905R97101
UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
REGION 5
IN RE: )
) Docket No. 05-97-AD01
City of Flint, Michigan )
) Report and Recommendation
) of the Resources
} Management Division and the
Request for Review of Disputes ) Office of Regional
Decision Official's Determination) Counsel Pursuant to
Grant No. C263259-02 ) 40 C.F.R. Part 30, Subpart L
REVISED REPORT AND RECOMMENDATION
I . INTRODUCTION
This request for review arises from a March 12, 1997,
decision by the Regional Disputes Decision Official (DDO) to
disallow $1,805,865 comprising of $184,466 in administrative
costs, $860,400 in architectural engineering fees, and $760,999
in 'construction costs that had been claimed for Federal
participation by the Grantee, the City of Flint, Michigan, under
Grant No. C263259-02. The DDO also determined that unclaimed
allowable costs of $32,879 will offset disallowed costs under the
grant .
On March 13, 1997, the Regional Administrator issued a
Decision and Order in this matter based on the Agency's
understanding that the Grantee had appealed the March 12, 1997
Final Determination Letter ("FDL") . The Grantee did not appeal
the FDL until April 11, 1997. In its notice of appeal, the
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Grantee requested an informal settlement conference. On August
12, 1997, pursuant to 40 C.F.R. § 30.1215, the Agency met with
the Grantee to further discuss details of this matter and review
additional information submitted by the Grantee. Accordingly,
this Revised Report and Recommendation supersedes the previous
version.
II. BACKGROUND
On January 11, 1978, the U.S. EPA awarded Grant No. C263259-
02 to Flint, Michigan (the City or Grantee), pursuant to Title II
of the Federal Water Pollution Control Act, as amended, 33 U.S.C.
1251 et seq. The purpose of the grant was to assist the City in
constructing modifications to its existing wastewater treatment
facilities. The amount of the grant was 75 percent of the
estimated allowable costs at the time of the grant award. The
total final incurred cost claimed by the city as allowable was
$92,910,775 and total grant funds claimed and paid were
$69,683,081, 75 percent of the claimed cost.
The Office of Inspector General, Northern Divisio^ (OIG),
completed a field audit and issued the Report of Final Audit on
September 30, 1993. The report accepted $79,109,285 and
questioned $13,801,490 of costs claimed by the Grantee.
The DDO reviewed the final report and issued a Final
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Determination Letter on March 12, 1997. The DDO reinstated a
total of $11,995,625. However, the DDO disallowed $1,805,865.
The costs disallowed include the following:
A. Administrative costs of $184,466 (Note 2 of Report of Final
Audit);
B. Engineering costs incurred after the contract completion date
of $415,339 (Note 3);
C. Engineering costs of $385,450 for ineligible or unsupported
time extensions for change orders (Note 4b);
D. Unidentified architectural engineering costs of $59,611
(Note 4c);
E. Construction costs of $150,970 (Note 5); and
F. Construction Costs of $610,029 (Note 6).
The City placed all costs disallowed by the DDO, except
$452,436,1 into issue for this 40 C.F.R. Part 30, Subpart L
Review.
Documentation which was reviewed for purposes of this
Subpart L review include Grantee submissions dated August 5,
1994, August 8, 1994, September 7, 1994, May 6, 1996, April 11,
1 The City did not attempt to substantiate $110,886 (Note
2a,b); $130,969 (Note 4b); $59,611 (Note 4c); $112,246 (Note 5a);
and, $38,724 (Note 5b). Therefore, the amounts in issues A and
C, below, are reduced by $110,886 and $130,969, respectively.
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1997, August 12, 1997, August 14, 1997 and September 4, 1997.
After careful consideration of the materials submitted by the
Grantee, the decision rendered by the DDO, applicable law,
regulations and guidance, the Office of Regional Counsel and the
Resources Management Division recommend that the determination
of the DDO be affirmed in part and reversed in part.
III. ISSUES PRESENTED
A. WHETHER $73,580 OF ADMINISTRATIVE COSTS IS ELIGIBLE
FOR GRANT PARTICIPATION (NOTE 2).
B. WHETHER $415,339 INCURRED AFTER THE CONTRACT COMPLETION
DATE IS ALLOWABLE (NOTE 3) .
C. WHETHER $254,481 IN INELIGIBLE OR UNSUPPORTED TIME
EXTENSIONS FOR CHANGE ORDERS IS NECESSARY AND WITHIN THE
SCOPE OF THE PROJECT (NOTE 4b).
D. WHETHER $610,029 IN CONSTRUCTION COSTS IS NECESSARY,
REASONABLE AND ALLOCABLE (NOTE 6).
