device, and allowed for painting of all accessible areas of the doors at the bottom landing.  Whereas the passenger estimates for Buildings 7 and 64 included installation of a new stainless-steel door panel, interlock device, hanger rollers and closer at the bottom landing (note that Building 64 indicated closers for all landings).

Since the SOW is inadequate to restore the damaged facilities as explained in the examples above which are based on documentation the Applicant submitted to support its appeal, the PW must be adjusted.  Except for the upgraded materials, the Applicant has demonstrated the quotes captured the eligible repair scope for each elevator. 

Regarding the upgraded materials, FEMA finds that replacing the cabs with steel is cost effective and at the same time will protect against or prevent future similar damage.  Unlike the porous wood-based material installed previously, steel is less likely to absorb water and contaminants making it easier to clean, disinfect and repair and, therefore, less likely to require replacement.[69]  The contractor provided a cost comparison to repair the elevator cabs by salvaging materials and retrofitting existing cabs versus replacing them with new stainless steel.  The comparison identified $8,709.00 as the replacement material cost for each new cab.^[70]  Therefore, the cost to upgrade the three passenger elevator cabs in Buildings 7 and 64 with steel amounts to $26,127.00, or approximately 10.45 percent of the total eligible project cost that FEMA approved previously.[71] 

Reconciliation of the project’s actual costs

In accordance with 44 C.F.R. §§ 206.203(c)(1) and 206.205(b) for large projects, the amount of final funding for eligible work and costs as clarified in this decision must be determined upon reconciliation of the project’s actual costs at closeout.[72]  The Applicant has completed the work, but the PW has not yet been closed.  Since this is a large project, final funding must be based on actual costs.[73] 

In response to the Final RFI, the Applicant provided actual expenditures for the elevator work, inclusive of DAC and PM costs.  The RA reviewed the elevator cost documentation for the purpose of resolving the appeal, not reconciling final costs for closeout.  ThyssenKrupp’s invoiced costs exceeded quoted pricing for the elevator work and based on invoices, this overage is not distinguishable by elevator.  In addition, actual DAC and PM costs exceeded the estimated amounts, yet the cost documentation does not account for activities related to this specific PW.  According to the Applicant, it authorized ThyssenKrupp to proceed with construction based on the quotations which once signed, became work orders and the agreed upon scope of repair.  At closeout, the Applicant must distinguish costs by elevator where possible and explain why invoiced amounts exceeded quotations since the quoted costs were not expected to change.  It must also submit a detailed accounting of actual DAC and PM costs specific to this PW.  FEMA will determine final eligible costs for the revised approved SOW and adjust the PW accordingly.  The Applicant’s appeal rights are preserved with respect to the Agency’s determination of those costs. 

Direct Result of the Disaster / Codes and Standards (Building 54)

Pursuant to regulations, an item of work must be required as the result of the disaster.^[74]  Work required as a direct result of the disaster that is necessary to restore the function of an eligible facility is eligible for Public Assistance.  When work shown to be necessary to restore the function of an eligible facility triggers additional work required by eligible codes and standards, the additional work is similarly eligible.  Upgrades required to meet applicable codes and standards are part of eligible restoration work if demonstrated as such.  Regulations provide that FEMA may reimburse costs of federal, state, and local repair or replacement codes or standards, if the codes or standards meet 44 C.F.R. § 206.226(d)’s required criteria.  As such, the codes or standards: (1) apply to the type of repair or restoration required; (2) are appropriate to the predisaster use of the facility; (3) are found reasonable, in writing, and formally adopted and implemented by the state or local government on or before the disaster declaration date or be a legal federal requirement applicable to the restoration; (4) apply uniformly to all similar types of facilities within the jurisdiction of the owner of the facility; and (5) were enforced during the time the standards were in effect.[75] 

Though the first appeal decision did not address the Applicant’s damage claim specifically, it upheld the denial of additional funding for Building 54, concurring with the PW determination that though the disaster damaged the stop switch in the elevator pit, the Applicant did not document any damage to the elevator.  As such, the decision found that none of the work claimed would have triggered the cited ASME code.  However, the second appeal review finds that the Applicant has substantiated with documentation and detailed narrative, the linkage between the disaster damage and chain of events that occurred when making necessary repairs, to fund the additional work as identified on the contractor’s quotation.

The Applicant previously submitted photographs and letters from its contractor as evidence of damage to the elevator’s control system that appear to have been overlooked inadvertently despite their relevance to establishing eligibility for the appealed work.  For example, pictures show the water line in the basement.[76]  Additionally, PW 594 documents the significant decontamination work necessitated by the amount of flooding throughout the Plant, and contractor logs indicate cleanup work was specifically performed in Building 54.[77]  Moreover, the contractor drafted a letter to record damage observed in the basement, noting the odor of burnt electrical items in the control panel and concluding that water had infiltrated and damaged the hydraulic system.[78]  The letter explained, since the damaged control panel and related equipment were originally manufactured by a proprietary source and not available, the contractor used comparable equipment from available sources. 

Thus, to restore the functionality of the elevator’s operating and control mechanism, the contractor was required to substitute similar parts.  The work related to this alteration, triggered by the event, required a permit to execute the repair which then required replacement/installation of additional operating devices that were necessary to comply with fire/safety/smoke provisions pursuant to ASME code.[79]  The ASME code was adopted previously by the State of Georgia and the City of Atlanta, as a recognized division of the state.[80]  As a result, FEMA finds that the Applicant provided justification in that the chain of events precipitated by the need for parts integral to the safe operation of the elevator and system, triggered code-mandated repairs.  As such, the work is eligible.  FEMA will adjust the PW to include the damage detail and scope of repair as indicated on the contractor’s quotation.  Since funding for this eligible work as clarified in this decision must be based on actual costs, the total amount will be determined upon final reconciliation at closeout.  The Applicant will retain the right to appeal the closeout determination.

Conclusion    

The Applicant’s T&M contract does not comply with federal procurement regulations requiring a cost ceiling and prohibiting the inclusion of a CPPC provision.  Due to the noncompliance, the RA had the discretionary authority to disallow funding as an enforcement action which was appropriate based on the circumstances and the lack of a cost analysis demonstrating reasonableness of the additional costs claimed.  Therefore, the Applicant’s appeal with respect to PW 594 is denied.  FEMA will, however, obligate an additional $104,169.81 to correct the PW’s final accounting of eligible costs.  

The Applicant has shown that PW 1883 excluded eligible work necessary to restore the damaged facilities.  Based on supporting documentation, the contractor’s quotations captured the eligible damage and SOW and FEMA will adjust the PW accordingly.  This includes the additional work as claimed to replace Building 54’s damaged elevator control system, related equipment, and installation of additional operating devices required for code compliance.  Since the Applicant demonstrated replacing the passenger elevator cabs with steel is more cost-effective than salvaging and retrofitting the existing cabs, FEMA will fund the work. Though the appeal is granted, the amount of eligible funding for the revised SOW as clarified by this decision must be determined by FEMA at closeout when reconciling all actual costs.  The Applicant’s appeal rights are preserved with respect to the Agency’s determination of those costs.