Department of Homeland Security

2IFHRI,QVSHFWRU*HQHUDO

FEMAs Progress in Clarifying its 50 Percent

Rule for the Public Assistance Grant Program

OIG-14-123-D

August 2014

OFFICE OF INSPECTOR GENERAL

Department of Homeland Security
Washington, DC 20528 / www.oig.dhs.gov

MEMORANDUMFOR:


FROM:


SUBJECT:


August7,2014

BradKieserman
ActingAssistantAdministrator,Recovery
FederalEmergencyManagementAgency


JohnV.Kelly
AssistantInspectorGeneral
OfficeofEmergencyManagementOversight
FEMAsProgressinClarifyingits50Percent
RuleforthePublicAssistanceGrantProgram
FEMADisasterNumbers4085DRNYand4086DRNJ
AuditReportNumberOIG14123D


Attachedforyourinformationisourfinalletterreport,FEMAsProgressinClarifyingits
50PercentRuleforthePublicAssistanceGrantProgram.WeauditedtheFederal
EmergencyManagementAgencys(FEMA)progressinclarifyingits50PercentRule
usedtomakerepairversusreplacementdecisionsinthePublicAssistancegrant
program.OurobjectivealsoincludeddetermininganypotentialimpactonHurricane
SandyrepairversusreplacementdecisionsifFEMAdoesnotclarifyits50Percent
Rule.WediscussedtheresultsofthisauditwithFEMAofficialsduringthecourseofthe
auditandprovidedadraftreporttothemonJanuary6,2014.Thereportcontainsfour
recommendations.

Within90daysofthedateofthismemorandum,pleaseprovideourofficewitha
writtenresponsethatincludesyour(1)agreementordisagreement,(2)corrective
actionplan,and(3)targetcompletiondateforeachrecommendation.Also,please
includecontactinformationforresponsiblepartiesandanyothersupporting
documentationnecessarytoinformusaboutthestatusoftherecommendations.Until
wereceiveandevaluateyourresponse,wewillconsidertherecommendationsopen
andunresolved.

ConsistentwithourresponsibilityundertheInspectorGeneralAct,wewillprovide
copiesofourreporttoappropriatecongressionalcommitteeswithoversightand
appropriationresponsibilityovertheDepartmentofHomelandSecurity.Wewillpost
thereportonourwebsiteforpublicdissemination.

OFFICE OF INSPECTOR GENERAL

Department of Homeland Security

MajorcontributorstothisreportareChristopherDodd,ActingDirector;JohnPolledo,
AuditorInCharge;andPattiSmith,SeniorAuditor.

Pleasecallmewithanyquestionsat(202)2544100,oryourstaffmaycontact
TondaL.Hadley,DeputyAssistantInspectorGeneralforAuditServices,Officeof
EmergencyManagementOversight,at(214)4365200.

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Background

FEMAsPublicAssistanceprogramprovidesfinancialassistancetorecoverfromawide
varietyofevents,includinghurricanes,earthquakes,tornadoes,floods,tsunamis,and
terroristattacks.FEMAobligatesanaverageof$10billioninDisasterReliefFunds
annually,withthemajoritybeingforPublicAssistancegrants.Muchofthesefundsare
fortherepairorreplacementofdamagedfacilities.Oneofthemostimportantrecovery
eligibilitydecisionsFEMAmakesfollowingadeclareddisastercanbewhethertofund
therepairorreplacementofdamagedbuildings.Generally,FEMAwillreplaceafacilityif
theestimatedcosttorepairitexceeds50percentoftheestimatedcosttoreplaceit.For
thiscalculation,repairestimateisthenumeratorandreplacementestimateisthe
denominator.FEMAusesits50PercentRuletocalculatethispercentage.

InFEMAsAugust1,2012,responsetoourreport,FEMA'sDecisionstoReplaceRather
thanRepairBuildingsattheUniversityofIowa(ReportNumberDD1217),FEMAs
Administratorsaid,weagreewiththeOIGthatFEMAscurrentpolicyandmethodsfor
implementingthe50PercentRuleareinneedofsignificantreviewandrevisionand
FEMAstronglyagreeswiththeReportsrecommendationtoreviewandrevisethe
policiesandtoolssupportingdecisionstorepairorreplacedisasterdamagedfacilities.
TheAdministratoralsosaidFEMAwouldreprioritizeandaccelerateathoroughreview
ofthe50percentrepairorreplaceruleandthatthereviewwouldincludehighlighting
tools,jobaids,andtrainingtoimplementthepolicychanges.AppendixAprovides
additionalbackgroundinformationonFEMAs50percentrepairorreplacerulepolicy
andanoverviewofthecriteriaapplicabletothisaudit.