E. WHETHER THE CITY OF FLINT IS ENTITLED TO AN OFFSET FOR
ONGOING CAPITAL IMPROVEMENT PROJECTS.
IV. DISCUSSION
A. WHETHER $73,580 OF ADMINISTRATIVE COSTS IS ELIGIBLE
FOR GRANT PARTICIPATION (NOTE 2).
<
Title 40 C.F.R. § 30.710 (1977) and Federal Management
Circular (FMC) 74-4 dated July 18, 1974, state that employee
fringe benefits and the cost of legal expenses required in the
administration of grant programs are allowable. However, a
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grantee may charge costs to a federal grant only if the grantee
demonstrates through proper documentation that the costs are
allocable to the grant program and necessary and reasonable to
its proper and efficient administration. Office of Management
and Budget Circular No. A-87 (May 9, 1968), City of Canton Ohio.
Docket No. 05-85-AD27 (December 4, 1986). A grantee must support
costs in the manner prescribed by the regulations in place at the
time of the issuance of the grant. See City of Canton Ohio.
Docket No. 05-85-AD27 (December 4, 1986).
The grantee shall maintain books, records, documents, and
other evidence and accounting procedures and practices,
sufficient to reflect properly the total costs of the project,
including all direct and indirect costs of whatever nature
incurred for the performance of the project for which the EPA
grant has been awarded. 40 C.F.R. § 30.805 (1977). Payroll
records, time sheets and canceled checks are the preferred form
of documentation to support a grantee's cost claims. City of
Eaton Rapids. Michigan. Docket No. 05-86-AD17 (July 28,( 1987) ,
at 5.
However, EPA's regulations provide great flexibility to
a grantee to produce any documents that potentially may
support claimed costs. Id. A grantee is given wide
discretion to respond to the unique factual
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circumstances of each case. Medina County. Ohio. Docket No.
05-85AD-01 (November 28, 1986) at 7.
1. Whether Fringe Benefit Costs of $55,786 are allowable.
The audit report questioned all the costs claimed for fringe
benefits because the costs were calculated using an unsupported
fringe benefit rate. The Grantee did not provide to the DDO
documentation to support the fringe benefit rate. Therefore, the
DDO disallowed all costs related to fringe benefits.
The Grantee asserts that at least $24,244 of the $55,786
disallowed for fringe benefits should be allowable, since this
amount reflects the fringe benefits attributable to the actual
Department of Public Works (DPW) staff direct labor charges for
grant related work. The City claims a fringe benefit rate of
43.46 percent. However, the City states that it has not been
able to identity specific records establishing the basis for the
43.46 percent fringe benefit rate. Nevertheless, the Grantee
asserts that the fringe benefit rate is low and that it is a
necessary and reasonable expense.
<
The grantee has the burden of maintaining and providing
pertinent financial reports that substantiate its claim for
indirect cost reimbursement. U.S. EPA cannot determine the
reasonableness of costs without supporting documentation. The
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City acknowledges that it cannot identify specific records to
establish the basis for the fringe benefit rate. Therefore, the
costs for fringe benefits must be disallowed, since the Grantee
has not provided to the U.S. EPA sufficient records to
substantiate its claimed costs. Thus, the Grantee has failed to
demonstrate that the costs are reasonable, necessary, eligible or
otherwise allowable for federal funding. Metropolitan Water
Reclamation District of Greater Chicago. Docket No. 05-91-Ad08
(June 25, 1992), at 7. Therefore, the DDO's determination to
disallow $55,786 in fringe benefit costs should be sustained.
2. Whether legal expenses of $17,794 are allowable.
The Grantee believes that $17,794 in legal expenses should
be grant eligible. Additionally, $12,537 in legal expenses is
being claimed for the first time. In this Subpart L dispute, the
Grantee provided invoices for $17,794 in legal expenses that it
claims are grant eligible, including four invoices for $167.31,
$4008.56, $5,670.60, and $2,091.73 that total $11,938. The
auditors included the costs associated with these invoices in the
total for allowable legal expenses. Therefore, legal expenses
amounting to $11,938 cannot be considered and accepted for grant
participation a second time. The August 5, 1994 submission
included invoices for the remaining $5,856 ($17,794 - $11,938).
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These invoices include amounts for the following: $152.93-
Litigation on Contract 9 with Greenfield Construction; $1,945.68-
Arbitrator Fee for Contract 7; $881.74-Engineering Assistance
with litigation concerning Contract 9; and, $2,875.44-Engineering
assistance with Contract 9. It is not clear based upon the
information provided by the Grantee that these invoices relate to
grant number C263259-02. Therefore, legal expenses in the amount
of $5,856 should not be reinstated.
