Reasonable Costs

Appeal Brief

Summary Paragraph

On December 31, 2005, high floodwaters caused damage to Rooney Dam, resulting in substantial scouring of the dam and the washing away of trees from the bank.  FEMA prepared a PW version for $352,077.00, an estimated cost for completing the work based on a previous project, and later the Applicant determined that actual costs on the project were $141,786.50.  On March 8, 2012, FEMA determined the Applicant did not properly procure its professional services contract, and the costs for those services were unreasonable given the construction costs.  FEMA also determined that the project was an improved project because some of the approved scope of work was completed along with a fish ladder project funded by another agency.  FEMA found eligible costs to be $74,946.64 and deobligated $277,130.36.  In the first appeal, the Applicant requested FEMA provide the actual costs, arguing that it followed procurement procedures and all costs were reasonable.  The Region IX Deputy Regional Administrator denied the first appeal on the issue of eligible costs, finding the Applicant failed to follow procurement procedures and did not verify the soft costs solely pertaining to the FEMA project.  On second appeal, the Applicant argues that all actual costs are the reasonable costs related to the FEMA project and that the fish ladder project was distinct from the FEMA project.

Authorities and Second Appeals

• 44 C.F.R. §§ 13.22(a)(1), 13.36, 206.203(d)(1).

• OMB Circular A-87, 2 C.F.R. § 225.

• PA Guide (1999), at 34, 39, 75-79.

Headnotes

• Pursuant to 44 C.F.R. § 13.36(c), applicants procurement of services under a federal grant must do so in a way that provides full and open competition, unless the applicant meets one of the exceptions under 13.36(d)(4)(i).

  • The Applicant did not demonstrate that it properly procured the professional services contract nor did it show that it met one of the exceptions.As a result, FEMA assessed, but could not verify the reasonableness of the costs.

• Pursuant to 44 C.F.R. § 206.203(d)(1), federal funding for improved projects shall be limited to the Federal share of the approved estimate of eligible costs.

  • The construction costs for the project are $47,227.00 and the claimed amount for soft costs is $94,559.50.The Applicant provided a spreadsheet noting task descriptions and the amounts attributable to those tasks for the Rooney Dam project.The task descriptions did not provide sufficient detail for FEMA to assess cost reasonableness.

FEMA applied an approved methodology to estimate reasonable costs.

Appeal Letter

Appeal Analysis

Background           

On December 31, 2005, high floodwaters caused damage to Rooney Dam on the Consumnes River in Sacramento County, California.  Due to high water levels, Omochumne-Hartnell Water District (Applicant) could not access the site to assess the damage for several months.  On April 1, 2006, FEMA prepared Version 0 of Project Worksheet (PW) 468, noted the accessibility issues, and instructed the Applicant to notify the California Emergency Management Agency (Grantee) when the site was accessible. 

Several months later, FEMA received information from the Grantee that the dam was accessible and, on February 26, 2007, wrote Version 1 of the PW.  The floodwaters caused substantial scouring of the dam in three locations, created a drop-off from the concrete dam sill, and washed trees away from the bank.  In order to repair the damage, the scope of work (SOW) included: (1) restoring the damaged sill, either by pressure grouting or formed concrete; (2) replacing lost rip-rap to the three scoured areas; (3) engineering for plans and bid proposals; (4) construction management; and (5) environmental permits.  In Version 1, FEMA obligated $352,077.00 as an estimated amount to complete the work.  

On February 26, 2008, FEMA prepared Version 2 to initiate consultation under the National Historic Preservation Act (NHPA) and re-initiate consultation under the Endangered Species Act.  FEMA noted in the PW that a formal NHPA consultation was required and that the Applicant would need to consult with the Miwok Tribe.  Based on comments received from the Miwok Tribe, FEMA required the Applicant to retain a qualified archaeological monitor and a Native American monitor to be present during ground-disturbing activity associated with the project.  In order to comply with federal and state laws, the Applicant had to acquire various types of environmental permits to complete the project and consult with the National Marine Fisheries Service due to impacts the project would have on fish passage.  