ResultsofAudit

ApplyingFEMAs50percentrepairorreplacerulecorrectlycanbeverydifficultand
susceptibletoerror,misinterpretation,andmanipulation.Ourauditresultshave
demonstratedthatmillionsofdollarsareatriskfromincorrect50percentrepairor
replaceruledecisions.Infiscalyears2012and2013,werecommendedFEMAdisallow
over$100millionofcoststhatresultedfromquestionable50percentrepairorreplace
decisionsinfiveaudits.Inthoseaudits,FEMAmadethereplacedecisionsbasedon
collective50PercentRuleestimatesof$31millionforrepairsand$50millionfor
replacements(basedonFEMAsapplicationofitspolicy).Duetovariousproblemswe
identified,weultimatelyrecommendedthatFEMAshouldhavepaid$226millionto
repairfacilities,insteadof$327milliontoreplacethem.InourdiscussionswithFEMA
officials,theyacknowledgedthedifficultiesinvolvedinreversingreplacementdecisions
aftertheyhadcommunicatedthosedecisionstograntrecipients.


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Weanalyzedtheresultsofpreviousauditsandidentified11issues/weaknesseswith
FEMAsimplementationofits50percentrepairorreplacerule.Webelievethat
addressingtheseissueswillmakeFEMAsdecisionstorepairorreplacefacilitiesless
costlyandmorefairandconsistent.Overshadowingtheseissuesisthe50percent
thresholditself.Thereplacementthreshold,bydefinition,appearsmuchlowerthancost
effectivenessdictates.However,theformulausedtoarriveatthe50percentthreshold
includessomecostsandexcludesothercosts.Consequently,the50percentthreshold
representsaratiothathaslittletodowithwhetheritwillcostthetaxpayermoreorless
toreplaceratherthanrepairthefacility.

WhileFEMAismakingprogressinclarifyingtherule,ithasnotyetpublishedadraft
revisedpolicy.Asaresultofouraudits,someFEMAregionshaveestablishedregional
policiestotightencontrolsover50percentrepairorreplaceruledecisionsuntilFEMA
headquartersissuesrevisedpolicies.However,FEMAneedstoreviewandreviseits
agencywidepolicyforallregionsandestablishaformaltrainingprogramforstaffand
contractorsresponsiblefordevelopingandreviewingtherulesunderlyingcost
estimates.

Finally,weintendedthisaudittoassessthepotentialimpactonFEMAsHurricaneSandy
repairversusreplacementdecisionsifitdidnotclarifyits50percentrepairorreplace
rule.AsofApril2014,FEMAofficialsinNewYorkandNewJerseymade15repairor
replacedecisionsthatresultedin7repairdecisionswithestimatedcoststotaling
$2.4millionand8replacementdecisionswithestimatedcoststotaling$3.5million.1

AlthoughFEMAisdevelopingnewpolicies,FEMAapprovedtheseeightHurricaneSandy
replacementprojectswitha50percentrepairorreplacepolicythatFEMAhasadmitted
isinneedofsignificantreviewandrevision.

FindingsandObservationsBasedonPreviousAudits

BasedonourpastauditsofdisastersdeclaredinLouisiana,Iowa,California,Alaska,and
Illinois,FEMAs50percentrepairorreplacerulepolicyneedsclarification.OnOctober
24,2012,DepartmentofHomelandSecuritys(DHS)UnderSecretaryforManagement,
supportedFEMAsdecisiontoallowcostswequestionedinourreportontheUniversity
ofIowa(DD1217).2However,inarrivingatthatdecision,theUnderSecretarystated
thathecouldnotdeterminewhetherFEMAsdecisionswereanaberrationora
customary,poorlydocumentedpracticeofexercisinglatitudeinmakingthesetypesof
decisions.Repairorreplacedecisionscanexceed$100million;andtheUnderSecretary


Estimatedcostsaspresentedinthisreportincludeonlytheamountsincludedintheactual50Percent
RulecalculationasprescribedinthecurrentFEMApolicy(seeappendixA).
2
TheDHSUnderSecretaryforManagementistheDHSResolutionOfficialforrecommendationswherea
componentdisagreeswiththeOIG.