As stated above, the Grantee also claims that $12,573 in
previously unclaimed legal fees is eligible for grant funding.
Allowable costs can be increased, to the extent the costs are
supported by documentation. Ohio Environmental Protection Agency.
Docket No. 05-86-AD22 (September 25, 1987). The Grantee provided
vouchers that it asserts show that these documents relate to the
grant project and that support the $12,573 in legal fees.
However, the auditors previously included two of the vouchers
(No. 0391027 and 03910213 for $2,002.25 and $906.80,
respectively) in the total for allowable legal expenses(. The
Grantee cannot claim these costs a second time. Therefore, the
amount in question is $9,664.
As to the remaining amount of $9,664, the Grantee has
fulfilled its obligations under grant law. Documentation
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submitted by the Grantee establishes that the costs incurred are
allowable costs. The term "allowable costs" is defined at 40
C.F.R. § 30.135-3 (1977) as follows:
Those eligible', reasonable, necessary and allocable costs
which are permitted under the appropriate Federal cost
principles, in accordance with EPA policy, within the scope
of the project, and authorized for EPA participation.
Accordingly, the DDO's determination to disallow $82,015 in
legal expenses should be sustained, but should be offset by $9664
in allowable legal expenses.
B. WHETHER $415,339 INCURRED AFTER THE CONTRACT COMPLETION
DATE IS ALLOWABLE (NOTE 3).
Costs incurred after the contract completion date are not
allowable unless the grantee shows specifically that these costs
do not represent costs incurred due to grantee mismanagement or
contractor failure to perform. See Office of Management and
Budget Circular No. A-87 (May 9, 1968); Memorandum. Costs
Incurred After the Contract Completion Date. James A. Hanlon and
Kenneth A. Konz, October 1, 19902. The Grantee must show that
2 The memorandum from James A. Hanlon, Director, Municipal
Construction Division and Kenneth A. Konz, Assistant Inspector
General for Audits, provides guidance for existing disputes in
Subpart L proceedings concerning the allocability of
postscheduled contract completion A/E fees. This memorandum is
based on the grant regulations and OMB Circular A-87 and
articulates the longstanding policy of the Agency concerning
allowable costs.
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costs incurred after the contract completion date are necessary,
reasonable, and within the scope of the project to be allowable.
See Hanlon and Konz Memorandum. October 1, 1990; Village of luka.
/'
05-91-AD04 (September 24, 1991); and, Luce County. 05-90-AD10
(December 20, 1990). The grantee has the obligation to present
to the U.S. EPA sufficient records to substantiate all of its
claimed costs and to demonstrate that the costs are reasonable,
necessary, eligible and otherwise allowable for federal funding.
Macomb County. Michigan. Docket No. 05-89-AD06, (June 5, 1991),
Delevan Lake Sanitary District. Docket No. 4-89-AD10 (June 7,
1990), Hanlon Memorandum, October 1, 1990. Costs for one-time
services such as preparation of the O&M manual, as-built
drawings, etc, (not related to on-going construction) are
allowable, if documented adequately. City of Sun Prairie. 05-89-
AD01 (September 6, 1989). The grantee must submit A/E billings
to identify the work performed and the associated costs incurred
in sufficient detail that permits a determination of the
necessity and allocability of costs. City of Owasso. Dpcket No.
05-90-AD06 (June 21, 1991).
The Auditor questioned $415,339 of A/E costs incurred after
the contract completion date for the following contracts:
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Contract No. Original EPA time EPA Approved
Completion Extension Completion
date Date
3
8
9
12
3/31/81
3/31/81
3/31/81
3/31/81
75
0
35
183
6/14/81
3/31/81
5/05/81
9/30/81
The costs disallowed include $285,978 from the prime engineering
consultant, Hubbell, Roth & Clark and $129,361 from
subconsultants.
The Grantee argues that the post construction A/E costs can
be sustained as grant eligible. The Grantee argues that its
position is consistent with the Hanlon Memo and requirements
applicable at the time the grant was issued. Specifically, the
Grantee states that the accounting systems used at the time of
the grant, did not identify and segregate the costs associated
with certain eligible costs. The Grantee argues that EPA
requirements, at the time of the project, were imprecise, and the
Hanlon Memo was not written until ten years later. Nevertheless,
the Grantee attempted to identify the types of work performed by
providing chronological lists of documents that the Grantee
asserts indicate that the engineers were attempting, on
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behalf of the City, to resolve post construction disputes and
contractor claims.
The City of Flint provided chronological correspondence logs
for Contracts 3, 8, 9, and 12. The City states that the logs are
an inventory of all the post construction correspondence that
helps explain the large A/E expenditures. However, the log
entrees do not sufficiently identify the work performed and the
associated costs incurred.
