Procurement & Contracting Requirements, Allowable Costs & Reasonable Costs

Appeal Brief

Summary Paragraph

From August 23 to September 15, 2017, Hurricane Harvey impacted Texas. Lamar University (Applicant) requested Public Assistance and FEMA prepared Project Worksheet 5891 based on an estimate of $849,312.68, which included $9,672.37 for direct administrative costs (DAC). The Applicant claimed $913,929.51 in total project costs, which included $23,602.09 for force account labor DAC and $50,687.11 for contractor DAC. The contractor DAC stemmed from a time and materials contract based on a 2010 contract for services related to Hurricane Ike. The Texas Division of Emergency Management submitted a large project closeout request, recommending an award of $856,573.26 that did not include the $50,687.11 for contractor DAC due to the lack of a not-to-exceed cost ceiling. FEMA concurred, adjusting the final eligible project cost and denying the contractor DAC. FEMA emphasized the lack of a required cost ceiling, full and open competition concerns, and the rate of the selected contractor being higher than other firms in the Applicant’s cost analysis. The Applicant appealed, requesting approval of $50,687.11 for contractor DAC. The Applicant stated it established a ceiling price in March 2021, used oversight controls by having status calls and reviewing invoices, and the claimed rates were similar to other professional service firms. FEMA denied the appeal, finding the Applicant did not comply with federal procurement standards and did not demonstrate costs were reasonable. The Applicant submits its second appeal, reiterating its prior arguments.

Authorities

• 2 C.F.R. §§ 200.318(a),(j), 200.319, 200.320(f)(2), 200.323(a), 200.338, 200.403, 200.404(a); 44 C.F.R. 206.206(a).
• PAPPG, at 30, 32, 38, 133.
• City of Pierre, FEMA-1984-DR-SD, at 7; City of Key West, FEMA-4337.DR-FL, at 4; E. Baton Rouge Sch. Bd., FEMA-4277-DR-LA, at 2.

Headnotes

• Applicants must comply with federal procurement regulations as a condition of receiving PA funding for contract costs for eligible work.
  • The Applicant did not comply with federal procurement requirements by entering into a noncompetitive procurement and using a time and materials contract without a ceiling price.
• FEMA’s enforcement remedies in noncompliant procurement transactions are discretionary and include disallowing all or part of the cost of the activity or action not in compliance. To the extent FEMA allows funding notwithstanding procurement violations, FEMA may base funding on the reasonableness of the costs.
  • FEMA has the discretionary authority to disallow funding as an enforcement action, which was appropriate here based on the circumstances and the lack of a cost analysis demonstrating reasonableness of the additional costs claimed.

Conclusion

The Applicant did not comply with federal procurement requirements and, additionally, has not demonstrated the claimed contractor DAC is reasonable. Therefore, this appeal is denied.

Appeal Letter

Appeal Analysis

Background

From August 23 through September 15, 2017, Hurricane Harvey impacted the state of Texas, resulting in a major disaster declaration on August 25, 2017. Lamar University (Applicant) requested Public Assistance (PA) funding for emergency protective measures that included force account labor (FAL), equipment and materials, equipment rentals, and contractor costs. FEMA prepared Project Worksheet 5891 based on an estimate of $849,312.68, which included $9,672.37 for Direct Administrative Costs (DAC). The Applicant claimed $913,929.51 in total costs related to the project, which included $23,602.09 for FAL DAC and $50,687.11 for contractor DAC stemming from a time and materials contract with Deloitte & Touche LLP (Contractor). 

The Texas State University System, which the Applicant is a part of, issued a request for qualifications (RFQ) in 2009 and entered into a contract with the Contractor in 2010 to provide professional services for internal audits and to evaluate expenditures related to Hurricane Ike. The Contractor billed for professional services on a time and materials basis using rates agreed upon in the 2010 contract and statement of work addendum. The Applicant and the Contractor issued subsequent addendums to the contract for actions such as increasing the scope of services or increasing pricing. The Applicant did not open the bidding process for other companies to compete. Based on the existing 2010 contract for Hurricane Ike and internal audit services, the Applicant authorized the Contractor to perform consulting services related to Hurricane Harvey in 2017. On behalf of the Texas Division of Emergency Management (Recipient), a third-party firm (Auditor) conducted an independent financial summary report for the project.[1] The Auditor identified improper procurement issues related to the Applicant’s contract with the Contractor due to its lack of a not-to-exceed cost ceiling. The Auditor pointed out that, as a time and materials contract, the Applicant should have set a cost ceiling and asserted a high degree of oversight in order to obtain reasonable assurance that the Contractor used efficient methods and effective cost controls. The Applicant stated not-to-exceed amounts were not established as each addendum was issued because costs were being incurred by multiple institutions in the Texas State University System, making it difficult to set an overall cost ceiling. The Applicant provided a Texas State University System cost reasonableness analysis for FEMA-related services, which included four companies selected for review. The Recipient submitted a large project closeout request dated May 14, 2021. Based on the financial summary review, the Recipient recommended awarding $856,573.26 in substantiated costs.[2] The Recipient excluded $50,687.11 for contractor DAC in its closeout request on the basis that the Applicant’s procurement did not demonstrate compliance with procurement requirements.