On January 31, 2011, the Grantee submitted the Final Inspection Report and requested closeout, indicating that the actual cost to restore the dam to pre-disaster condition was $141,786.50.  On June 3, 2011, FEMA responded to the closeout request by stating that the costs claimed were not sufficiently documented to support the approved SOW and regulatory eligibility requirements.  FEMA also requested source documentation for all final costs, professional services procurement, and information about the entities that completed both the professional services and construction on the project.  On August 4, 2011, the Grantee provided additional information in response to FEMA’s request.  On March 8, 2012, FEMA concluded that the professional services were negotiated without competitive bidding and were billed as a time-and-materials contract with cost-plus-percentage of costs added.  FEMA also determined that project management costs were for indirect costs and as such were ineligible.  Furthermore, FEMA found that the project was an improved project because some of the approved SOW for the FEMA project was completed at the same time, and by the same contractor, as a United States Fish and Wildlife Service (USFWS) fish ladder project in the same area.  After reviewing the invoices the Applicant provided, FEMA determined that construction costs of $49,307.00 were reasonable for the work completed, but that professional services costs[1] of $94,559.50 (192% of the construction costs amount) was unreasonable.  In the first appeal decision involving repairs to another dam, FEMA found that a reasonable cost for professional services for work on this type of dam is 52% of the amount of construction costs and provided the following reasoning based on cost curves in Public Assistance policy guidance from 2007[2]:

According to Cost Curves A & B depicted on Pages 58 and 60 of [the PA Guide], engineering and design services for an above-average complexity construction project…is estimated at 26% of construction costs, and for an average complexity construction project such as small dams, roads and other conventional projects is estimated at 14% of construction costs.  In recognition of the complex environmental permitting process required to repair the three dams, FEMA used Cost Curve A at 26%, and doubled that amount to 52% to account for the complex environmental permitting and coordination necessary for each site.[3]

Based on this methodology, FEMA determined the reasonable cost for professional services to be $25,639.64 and total eligible funding to be $74,946.64[4] resulting in a de-obligation of $277,130.36.[5]  Furthermore, since the project was completed as an unapproved improved project, FEMA determined that eligibility will be predicated on documentation to support the improved project.  FEMA required the Applicant to provide complete plans, professional service costs, and schedules for improvements done under the fish ladder project.  On May 8, 2012, the Grantee provided the requested documentation.  

First Appeal

In its first appeal letter submitted on June 13, 2012, the Applicant claimed that FEMA should fund the actual costs of $141,786.50 and requested that FEMA reobligate $66,839.86.  The Applicant claimed that it followed procurement procedures and the professional services costs were reasonable and necessary for completion of the project given the project type and the Applicant’s one-person staff at the time of the disaster.  The Applicant asserted that it did not competitively bid the professional services contract because there was a “public exigency or emergency” pursuant to 44 Code of Federal Regulations (C.F.R.) § 13.36(d)(4)(i)(B) because the dam was seriously damaged in the storm event and any delay in repairing the dam risked damages to property and flooding around the area.  The Applicant also claimed that its standing relationship with Robertson-Bryan, Inc. (RBI) did not bear the hallmarks of unfair competition, such as undue influence, contingency agreements, or unreasonable rates.  The Applicant also noted that RBI had a familiarity with the unique dam features and this knowledge allowed for an easy transition.  The Applicant further claimed that the project required more than the “traditional” professional services covered under Cost Curve A.[6]

The Grantee had not yet transmitted the Applicant’s appeal to FEMA Region IX, when, on July 3, 2012, FEMA prepared Version 5 of the PW, de-obligating all funding.  FEMA found that the project met the United States Army Corp of Engineers (USACE) “flood control work” definition, which removes FEMA’s authority to fund the dam repairs.  On July 30, 2012, the Grantee transmitted the appeal to Region IX.   

On September 11, 2012, the FEMA Region IX Deputy Regional Administrator (DRA) issued a letter which determined that the first appeal was moot.  The DRA explained that it “overlooked the fact that this facility” falls under the authority of the USACE and is not eligible for FEMA Public Assistance funding.  The DRA attached a memorandum from the USACE to FEMA noting that the facility is part of a flood control work and instructed the Applicant that it could appeal the determination to the Regional Administrator.

On November 30, 2012, the Applicant filed an appeal, asserting that the facility was not a flood control work and that the total eligible cost for the project was $141,786.50.  The Grantee forwarded the appeal on February 4, 2013.                           