It is not clear whether the activities performed by the
engineers are grant eligible. First, the chronologies provided
by the Grantee do not describe in sufficient detail the
activities performed by the engineers. Second, there is no clear
correlation between the activity described in the chronology and
the costs incurred by the Grantee. Further, the City's
submission does not succeed in showing that these costs do not
represent costs incurred due to grantee mismanagement or
contractor failure to perform.
The City has failed to provide sufficient documentation that
identifies the work performed and the associated costs incurred
to permit a determination of necessity and reasonableness of the
A/E fees. Therefore, the DDO's determination to disallow
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$415,339 in A/E fees incurred after the contract completion date
should be sustained.
C. WHETHER $254,481 IN INELIGIBLE OR UNSUPPORTED TIME
EXTENSIONS FOR CHANGE ORDERS IS NECESSARY AND WITHIN THE
SCOPE OF THE PROJECT (NOTE 4b).
It is well established that approval of construction grant
plans, specifications, estimates, contracts and contract
documents by U.S. EPA, its delegated state agent, or the Corps of
Engineers (COE) does not automatically make all costs allowable
for U.S. EPA grant participation. See City of Owosso. 05-90-AD06
(June 26, 1991); City of Fountain. 05-88-AD09 (September 25,
1988); City of Bloominaton 05-88-AD03 (September 23, 1988). All
costs are subject to final audit. Metropolitan Water Reclamation
District of Greater Chicago. Docket No. 05-91-AD08 (June 25,
1992); City of Bloomington. Indiana. Docket No. 5-88-AD03 (August
5, 1991); Macomb County. Michigan. Docket No. 05-89-AD06 (May 24,
1991). The Regional Administrator may at any time review and
audit a request for payment and make appropriate reductions for
payments that are found, on the basis of the review or (audit, not
to constitute allowable costs. 40 C.F.R. § 35.945(c).
1. Whether A/E expenses of $127,787 are allowable.
These costs are associated with an increase in the project
scope and budget to cover mitigation for problems associated with
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residential wells that went dry. The City hired Neyer, Tiseo &
Hindo, a hydrological engineering firm, to investigate the
alleged causal connection between the dry well problems and
construction of a deep sanitary relief tunnel.
The Grantee argues that the audit report incorrectly states
that the costs were not identified with any of the construction
contracts. These costs were identified as Contract 13 for
accounting purposes. • Further, the City argues that it carefully
documented the investigation and mitigation of this problem, and
that U.S. EPA approved it. The Grantee argues that the expenses
incurred to cover the dry well problem ($127,787) should be
reinstated as grant eligible, in accordance with EPA's
eligibility determination and the grant amendment of June 24,
1983.
The U.S. EPA thoroughly reviewed the measures taken by the
City to mitigate the problem and concluded that the activities
relating to the engineering and legal services "appear to be
allowable supporting costs providing the activities and( costs can
be well documented."3 The project file indicates that the U.S.
3 March 1, 1983 letter from Todd A. Gayer, Chief, Municipal
Facilities Branch, to Richard Hinshon, Chief Grants Administrator
Section, MDNR.
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EPA, MDNR, and the City engaged in extensive discussion about
investigating and mitigating the problem associated with the dry
wells. Further, the City explains that the costs associated with
the dry well mitigation are set forth in Contract 13 and
provides the supporting invoices. The costs in the invoices are
consistent with the costs figures submitted to the U.S. EPA and
MDNR during discussions about increasing the scope of the project
to address the problems with the residential wells. Therefore,
the DDO's determination to disallow $127,787 in A/E expenses
should not be sustained.
2. Whether miscellaneous costs of $126,694 are allowable.
The auditor disallowed $126,694 of direct charges for
"miscellaneous" costs under Contract 13. The Grantee argues that
these costs are grant eligible and that sufficient documentation
exists to explain the nature of these expenses. The Grantee
states that the miscellaneous costs disallowed by the DDO relate
to four basic items under Contract 13. These items include the
following: (
1. Monthly adjustments to the indirect charges to reflect
the proportion of costs incurred for non-grant related
work ;
2. Two adjustments to correct the estimated indirect rate
and substitute the final approved indirect rate;
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3. A one time adjustment to the fixed fee resulting from
a contract amendment which increased the scope of work;
and
4. Minor amounts of mileage expenses.
All of the miscellaneous costs were incurred after the
construction contract completion date. However, these costs are
associated with the dry well problem. Additionally, such costs
are consistent with this type of construction project.
Therefore, we must conclude that the costs are necessary and
within the scope of the project. The DDO's determination to
disallow miscellaneous costs of $126,694 should not be sustained.