FEMA concurred with the Recipient’s recommendations, adjusting the final eligible project cost to $856,573.26. After reviewing the additional addenda that extended the 2010 contract, confirmed rate increases, and added services related to Hurricane Harvey, FEMA concluded the Applicant did not include a cost ceiling as required for time and materials contracts. Additionally, FEMA noted concerns that the Applicant procured services without full and open competition and the Contractor did not offer the lowest rate among the companies selected for review in the Applicant’s submitted cost analysis. For these reasons, FEMA denied the $50,687.11 for contractor DAC claimed by the Applicant.

First Appeal 

The Applicant submitted its first appeal in a letter dated March 14, 2023, requesting approval of contractor DAC totaling $50,687.11. The Applicant argued it did not establish a ceiling price for services to be rendered because it did not know the extent of work needed due to the severity of the disaster. Instead, the Applicant stated it used oversight controls that included weekly status calls with the Contractor and invoice reviews. The Applicant noted that, after administrative efforts became more predictable, it issued an addendum documenting the specific scope of services and establishing a ceiling price of $200,000.00.[3] The Applicant argued that, based on the cost reasonableness evaluation it previously provided, the Contractor’s rates were similar to those accepted by the Recipient by other professional service firms for grant monitoring services related to FEMA PA. The Applicant clarified that its cost analysis included firms that provided similar services and did not represent the actual firms that responded to the 2009 RFQ which initiated the 2010 contract. Additionally, the Applicant stated FEMA reviewed and obligated costs for invoices detailing rates and hours incurred in other Project Worksheets and the claimed contractor DAC costs for this project did not exceed 5 percent of the total project costs. In a letter dated April 6, 2023, the Recipient transmitted the first appeal to FEMA with its support.

On October 3, 2023, the FEMA Region 6 Regional Administrator denied the appeal, finding the costs for the Contractor were not procured in compliance with federal procurement standards and not demonstrated to be reasonable. FEMA emphasized that the Applicant modified the scope and rates of the 2010 contract several times without re-bidding and did not provide the selection criteria for the contract despite alleging it was based on qualification rather than price. FEMA noted that the Applicant changed the scope of work of the original 2010 contract, which was limited to the performance of internal audit services, by including grant administration services for Hurricane Harvey. Furthermore, FEMA found the Applicant provided no documentation of cost controls and did not provide a high degree of oversight or put any kind of cost ceiling in place until March 17, 2021, over three years after the disaster. FEMA also concluded the claimed costs were unreasonable for contractor DAC. FEMA noted that the $50,687.11 claim for contractor DAC exceeded 5 percent of the total project cost ($856,573.26) and was in addition to the $23,602.09 in FAL DAC approved by FEMA for the project. Additionally, FEMA noted that the DAC activities, as documented, coincided with FAL on the same dates and included general tasks such as catching up on emails, “weekly check-in,” or “document DAC.” FEMA pointed out that the Applicant’s cost analysis indicated that the senior-level Contractor personnel it used have higher rates than the junior-level personnel typically used for DAC. FEMA also explained that the other projects identified by the Applicant for comparison were initial reviews to confirm the documentation of costs and not whether those costs were reasonable.

Second Appeal

The Applicant submits its second appeal in a letter dated December 1, 2023, maintaining its claim for $50,687.11 in contractor DAC. The Applicant reiterates that an eventual addendum instituted a not-to-exceed amount of $200,000.00 and states it exercised controls to maintain oversight of the Contractor that included weekly meetings with the Contractor, reviewing invoices, and amending the contract incrementally to gradually increase not-to-exceed amounts only as necessary. The Applicant states the Contractor was selected as the more qualified contractor out of two RFQ responses it evaluated in 2009 and reiterates that the claimed costs are comparable to rates accepted and billed to the Recipient for comparable grant administration services. In a letter dated December 11, 2023, the Recipient transmits the second appeal with its support.