The DRA partially granted the appeal on July 10, 2013.  The DRA determined that the facility was not a flood control work and is eligible for Public Assistance funding.  However, the DRA found that the Applicant did not follow the procurement process when it selected RBI to perform professional services because the Applicant did not provide evidence to support competitive bidding.  As a result, the DRA evaluated the professional services costs to assess reasonableness in accordance with 44 C.F.R. § 13.36(f).  The DRA found actual construction costs to be $47,227.00[7] with the remainder of the costs attributed to engineering, project management, and permitting services provided by RBI.  According to the DRA’s calculations, the professional services costs are as follows: (1) engineering costs totaling $23,661.60; (2) project management costs totaling $17,559.29; and (3) permitting costs totaling $53,662.77.  The DRA noted that construction in and around the Consumes River requires “extraordinary management, permitting, and monitoring requirements” due to the presence of fish species and other animals protected under the Endangered Species Act.  However, the DRA found these costs to be unreasonable when compared to the actual construction costs as well as potentially related to the fish ladder project, which was completed downstream from the dam.  The DRA specifically identified language in an August 18, 2009 letter from the National Marine and Fisheries Service (NMFS) to FEMA Region IX Environmental and Historic Preservation Officer, which stated that RBI designed both projects “simultaneously, using the same access points, equipment and construction crews.”  The letter also indicated that the organization responsible for the fish ladder project, the Fishery Foundation of California (FFC), would provide construction management for the project.  The DRA found that the Applicant did not separate costs associated with the fish ladder project from the FEMA project costs.  As a result, the DRA could not verify that the professional services costs claimed were “specifically and solely related to the FEMA approved SOW.” In addition, the Applicant did not provide adequate documentation demonstrating that the claimed soft costs were reasonable despite improper procurement.  Although the Applicant failed to establish that its claimed costs were reasonable, the DRA applied the same methodology from the eligibility determination by allowing 52% of the total actual construction costs of $47,227.00 for soft costs ($24,558.04), capped the project as an improved project, and found the total eligible amount to be $71,785.04. 

Second Appeal

The Applicant claims in a second appeal letter dated September 13, 2013 that it should receive an additional $70,001.46 in funding because the “costs claimed under PW 468 represent the true and reasonable costs necessary [to put] Rooney Dam [back] to its pre-disaster condition.” First, the Applicant argues that this project and the fish ladder project are distinct and were executed separately with different scopes of work and source funding.  However, the Applicant also states that “concurrent construction reduced FEMA’s costs” and controlled “environmental impacts and costs” by bringing aspects of both projects together.  The Applicant also explains that RBI provided services for both projects but the Applicant was not a party to RBI’s contract with FFC and RBI separately invoiced the two projects.  The Applicant attached a chart, indicating the differences between the two projects but did not identify the individual costs associated with each project.  Second, the Applicant argues that the professional services costs were reasonable given the environmental compliance, historic preservation compliance, and permitting necessary to complete the project.  The Applicant claims that the project required more than the traditional professional services costs currently covered under Cost Curve A and that such services are eligible because the costs are “reasonable in relation to the services rendered.”  Third, the Applicant argues that funding actual costs for the FEMA project is consistent with the Stafford Act, Public Assistance Guide, and OMB Circular A-87.  The Applicant notes that the FEMA project “ran under budget” based on the amount originally obligated, $352,077.00.  The Applicant again asserts that it did not competitively bid the professional services contract due to “time restrictions associated with the work and the specialized knowledge required” to complete the project. 

Discussion

Proper Procurement

Procurement of services under a federal grant must provide for “full and open competition.”[8]  Procurement by noncompetitive proposals may only be used when the award of a contract is infeasible under small purchase procedures, sealed bids or competitive proposals and one of the following circumstances applies: “(A) The item is available only from a single source; (B) The public exigency or emergency for the requirement will not permit a delay resulting from competitive solicitation; (C) The awarding agency authorizes noncompetitive proposals; or (D) After solicitation of a number of sources, competition is determined inadequate.”[9]

When an applicant materially fails to comply with procurement procedures, FEMA may take one or more of the following actions: (1) temporarily withhold cash payments; (2) disallow all or part of the costs of the activity; (3) wholly or partly suspend or terminate the current award; (4) withhold further awards; or (5) take other remedies that may be legally available.[10]  Further, the Public Assistance Guide from 1999 noted that FEMA requires that contracts must be of a reasonable cost.[11]  In accordance with OMB Circular A-87, FEMA evaluates reasonable costs based on the premise “that 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.”[12]   

In its second appeal, the Applicant claims that it did not competitively bid the RBI professional services contract due to “time restrictions associated with the work and the specialized knowledge required” to complete the project.  The Applicant, however, has not provided documentation to substantiate these claims.  The Applicant has not demonstrated that procurement by small purchase procedure, sealed bid, or competitive proposal was “infeasible” at the time of the procurement action.  Additionally, the Applicant has not demonstrated that one of the circumstances listed under 44 C.F.R. § 13.36 (d)(4)(i) applied at the time of the procurement action to justify procurement by noncompetitive proposal.  Without additional information, FEMA cannot verify that the Applicant complied with applicable federal grant procurement requirements.  Pursuant to 44 C.F.R. § 13.43(a)(5), FEMA can exercise its authority to award reasonable costs when there has been improper procurement and will determine if the costs incurred for RBI’s services were reasonable in this instance.

