K.1. Reasonable Costs

A cost is reasonable if, in its nature and amount, it does not exceed that which would be incurred by a prudent person under the circumstances prevailing at the time the non-federal entity decides to incur the cost.^[129]

In conducting a reasonable cost analysis, FEMA performs a preliminary review of the documentation to assess the complexity of the activity and the expertise required to complete the analysis. If specialized expertise is required, a subject matter expert with the appropriate specialized skills, knowledge, experience or capability in the appropriate field such as engineering, architecture or cost estimating conducts the analysis.

Considerations include:

• Whether the costs were of a type generally recognized as ordinary and necessary for the operation of a non-federal entity or the proper and efficient performance of the award.
• Restraints or requirements imposed by sound business practices, arm’s-length bargaining, applicable laws and regulations, and terms and conditions of the award.
• Market prices.
• Whether the non-federal entity acted prudently in the circumstances concerning its responsibilities.
• Whether the non-federal entity significantly deviated from its established practices and policies when incurring costs that may have unjustifiably increased the award’s costs.^[130]

FEMA determines reasonableness by evaluating:

• Whether the skill level and level of effort are necessary to complete the required activity.^[131] If the type of employee or skill level is not appropriate for the specific task, FEMA limits HMA to a rate based on the appropriate employee type or skill level. For complex activities, staff with a higher level of technical proficiency and experience may be appropriate.
• Whether the individuals concerned acted with prudence under the circumstances considering their responsibility to the non-federal entity, its employees, its students or membership, the public and the federal government.^[132]
• Whether the applicant complied with procurement requirements (Part 4.M.3) FEMA generally considers contract costs reasonable when the non-federal entity adheres to full and open competition under applicable federal procurement requirements, and the scope of services or work in the contract and level of effort is consistent with respect to the eligible scope of work. FEMA evaluates reasonableness when price competition is lacking or when the selection was non-compliant with the applicable procurement under award requirements even though there may have been price competition.
• Whether the non-federal entity selected the lowest responsible bidder based on the selection criteria. If the non-federal entity selected a contractor with a higher bid than others, it must substantiate its selection based on the selection criteria set forth in its request for proposal.

FEMA generally considers the non-federal entity’s own labor, equipment and supply costs as reasonable provided the costs are consistent with the non-federal entity’s policies including but not limited to pay rates, labor policies and cost schedules used during its normal operations.

The cost or price analysis is one component of documentation that FEMA may review as part of its evaluation of reasonable costs. If the non-federal entity does not submit a cost or price analysis, FEMA may evaluate the elements that would have been part of such analysis. The non-federal entity may need to provide this information if it is not included in the documentation submitted.

FEMA will evaluate whether costs are comparable to the current market price for similar goods or services in the same geographical area.^[133] FEMA makes its determination based on one or more of the following:

• Historical documentation (previous contracts, invoices or other documentation). FEMA may compare costs to the non-federal entity’s historical costs for similar scope of work or items.
• Average costs in the area.
• Weighted average unit pricing. FEMA may determine the average costs in the area using weighted average unit prices. These consist of the average costs of historical bid tabulations and related specifications from competitive bid pricing solicitations respective to the area and usually includes all factors required to bid on public works projects, such as performance bonds, bid bonds, overhead and profit, and general conditions. The non-federal entity or respective state, territorial or regional agency, such as the state’s Department of Transportation may provide weighted average unit pricing and related specifications for FEMA’s review.
• Other non-federal entity activity costs. FEMA may compare the costs with other non-federal entity activities of similar scope of work and similar circumstances.
• Published unit costs from national cost-estimating databases. When using this method, FEMA confirms that the cost publication is current and the appropriate locality adjustment factor is applied.
• Industry cost estimating resources. When appropriate local data cannot be developed or obtained, FEMA uses industry-standard construction cost-estimating resources to prepare an estimate against which to evaluate the reasonableness of the non-federal entity’s actual costs. These costing methods include but may not be limited to RSMeans, BNi Costbooks, Marshall and Swift, and Sweet’s Unit Cost Guide, which are widely accepted in the industry and available for use nationwide.
• Federal, state or territorial unit costs. When industry-standard construction cost estimating resources do not provide work items that are appropriate or applicable to the construction activities required to complete the project, FEMA considers local cost data from other federal agencies or state or territorial agencies responsible for the construction of similar facilities in or near the locality.

When a reasonable cost analysis has been conducted and costs appear high for an activity, FEMA reviews the non-federal entity’s justification in the budget narrative, to determine whether any additional factors justify the higher cost as a reasonable amount.

The non-federal entity is responsible for providing documentation to demonstrate its claimed costs are reasonable. Documentation may include, but is not limited to:

• Documentation showing current market price for similar goods or services, such as:
  • Historical documentation.
  • Average costs in the area.
  • Published unit costs from national cost estimating databases.
• Documentation supporting necessity of unique services or extraordinary level of effort.
• Documentation supporting challenging circumstances, such as news stories or supply chain vendor reports.

If FEMA determines any of the costs to be unreasonable based on its evaluation after completing the evaluation and ensuring that all appropriate costs and factors are included as described above, FEMA may disallow all or part of the costs by adjusting eligible assistance to an amount it determines to be reasonable. When determining the reasonable amount, FEMA may use the least-cost alternative, the lowest bid received by the applicant, or the pricing of another applicant’s properly procured and selected contractor.