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ruledinfavorofFEMA,notbecausetheevidencepresentedshowedFEMAmadethe
correctdecision,butratherbecausehecouldnotdeterminewhetherFEMAhadjust
poorlydocumenteditsdecision.ThesefactshighlightwhyFEMAshouldexpedite
revisionstoitspolicy,becauseifFEMAmakesthewrongdecisioneithertheapplicantor
thetaxpayerisharmed.

FEMAalsoneedstodevelopaformaltrainingprogram,andimproveoversightto
preventfurtherinappropriatereplacementdecisions.Ourauditshaveidentified
significantproblemswithwhatshouldbeincludedandexcludedfromthecalculation
andthemannerinwhichFEMAdevelopscostestimates.FEMAsgoaltogetmoneyon
thestreetsquicklyafteradisasterstrikescontributestotheseproblems.Further,
seniorFEMAofficialshavetoldusthatitisdifficulttoreversethedecisiontofundthe
replacementofafacilityafterFEMAhascommunicatedthatcommitmenttogrant
recipients.WeunderstandFEMAsneedtohonoritscommitments;however,thatnoble
desireonlyincreasesthereasonwhyFEMAneedstomakenotonlyaquickdecisionbut
alsothecorrectdecision.

Implementingthe50percentrepairorreplaceruleinvolvescomplicatedestimatesthat
attempttoapplysometimesambiguousrules,oftenwithincompletedamage
descriptionsandlimitedinformationonthebuildingspredisasterdesign.In
complicatedandhighdollarvaluecalculations,themostqualifiedandexperienced
FEMAstaffandcontractors,allwellversedincostestimatingprinciplesandFEMA
policy,shouldperformandreviewcostestimates.Therefore,inconjunctionwith
developingclearpolicies,FEMAshouldformallytrainandprequalifyallstaffand
contractorsinvolvedindevelopingandreviewing50percentrepairorreplacerule
calculations.

In2011,webeganencounteringproblemswithFEMAsimplementationofthe
50percentrepairorreplacerule.AppendixAprovidesanoverviewofthecriteriawe
usedinthisauditandinourpreviousaudits.Table1summarizesthemajorissuesfrom
ourpreviousauditreports:




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Department of Homeland Security
Table1:SummaryofAuditFindingson50PercentRepairorReplaceRule
Report
ShortTitle
PasoRoblesJoint
UnifiedSchool
District

Report#

State

Date
Issued

Costs
Questioned

DS1203

CA

02/09/12

$12,958,864

Universityof
Iowa

DD1217

IA

06/19/12

OchsnerClinic

DD1215

LA

06/20/12

DD1304

IL

01/14/13

DS1306

AK

04/05/13

MartinsvilleHigh
School
AlaskaDept.of
Natural
Resources

TotalQuestionedCosts

ProblemsIdentified

1. Codesandstandardsnotconsidered
inreplacementestimate.
1. Inappropriateuseofconceptual
costestimating.
2. Noconsiderationofuniqueand
specializedaspectsoffacility.
3. Noassessmentofestimatefor
reasonableness.
4. Insufficientsupporting
documentation.
5. Inclusionofcodetriggeredupgrades
83,745,594
intherepair.
1. Inappropriateuseofconceptual
costestimating.
2. Inaccuratecostestimating
methodologyforrepair.
3. Insufficientsupporting
2,197,550
documentation.
1. Inclusionofcodetriggeredupgrades
inrepair.
1,136,581 2. Inclusionofsoftcosts.

398,186 1.

Inclusionofsoftcosts.