D. WHETHER $610,029 IN CONSTRUCTION COSTS IS ALLOCABLE,
REASONABLE AND NECESSARY (NOTE 6).
The contract price or time may be changed only by a change
order. 40 C.F.R. § 35.938.5(b) (1977). Costs associated with
change orders must be supported by cost and pricing data. See
40 C.F.R. § 35.938-5 (1977). The grantee must present to the
U.S. EPA records sufficient to substantiate all claimed costs,
and to demonstrate that all are necessary, reasonable, eligible
t
and otherwise allowable for federal funding. Metropolitan Water
Reclamation District of Greater Chicago. Docket No. 05-91-AD08
(June 25, 1992) and City of Riverside. Docket No. 08-85-AD01
(March 27, 1986).
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1. Whether $73,958 for actual costs of repairs awarded
under arbitration is allowable.
The DDO disallowed $73,958 claimed for time and materials as
the actual cost for mining machine repairs4 because the Grantee
failed to support this amount with cost and pricing data. On
August 15, 1980, Greenfield Construction Company received an
Arbitration Award that included an award for mining machine
repairs. However, as pointed out by the Grantee, the Arbitration
Award did not assign a dollar value to the repairs and the cost
had not been established. The Grantee argues that the cost for
the repairs are grant eligible and should be allowed because the
arbitration action established the purpose and cost basis ("time
and materials") of the machine repair, the arbitration decision
reflected the effective lump sum nature of the machine repair
cost, and the cost at issue is less than $100,000.
The first regulations to specifically address the
allowability of settlement costs were set forth at 40 C.F.R.
Part 35, Subpart I, Appendix A ("Appendix A"). These regulations
i
were promulgated as Interim Rules on May 12, 1982, 47 Fed.
Reg. 20450, and became final rules on February 17, 1984. 49 Fed.
4 The contractor had demanded $864,056 for future repairs
and downtime on Machine #2.
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Reg. 6224. Paragraph A.l.g. of Appendix A states, in relevant
part, as follows:
A. Costs Related to Subagreements
1. Allowable costs related to sub-agreements include:
* * *
g. Change orders and the costs of meritorious contractor
claims for increased costs under subagreements as follows:
(1) Change orders and the costs of meritorious
contractor claims provided the costs are:
(i) Within the scope of the project;
(ii) Not caused by the grantee's mismanagement;
and
(iii) Not caused by the grantee's vicarious
liability for the improper actions of others.
* * *
(3) Settlements, arbitration awards and court
judgments which resolve contractor claims shall be
reviewed by the grant award official and shall be
allowable only to the extent that they meet the
requirements of paragraph g(l), are reasonable, and do
not attempt to pass on to EPA the cost of events that
were the responsibility of the grantee, the contractor,
or others.
Since these substantive regulations had not been promulgated at
the time the grant was awarded, they do not govern this grant per
se, because doing so would contravene the general rule against
the retroactive application of substantive regulations. City of
Bloomington. Indiana. Docket No. 05-88-AD03 (Decision of the
Assistant Administrator for Water; August 5, 1991). However, the
standards set forth in substantive regulations promulgated after
the effective date of the grant may govern the resolution of
issues arising in a dispute under the grant if those standards
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constitute reasonable criteria that are consistent with the
regulations in effect at the time the grant was issued and are
applied in a common sense manner. Id.; Washtenaw County
Department of Public Works. Docket No. 05-93-AD02 (September 29,
1995). Since the Appendix A regulations constitute reasonable
criteria which merely codify cost principles that have long been
applicable to EPA grants, they supply the appropriate legal
standard for determining the allowability of .arbitration awards,
settlements and court judgments arising from contractor claims
even if the subject grant was issued prior to promulgation of
Appendix A. Washtenaw County Department of Public Works. Docket
No. 05-93-AD02 (September 29, 1995); County of Nassau. Docket No.
02-90-AD03 (April 20, 1995); Sacramento Regional County
Sanitation District. Docket No. 09-87-AD13 (September 27, 1990);
Rochester Pure Waters District. Docket No. 02-87-AD20
(February 20, 1990); Jackson County Department of Public Works.
Docket No. 05-86-AD12 (September 28, 1987); City of Hitchcock.
Texas, Docket No. 06-86-AD03 (June 30, 1987); City of Stockton.
Docket No. 09-86-AD17 (June 18, 1987); City of Stockton. Docket
No. 09-86-AD18 (June 18, 1987); Oneida County Sewer District.
N.Y.. Docket No. 02-85-AD19 (December 16, 1986); Bismarck. North
Dakota. Docket No. 08-86-AD01 (October 29, 1986).