Reasonable Costs

Pursuant to 44 C.F.R. § 206.203(d)(1), Federal funding for improved projects shall be limited to the Federal share of the approved estimate of eligible costs.[13]  If a project requires engineering and design services, the costs of the basic level of these services, which are normally performed by an architectural-engineering firm on complex construction projects, are eligible for reimbursement.[14]  Such basic services include preliminary engineering analysis, preliminary design, final design, and construction inspection.[15]  Some projects are more complex and require more than the basic engineering services.  These special services include engineering surveys, soil investigations, services of a resident engineer, and feasibility studies.[16]  When estimating costs during project formulation for basic professional services for projects of above average complexity and non-standard design, FEMA must look to Cost Curve A, matching the estimated construction costs to the associated percentage of engineering and design services.[17]  This percentage is then multiplied by the estimated construction costs to determine an appropriate engineering and design cost estimate.[18]  Because special services are not required on all projects, they are not included in the percentages on Cost Curve A and are estimated separately.[19]  Actual costs, not estimated costs, for eligible engineering and design services should be claimed in final inspection and reconciliation.[20]  Engineering and design costs that exceed the amounts determined by use of Cost Curve A[21] are reviewed for reasonableness.[22]   

Had the Applicant’s special services been properly procured, they would be viewed as reasonable.  However, because they were not, FEMA must determine the reasonable cost for these services.[23]  The PA Guide describes the following ways reasonable costs may be established: historic documentation for similar work, average costs for similar work in the area, published unit costs from national cost estimating databases, and FEMA cost codes.[24]  When FEMA cannot determine cost reasonableness using these mechanisms, FEMA follows the estimated figure provided in Cost Curve A for costs associated with engineering and design services. 

The Applicant claims that actual costs for both construction and soft costs for the project are $141,786.50; the Applicant does not contest the DRA’s determination that the actual construction costs are $47,227.00.  The Applicant does argue that FEMA should fund $70,001.46 in addition to the $71,785.04 provided on first appeal because:  (1) these additional costs are related to professional “special services” that RBI provided and (2) these special services were related to the Rooney Dam project alone, not the downstream fish ladder project.  The documents provided with the first and second appeals indicate that RBI consolidated the professional services for the two projects to reduce the overall costs. 

With its first appeal, the Applicant provided a spreadsheet listing all invoices and tasks related to the FEMA project.  Each line of the spreadsheet contains an invoice number, a task description, total invoice cost, the portion of the cost associated with the FEMA project, and a cost classification.  The costs in the spreadsheet total $144,677.96 for all eligible costs, which is $2,891.46 more than the amount the Applicant claimed were eligible costs in its first and second appeals.    

While the Applicant claimed the actual costs for professional services, FEMA determined these costs were not procured properly and consequently could not presume them to be reasonable.  In determining the appropriate amount for soft costs, the DRA acknowledged the project’s difficulty and doubled the Cost Curve A percentage that would normally be allowed for a project with $47,227.00 in construction costs.  The DRA used 52 percent instead of 26 percent, granting $24,558.04 instead of $12,279.02.  However, neither FEMA statutes, regulations, nor policies suggest doubling a cost curve percentage when an applicant completes an especially difficult project.  Accordingly, the DAR was not authorized to grant funding based on doubling an approved estimation tool.    

For purposes of the second appeal, FEMA reviewed each task description in the spreadsheet to determine if the described task supported the scope of work provided in the PW and if the cost was reasonable.  FEMA found certain tasks aligned with the FEMA project scope of work and others represented tasks associated with indirect and direct administrative costs.      

As such, the only method left to determine the appropriate amount of soft costs[25] is to utilize the Cost Curve A percentage[26] for a project with $47,227.00 in construction costs, 26 percent.[27]  Accordingly, the eligible amount for soft costs for this project is $12,279.02.     

Conclusion

The Applicant did not demonstrate that it followed proper procurement procedures when it contracted with RBI.  As a result, FEMA reviewed each task for eligibility and reasonableness. FEMA found certain tasks aligned with the FEMA project scope of work but could not determine if the costs were reasonable, and therefore utilized Curve A at 26 percent. The amount eligible for soft costs is $12,279.02 and not $24,558.04 provided at first appeal.  Accordingly, I am requesting the Regional Administrator deobligate $12,279.02 in funding for this project.