$100,436,775


Inourfiscalyear2012auditofOchsnerClinic,FEMAofficialsestimatedalumpsum
replacementcostbyenteringbasicsquarefootdata,alongwithothergeneralfactors,
intoaconceptualcostestimatingprogram.3Thismethodologydidnotcomplywith
FEMAsCostEstimatingFormatthatrequiresFEMAtodevelopadetailedscopeofwork
anditemizespecificcosts.Tocompoundthiserror,FEMAofficialstookthislumpsum
replacementcostandappliedthereplacementvaluestoestimateddamagepercentages
forvariousbuildingelementstodevelopanoverallrepaircostestimate.Inessence,
FEMAusedasignificantlyflawedestimatingmethodasthebasisofanotherinaccurate
method.

ThisapproachtoestimatingcostsisnotconsistentwithFEMApolicies.Further,weare
concernedthatsomeFEMAofficialsmaycontinuetousethisapproachunlessFEMA
finalizesitsnational50percentrepairorreplaceruleandprohibitsthismethodology.
Additionally,FEMAshouldclarifythespecificcircumstanceswhenuseofconceptual
costestimatingprogramsisacceptable.Thistypeofapproachcanleadtodramatically

3

Fortheprojectswereviewed,FEMAofficialsusedtheRSMeansSquareFootEstimator.

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inaccurateestimates.Forexample,whenFEMAusedasimilarmethodtosupport
replacingOchsnerClinic(ReportDD1215),FEMAestimatedthatitwouldcost$278,997
torepairtheclinicand$512,250toreplaceit.However,itactuallycostFEMA
$2,476,547toreplacetheclinic,whichisoverfourtimestheestimatedcosttoreplace
theclinicandovereighttimestheestimatedcosttorepairtheclinic.

Inourfiveprioraudits,FEMAmadethereplacementdecisionsbasedoncollective
50PercentRuleestimatesof$31millionforrepairsand$50millionforreplacements
(based`onFEMAsapplicationofitspolicy).Duetovariousproblemsweidentified,we
ultimatelyrecommendedthatFEMAshouldhavepaid$226milliontorepairfacilities,
insteadof$327milliontoreplacethem

Issues/WeaknessesRelatedtoFEMAs50PercentRule

TheweaknessesinFEMAsexistingpolicyillustratehowsusceptible50percentrepair
orreplacerulecalculationsaretoerrorormanipulation.Theyalsopointtothe
inadequatetrainingandexperienceofthosewhoperformandreviewthecalculations.
Inanalyzingtheresultsofpreviousaudits,weidentified11specificissues/weaknesses
withFEMAsimplementationofits50percentrepairorreplacerule.Webelievethat
addressingtheseissueswillmakeFEMAsdecisionstorepairorreplacefacilitiesless
costlyandmorefairandconsistent.Thoseissuesinclude:
1. inclusionofsoftcosts;
2. omissionofbuildingelevationinreplacement;
3. inclusionofbuildingelevationinrepair;
4. useofconceptualcostestimates;
5. inaccurate/incompletecostestimates;
6. inclusionofcodetriggered,wholebuildingupgradesintherepair;
7. inclusionofEmergencyProtectiveMeasuresintherepair;
8. absenceofformaltraining/standardqualifications;
9. insufficientindependentreview;
10. insufficientsupportingdocumentation;and
11. decisionsmadewithoutthoroughassessments.

Issue1:InclusionofSoftCosts

FEMApolicydoesnotallowsoftcostsinthecalculation.Theformulaallowsonlydirect
constructioncosts,orhardcosts,inthenumerator(repair)ordenominator
(replacement)costs.Softcostsincludethecostsforprojectmanagement,
architecturalfees,costescalation,andprofit.However,wecontinuetofindsoftcostsof
alltypesinthecalculation.Becausethisisanelementarymistake,itlikelyresultsfrom
theabsenceofformal50percentrepairorreplaceruletraining.SomeFEMAofficials
saidthiserrorisnotverysignificantbecausetheytypicallyaddedsoftcoststoboththe
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repairandreplacementsidesoftheequation.However,thatresponseignorestherules
ofmathaddingthesamenumbertoboththenumeratorandthedenominatorofany
fractionthatislessthanonewillresultinalargerfraction.Inaddition,softcostcanbe
higherinbuildingreplacementsthaninrepair.Further,50percentrepairorreplacerule
determinationscanhingeonminorcosts,evena1percenterrorcanresultinfundinga
newbuildingratherthanrepairingtheexistingbuilding.FEMAofficialshavetoldusthe
revisedpolicywillclarifyandspecificallyaddressthehandlingofthesetypesofcosts.