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U.S. EPA has applied the foregoing standards to determine
the allowability of lump sum settlements, court judgments and
arbitration awards resolving contractor claims. Washtenaw County
Department of Public Works. Docket No. 05-93-AD02 (September 29,
1995) (arbitration award); County of Nassau. Docket No.
02-90-AD03 (April 20, 1995) (court judgment); Sacramento Regional
County Sanitation District. Docket No. 09-87-AD13 (September 27,
1990) (arbitration award); Rochester Pure Waters District. Docket
No. 02-87-AD20 (February 20, 1990) (settlement/jury award);
Jackson County Department of Public Works. Docket No. 05-86-AD12
(September 28, 1987) (arbitration award); City of Hitchcock.
Texas. Docket No. 06-86-AD03 (June 30, 1987) (arbitration award);
City of Stockton. Docket No. 09-86-AD17 (June 18, 1987)
(settlement); City of Stockton. Docket No. 09-86-AD18 (June 18,
1987) (settlement); Oneida County Sewer District. N.Y., Docket
No. 02-85-AD19 (December 16, 1986) (arbitration award); Bismarck.
North Dakota. Docket No. 08-86-AD01 (October 29, 1986)
(arbitration award). (
Other cases have resolved the allowability of such costs
under the same general analysis without relying directly upon
Appendix A. Grosse lie Township. Docket No. 05-92-AD11
(August 1, 1994) (settlement); City of Parma. Ohio. Docket No.
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05-85-AD11 (June 30, 1987) (jury award); City of Baytown. Texas.
BAA Docket No. 82-99 (December 19, 1984) (settlement). These
cases hold as a general rule that, where a lump sum expense may
contain both eligible and ineligible cost elements, the grantee
bears the burden of clearly segregating the eligible and
ineligible costs so that an allowability determination can be
made. Where the grantee is unable to reasonably segregate
eligible and ineligible cost items, the entire lump sum is
disallowed. County of Nassau. Docket No. 02-90-AD03 (April 20,
1995); Grosse lie Township. Docket No. 05-92-AD11 (August 1,
1994); Rochester Pure Waters District. Docket No. 02-87-AD20
(February 20, 1990); City of Parma. Ohio. Docket No. 05-85-AD11
(June 30, 1987); City of Stockton. Docket No.- 09-86-AD17
(June 18, 1987); City of Stockton. Docket No. 09-86-AD18
(June 18, 1987); Oneida County Sewer District. N.Y.. Docket No.
02-85-AD19 (December 16, 1986); Bismarck. North Dakota. Docket
No. 08-86-AD01 (October 29, 1986); City of Baytown. Texas. BAA
Docket No. 82-99 (December 19, 1984). Where the grantee has
sustained its burden of reasonably segregating the grant eligible
costs, such costs will be allowed even though an exact
calculation may be impossible. Washtenaw County Department of
Public Works. Docket No. 05-93-AD02 (September 29, 1995);
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Sacramento Regional County Sanitation District. Docket No.
09-87-AD13 (September 27, 1990); Jackson County Department of
Public Works. Docket No. 05-86-AD12 (On Remand from the Assistant
Administrator for Water; July 7, 1989),.; City of Hitchcock. Texas.
Docket No. 06-86-AD03 (June 30, 1987); see also Bolinas Community
Public Utility District. BAA Docket No. 79-43 (August 31, 1982) .
Applying the above rational to the instant matter, the DDO
erred in disallowing the costs associated with the mining machine
repairs. As the arbitration award provides a detailed breakdown
of the costs awarded, it reasonably segregates eligible from
ineligible costs. Furthermore, the costs awarded are for work
that is within the scope of the project and, thus, are eligible
for reimbursement. Finally, there is no evidence in the record
to conclude that the award resulted from grantee or contractor
mismanagement or negligence. Therefore, the Grantee has shown
that the costs of the mining machine repairs constitute
reasonable costs. Based on the above analysis, the DDO's
determination to disallow $73,958 in mining machine repairs
should be reversed.
It should be noted, however, that the Grantee is incorrect
in its assertion that the need for cost and pricing data is
eliminated because the cost at issue is less than $100,000. For
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each change order in excess of $100,000, the contractor shall
submit to the grantee for review sufficient cost and pricing
data. 40 C.F.R. § 938-5(d) (1977). In this instance, the costs
questioned for raining machine repairs are only a portion of the
total amount of Change Order 4-45. Cost and pricing data must be
provided for the all change orders.
2. Whether $130,399 in interest awarded under arbitration
is allowable.