Discussion

Procurement & Contracting Requirements

Applicants must comply with federal procurement regulations as a condition of receiving PA funding for contract costs for eligible work.[4] Generally, all procurement transactions for the acquisition of property or services under Federal award must be conducted in a manner to ensure full and open competition.[5] When an applicant makes a change to an existing contract that is beyond the scope of the original contract (a cardinal change), then the applicant has made a noncompetitive procurement that must be justified in the same manner as making an original award through solicitation of a proposal from only one source.[6]  Noncompetitive procurement of an award may be used only in certain circumstances, such as when the public exigency or emergency for the requirement will not permit a delay resulting from competitive solicitations.[7] Time and materials contracts do not provide incentives to the contractor for cost control or labor efficiency, so FEMA may reimburse costs incurred under such contracts only if all of the following apply: (1) no other contract was suitable; (2) the contract has a ceiling price that the contractor exceeds at its own risk; and (3) the applicant provides a high degree of oversight to obtain reasonable assurance that the contractor is using efficient methods and effective cost controls.[8]

The pre-existing contract used by the Applicant for work related to Hurricane Harvey is a contract based on a 2009 RFQ and 2010 agreement limited to the provision of professional services for internal audits and evaluating expenditures related to Hurricane Ike. This prior RFQ and contract did not contemplate the provision of DAC for future major disaster declarations, such as Hurricane Harvey. The authorization of DAC work based on the 2010 contract and subsequent addenda for grant administration related to Hurricane Harvey constitutes a cardinal change that expands the scope of work in the original contract without providing other contractors an opportunity to compete for the work. The Applicant’s use of the Contractor by implementing a cardinal change to the pre-existing contract, therefore, is an impermissible noncompetitive procurement. The Applicant provides no argument or evidence demonstrating that the circumstances of the agreement fit into any limited circumstance allowing for a noncompetitive procurement. 

Furthermore, the Applicant entered into a time and materials contract without a required not-to-exceed cost ceiling. Although the Applicant maintains that a time and materials contract was suitable under the circumstances, it provides no evidence substantiating a meaningful not-to-exceed amount being in place for contractor DAC related to Hurricane Harvey. The only relevant ceiling price provided by the Applicant is dated March 2021, over three years after the disaster. The Applicant also has not demonstrated that it exercised a high degree of oversight, describing its oversight as conducting weekly meetings with the Contractor and reviewing invoices. The Applicant did not comply with federal procurement requirements by entering into a noncompetitive procurement and using a time and materials contract without a ceiling price.

Allowable Costs & Reasonable Costs

FEMA’s enforcement remedies in noncompliant procurement transactions are discretionary and include disallowing all or part of the cost of the activity or action not in compliance.[9] To the extent FEMA allows funding notwithstanding procurement violations, FEMA may base funding on the reasonableness of the costs.[10] 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 decision was made to incur the cost.[11] Factors to be considered include: whether the cost is generally recognized as ordinary and necessary; the requirements imposed by Federal, state, and other laws and regulations and conditions of the Federal award; the market price for comparable service; whether the procurement was prudent under the circumstances given the responsibility to governmental units and the general public; and significant deviations from established governmental practices which may unjustifiably increase the federal award’s costs.[12] FEMA may reimburse DAC that are properly tracked, charged, and accounted for directly to a specific project.[13] When determining the reasonableness of DAC, FEMA considers whether the type of employee and skill level is appropriate for the activities performed and the level of effort required to perform an activity.[14] It is the applicant’s responsibility to provide documentation to substantiate its claim as eligible and to clearly explain how those records support the appeal.[15]

The Applicant’s failure to comply with procurement requirements for full and open competition and a cost ceiling for time and materials contracts did not promote reasonable pricing through efficient methods and effective cost controls to ensure costs did not exceed those which would be incurred by a prudent person under the circumstances prevailing at the time.[16] The administrative record also indicates the Applicant used only senior-level Contractor personnel without justifying why junior-level personnel were deemed inappropriate for the claimed DAC. Although the Applicant stated they conducted a cost reasonableness analysis in 2021, comparing rates charged by other professional service firms for grant monitoring services related to FEMA PA, it failed to demonstrate how these rates reflected market prices for comparable services (e.g., based on similar work with comparable complexity, derived from the same incident time period). Additionally, despite acknowledging that its cost analysis did not represent the actual firms that responded to the 2009 RFQ, the Applicant did not provide proposed rates and qualifications of the other bidding firm(s) for comparison. 

Despite the federal procurement violations, FEMA addressed the reasonableness of eligible costs supported by invoices and documentation in its first appeal decision. FEMA exercised discretion in denying $50,678.11 in contractor DAC, limiting reasonable costs to the $23,602.09 previously approved for FAL DAC, which at times overlapped with the claimed contractor DAC. Due to the procurement noncompliance, FEMA was within its discretionary authority to disallow funding as an enforcement action, which was appropriate based on the circumstances and the absence of a cost analysis demonstrating reasonableness of the additional costs claimed.

Conclusion

The Applicant did not comply with federal procurement requirements and, additionally, has not demonstrated the claimed contractor DAC is reasonable. Therefore, this appeal is denied.