Issue2:OmissionofBuildingElevationinReplacementEstimates

FEMApolicymandatesthatthereplacementestimatemustincludeallthe(hard)costs
ofreplacingthebuildingattheexistinglocation.Specifically,the50percentrepairor
replacerulestatesthatthereplacementestimateincludesallworknecessarytoprovide
anewfacilityofthesamesize,designcapacity,andfunctionasthedamagedfacilityin
accordancewithcurrentcodesandstandards.Constructinganewbuildingoften
requireselevation,orsomeothertypeoffloodproofing,tomitigateagainstfuture
floodsandtomeetbuildingcodes.However,FEMAoftenexcludesthesecostsfromits
estimateofreplacementcosts.Thistypeoferrorincludesnotonlyomissionof
elevation,butalsotheomissionofotherrequiredcodesandstandardsinthe
replacementincludingcompliancewiththeAmericanswithDisabilitiesActandstate
andlocalbuildingrequirements.Excludingthoseamountsfromthedenominator
increasestheratio,thusincreasingthelikelihoodthattheratiowillexceed50percent.

Twoconditionslikelycausetheseproblems:(1)limitedfamiliaritywith,andanabsence
offormaltrainingin,theproperapplicationofthe50percentrepairorreplacerule,or
(2)insufficientprofessionalexperienceandqualificationsofthosewhoprepareand
reviewthecalculations.Inaddition,FEMAsnormalprojectreviewproceduresdidnot
detectthesemistakes.FEMAofficialssaidtherevisedpolicywillclarifythisissueand
addressfloodingmitigationissues.

Issue3:InclusionofBuildingElevationinRepairEstimates

FEMApolicydoesnotallowtheinclusionofcodetriggered,wholebuildingupgrades,
suchasbuildingelevations,intherepairsideofthecalculation.However,FEMAoften
includesthesecostsinitsrepairestimates.Thistypeoferrorcanalsoincludethe
inclusionofotherwholebuildingenhancementssuchasseismicupgradesorenhanced
fireprotectionsystems.Theinclusionofthoseamountsinthenumeratorincreasesthe
ratio,thusincreasingthelikelihoodthattheratiowillexceed50percent.

WhilewebelievethatFEMAspolicyclearlyandspecificallyexcludesthesecosts,some
seniorFEMAofficialscontinuetoassertthatthesecostsareallowableinthecalculation.
The50percentrepairorreplaceruleexplicitlystatesthattherepairestimateincludes

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onlythoserepairs,includingnonemergencymoldremediation,associatedwiththe
damagedcomponentsandthecodesandstandardsthatapplytotherepairofthe
damagedcomponents.Insomecases,FEMAofficialshavearguedthatlegallyrepairing
thedamagedelementrequirestherepairestimatetoincludethecostofelevatingthe
wholebuilding.Thesedisagreementspointtotheneedtoclarifytheexistingpolicy.
FEMAofficialssaidtherevisedpolicywouldclarifythisissueandspecificallyaddressthe
handlingofcodetriggered,wholebuildingupgrades.

Issue4:UseofConceptualEstimates

SomeofthemistakesweidentifiedresultedfromFEMAsinappropriateuseof
conceptualcomputergeneratedmodels.Thesecomputermodelsquicklygenerate
overallcostestimatesbyapplyingbuildingdimensions,alongwithothergeneralfactors,
togenericconstructionmodels.Withsomebasicinformation,FEMAcanperformthese
calculationsinjustafewminutes.WehaveidentifiedinstancesofFEMAusingthis
methodin50percentrepairorreplacerulecalculationsinLouisianaandIowa.

Theproblemswithusingthisestimatingmethodarethatit:(1)isbasedongeneric
buildingmodelsthatdonotcapturetheuniquecharacteristicsofthedamagedfacility;
(2)doesnotcomplywithFEMAsCostEstimatingFormatInstructionalGuide,which
requiresadetailedscopeofworkanditemizedcostelements;and(3)was
inappropriateforsomefacilitieswereviewed,thecomputergeneratedmodelitself
indicatedthebuildingsizeexceededprogramparameters.Further,thisestimation
methodcannotconsiderallrequiredbuildingcodesandstandardsorthecostsofthe
sometimesiconicarchitecturalfeaturescommoningovernmentanduniversity
buildings.Theseproblemsmanifestthemselvesindistortingtheratiobecause
understatingthedenominatorthusincreasesthelikelihoodthattheratiowillexceed50
percent.