In a submission dated August 8, 1994, the City argues that
interest is not an issue in this dispute, because interest is not
a part of the arbitration award. Also, the Grantee argues that
interest would be allowed in this case pursuant to regulation at
40 C.F.R. § 35.940-(2) (f) even if interest6 was an issue. The
threshold issue here is whether the arbitration award included
interest7.
5 The total claimed cost for Change Order 4-4 is $6,434,665.
6 The Federal Regulation effective at the time of issuance
of this grant states that interest on bonds or any othe*r form of
indebtedness required to finance the project costs is not
necessary for the construction of a treatment works and therefore
is unallowable. 40 C.F.R. § 35.940-2(f) (1977).
7 See Jackson County Department of Public Works. Docket No.
05-86-AD12 (September 25, 1987); City of Hitchcock. Docket No.
06-86-AD03 (June 30, 1987); and, Bismarck. North Dakota. Docket
No. 08-86-AD01 (October 29, 1986). In each of
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The contractor demanded $1,839,7448. This demand included
$163,1989 for interest. The arbitrator awarded $1,470,000. The
arbitration award states simply, "Respondent shall pay claimant
the sum of one million four hundred seventy thousand dollars
(($1,470,000.00)." The award does not indicate that any portion
of this award is for interest. Furthermore, the contract did not
permit the award of interest in arbitration. Consequently, we
must conclude that the $130,399 disallowed by the DDO is not
interest but a substantive part of the arbitration award and that
the costs are reasonable and necessary. The DDO's determination
to disallow $130,399 should not be sustained.
3. Whether $185,672 for construction costs approved under
Change Order 10-3 is allowable.
The DDO disallowed $50,852 plus $134,820 for construction
these cases the arbitration awards expressly award interest. In
the case at hand, the award is silent on whether interest is
included.
8 The contractor provided a detailed breakout of the costs
demanded. The DDO determined that all costs, except $130,399 for
interest, are grant eligible.
9 The DDO determined that $130,399 related to unallowable
interest. The DDO used the ratio based on total unallowable
costs to total costs demanded ($163,198\$1,839,744). Then the
DDO applied this ratio to the $1,470,000 arbitration award
(.0887069 x $1,470,000 = $130,399).
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of a sewer extension in Carmen Creek running from Manhole 144 to
Manhole 227. These costs were an addition to Contract 10. The
Grantee argues that MDNR and the Corps of Engineers both reviewed
and approved the change order for these costs, when the City
submitted it. The City argues that these costs should be
eligible because the State and Corps approved the change order
and the City submitted adequate documentation for its procurement
process.
Change Orders approved by a delegated agency do not bind the
U.S. EPA to approve claimed costs. Luce County Department of
Public Works. Docket No. 05-90-AD04 (September 26, 1990); City of
Sun Prairie. Docket No. 05-89-AD10 (September 6,1989); and City
of Bloomingtonf Docket No. 05-88-AD03 (September 23, 1988). A
grantee is on express notice that grant awards are subject to
final audit. 40 C.F.R. 30.820 (1977). As stated herein, costs
incurred are allowable, if they are necessary and reasonable for
proper and efficient administration of the grant program. Office
Management and Budget Circular No. A-87. (May 9, 1968) .( However,
a grantee must provide adequate documentation to support costs in
a manner prescribed by regulation in place at the time a grant is
issued. Village of luka. Docket No. 05-91-AD04 (September 4,
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1991); City of Canton. Ohio. Docket No. 05-85-AD27 (December 5,
1986) .
It is important to point out that the auditor does not
question the eligibility of Change Order 10-3. The Grantee
showed successfully that the work performed under Changer Order
10-3 is grant eligible. However, the Grantee states that Item 1
was identified in the change order as a lump sum cost of
$134,820. The change order does not specify the basis for the
lump sum. However, the Grantee argues that letters from the City
dated December 5, 1979 and March 5, 1980 indicate the City
selected the contractor for this item based on competitive bids,
and that the final price for the work was then negotiated to
incorporate several modifications10.
The assertion that the City negotiated bids with the
contractor does not satisfy its obligation to provide sufficient
documentation to support the costs incurred. The Grantee did not
provide a breakdown of the costs negotiated with the contractor
or any other documentation to allow the Agency to deterpine
whether the costs are allowable. Therefore, the DDO's
10 This argument is set forth in the submission from Hinshon
Environmental Consulting dated September 7, 1994.
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determination to disallow $134,820 related to Change Order 10-3
should be sustained.
As set forth above, the DDO also disallowed $50,852 related
to Change Order 10-3. In this instance, however, the Grantee
provides detailed documentation which shows a breakdown of the
$50,852. This documentation adequately supports the costs
incurred. Therefore, the DDO's decision to disallow $50,852
related to Change Order 10-3 should not be sustained.