TheuseofconceptualestimatesisseriousbecausesomeFEMAofficesbelievethat
FEMApolicyallowstheuseofthismethod.Theuseofthiscostestimatingmethodmay
beappropriateforsomesmallorverysimplebuildings.However,forlargeorcomplex
buildings,itsusedefiescommonsenseaswellasFEMApolicy.BecausesomeFEMA
officialsdonotunderstandthelimitationstousingthismethod,FEMAshouldconsider
clarifyingitspolicyontheuseofconceptualestimatingmethods.

FEMAofficialsagreedthatthecurrentpolicydoesnotspecificallyrestricttheuseof
conceptualmodels.However,theyacknowledgedthatthismethodology:(1)canbe
inaccurateifappliedincorrectly;and(2)maynotbeappropriateforallfacilities,though
itmaybeusefulforsmaller,lesscomplexfacilities.FEMAofficialssaidtheywould
addresstheuseofconceptualmodelsintherevisedpolicy.


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Issue5:Inaccurate/IncompleteCostEstimates

Someoftheerrorsweidentifiedresultedfromavarietyofinaccurateandincomplete
costestimatesinboththerepairandreplacementsidesofthecalculation.FEMAs
errorsincluded(1)repairestimatesthatincludedamagedelementsthatwerenotthe
resultofthedisaster,(2)useofcostestimatesfordamagedelementsthattheapplicant
hadalreadyrepairedandforwhichactualcostswereavailable,and(3)replacement
estimatesbasedoninaccuratesquarefootageofthereplacementfacility.Asmentioned
earlier,developingcostestimatesfornewbuildings,sometimeswithincompleteor
missingdesigninformation,canbeextremelycomplexandtimeconsuming.Inaddition,
incompletereplacementcostestimatesresultinanunderstateddenominatorthat
increasesthelikelihoodthattheratiowillexceed50percent.

Wearenotalwayssurewhytheseerrorsoccurred.However,FEMAlikelywouldhave
avoidedtheseerrorsiftheyusedtrained,qualifiedstafftoindependentlyreview
50percentrepairorreplaceruledecisions.

FEMAofficialsagreedwithourobservationandtoldustherevisedpolicywillincludea
formalreviewprocesstomitigatethepossibilitythattheseerrorscouldoccurandgo
undetected.

Issue6:InclusionofCodetriggered,WholebuildingUpgradesinRepairEstimates

FEMAspolicydoesnotallowinclusionofcodetriggered,wholebuildingupgradesin
therepairestimate.However,ourauditshaveshownthatsomeFEMAofficialshave
includedtheseupgradesbecausetheyinterpretedthepolicyasallowingthem.By
includingthesecostsinthenumerator,itincreasesthelikelihoodthattheratiowill
exceed50percent.

Thus,FEMAshouldclarifyitspolicysothesemistakesdonotcontinuetooccur.The
50percentrepairorreplaceruleexplicitlystatesthattherepairestimateincludesonly
thoserepairs,includingnonemergencymoldremediation,associatedwiththe
damagedcomponentsandthecodesandstandardsthatapplytotherepairofthe
damagedcomponents.FEMAofficialstoldusthattherevisedpolicywouldinclude
languagetofurtherclarifythisissue.




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Issue7:InclusionofEmergencyProtectiveMeasuresinRepairEstimates

FEMAspolicydoesnotallowtheinclusionofEmergencyProtectiveMeasuresinrepair
estimates.4Yet,someFEMAofficialshaveincludedthem.The50percentrepairor
replacerulepolicystatesthattherepairestimateincludesonlythoserepairs,including
nonemergencymoldremediation,associatedwiththedamagedcomponentsandthe
codesandstandardsthatapplytotherepairofthedamagedcomponents.Despitethis
prohibition,someFEMAofficialstoldusthattheinclusionofthesetypesofcostis
appropriateasprecursorstorepairs.SomeFEMAofficialsalsoreasonedthat,because
itspolicysaysthatdemolitionessentialtotherepaironlyofthedamagedelements
maybeincludedinthenumerator[repairsideofcalculation],FEMAshouldalsoinclude
thecostsofemergencyprotectivemeasuresremovingwater,muckoutanddryingthe
buildinginthenumerator.However,includingthesecostsinthenumeratorincreases
thelikelihoodthattheratiowillexceed50percent.