4. Whether a $220,000 lump sum settlement between the
Grantee and its contractor is allowable.
This amount represents a lump sum settlement between the
City and its contractor. The Grantee asserts that the $220,000
settlement resulted from an August 6, 1980 arbitration award.
The arbitration proceeded in a two step process. The parties
discussed liability and then damages. Following a determination
of liability, the parties settled the issue of damages and agreed
upon a price. The settlement did not establish the specific cost
associated with each item at issue. However, the settlement
i
established the total dollar amount for these items.
Additionally, the Grantee provided detailed cost and pricing data
showing a total original claim of $264,803.81.
As set forth above, a cost breakdown for a lump sum
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settlement amount is necessary to verify the nature of the
settlement and how it relates to eligible costs. Grosse lie
Township. 05-92-AD11 (September 1, 1994). The U.S. EPA cannot
determine whether calculated lump sum settlement amounts are
reasonable, allowable, and allocable to the project, without a
breakdown of the costs. Id. Therefore, a grant recipient is not
entitled to Federal cost participation for any part of a lump sum
award, unless it can demonstrate the breakdown between allowable
and unallowable costs. See Grosse lie Township. Oneida County,
Docket No. 02-85-AD11 (December 16, 1986), and City of Parma.
Ohio. 05-85-AD11 (June 30, 1987).
Applying the standards for lump sum settlements set forth
above, the DDO erred in disallowing this $220,000 lump sum
settlement. First, although the lump sum settlement does not
provide an individual breakdown of the costs awarded, it provides
a description of all items at issue and the total cost of these
items. Additionally, detailed cost and pricing data for the
items in question adequately supports the total amount pf the
settlement. Second, as every item that comprises the settlement
is eligible for grant funding, the lump sum settlement reasonably
segregates eligible from ineligible costs. And lastly, there is
no evidence in the record to conclude that the award resulted
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from grantee or contractor mismanagement or negligence.
Therefore, the DDO's determination disallowing the $220,000 lump
sum settlement should be reversed.
E. WHETHER THE GRANTEE IS ENTITLED TO AN OFFSET FOR ONGOING
CAPITAL IMPROVEMENT PROJECTS.
In the Grantee's appeal dated April 11, 1997, it argues that
costs for current capital improvements should offset any monies
owed because these costs likely would have been grant eligible if
funds were still available. In support of its argument, the
Grantee cites to Orange County. FL. EPA Docket No. 04-91-ADOS
(September 27, 1997) and City of Austin. TX. EPA Docket No. 06-
92-AD03 (April 26, 1993) .
In Orange County, the grantee requested that I/A funds
authorized by grant amendment be used to offset money due EPA as
a result of audit disallowances. Because the I/A funds were
approved, but no longer available, EPA granted the request.
Similarly, in City of Austin, an EPA audit revealed $120,000
worth of ineligible project costs, while there existed $4.6
<
million of unclaimed eligible costs. The Agency accepted the
grantee's offset request reasoning that at least $96,000 of the
$4.6 million would have been grant eligible.
The above cases reflect scenarios where costs were eligible,
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but funding, while approved, was unavailable. Therefore, offsets
were allowed to compensate for the lack of funding. The
distinguishing factor in these cases is that the funding was
approved. In the instant case, a grant amendment concerning the
Grantee's ongoing capital improvements has not been approved.
Consequently, the Grantee's request for an offset should be
denied.
V. CONCLUSION
As set forth above, the DDO disallowed $1,805,865 in costs
claimed by the Grantee for Federal participation. In this
Subpart L review, the Grantee requested review of $1,353,429 in
costs disallowed by the DDO. The Grantee did not dispute
$452,436 in costs disallowed. We recommend that $729,690 be
reinstated and that $1,076,175 be sustained as unallowable for
Federal participation. The Grantee has not paid any of the
disputed Federal share. Therefore, $775,224, which constitutes
the 75 percent Federal share of $1,076,175 in unallowable
disputed costs less the 75 percent share of offsets of $32,879
and $9664, should be refunded to U.S. EPA. The Grantee should
pay U.S. EPA interest charges of 5 percent per annum, if payment
is not received by U.S. EPA within 30 days of issuance of the
FDL.
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Respectfully submitted,
Dated:
BERTRAM C. FREY
Acting Regional Counsel
U.S. Environmental Protection
Agency, Region 5
Dated:
ROBERT SPRINGER
Assistant Regional Administrator
for Resources Management
U.S. Environmental Protection
Agency, Region 5
Dated:
RICHARD M. MURAWSKI
Assistant Regional Counsel
U.S. Environmental Protection
Agency, Region 5
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