Weseewherereasonablepeoplecoulddisagreeonwhatthepolicymeans.However,
otherFEMAguidanceclearlyprohibitstheinclusionsofsuchcosts.Forexample,onJuly
17,2008,FEMAsAssistantAdministrator,DisasterAssistanceDirectorate,ruledthat
emergencyworkisnotconsideredinthe50percentrepairorreplaceruleanalysis.
Further,includingthesecostsisfundamentallywrongtheapplicantshavealready
expendedthecosts(andFEMAwillreimbursethem),andthereforeFEMAshouldnot
includethesecostsinanyfuturecostbenefitanalysis.Thesecostsaresunkand
thereforenolongerrelevanttoFEMAsrepairversusreplacementdecision.

Becausethehighriskofcontinuedmisinterpretationofthispolicy,FEMAshould
considerclarifyingitspolicy.FEMAofficialsacknowledgedtheneedtoclarifythisissue
initsrevisedpolicyandtoldusthatFEMAplanstoclearlyexcludeemergencyprotective
measuresfromthe50percentrepairorreplacerulecalculation.

Issue8:AbsenceofFormalTraining/StandardizedQualifications

Atthetimeweconductedtheseaudits,neitherFEMAheadquartersnortheFEMA
Regionshadestablishedmandatorytrainingspecifictothe50PercentRuleforthe
FEMAofficialsresponsibleformakingthesedecisions.Thus,wewerenotsurprisedthat
someoftheerrorsweidentifiedresultedfromcostestimatingstaffnotunderstanding
the50percentrepairorreplaceruleandcostestimatingstandards.FEMAmayhave
avoidedtheseerrorsifithaddevelopedaformaltrainingprogramandestablished


CategoryBEmergencyProtectiveMeasuresareoftennecessarytoeliminateorreduceanimmediate
threattolife,publichealth,orsafetyoreliminateorreduceanimmediatethreatofsignificantdamageto
improvedpublicorprivatepropertythroughcosteffectivemeasures.Muckoutworkincludesthe
removalofmudandwaterandstabilizationofafacilityfollowingafloodtoprotectthefacilityfrom
furtherdamage.

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standardizedqualifications(training/education/experience)forthosewhoprepareand
review50percentrepairorreplaceruledecisions.FEMAofficialssaidthat,while
FEMAsCostEstimatingFormattrainingbrieflyaddresseshowtoapplythe50percent
repairorreplacerule,FEMAdoesnothavecomprehensivetrainingonhowtoapplythe
ruleorminimumqualificationsforthoseresponsibleforpreparingorreviewingthe
calculations.

FEMAshouldestablishstandardizedtrainingandqualificationstohelpFEMAJointField
Officesandregionalleadershipproperlyassignstaffandcontractors,especiallywhen
facedwithlargeandcomplexprojects.FEMAofficialspointedoutthattheydohavea
qualificationssystem,butthatitdoesnotincludespecificqualificationsforthose
preparingandreviewingthe50percentrepairorreplacerulecalculations.Theytoldus
thatthenewpolicywouldspecificallyidentifyqualificationsneededtoformulatea
projectandlevelsofreviewrequireddependingonthesizeandcomplexityofthe
project.

Issue9:InsufficientIndependentReview

FEMAhasnotestablishedanindependentreviewprocesstoconfirmthevalidityof
50percentrepairorreplacerulecalculationsanddecisions.FEMAofficialsmayhave
beenabletoidentifysomeoftheseerrorsiftheyrequiredqualifiedstaffattheregional
officestoreviewthecalculations.WhileFEMAofficialsreviewprojectsforavarietyof
factors,FEMAdoesnotrequireaspecificreviewof50percentrepairorreplacerule
decisions.Inaddition,JointFieldOfficemanagementmaynotalwaysbefamiliarwith
thequalificationsoftheFEMAstaffandcontractorsassignedtoestimatecostsand
makethesedecisions.AfinalindependentreviewofJointFieldOfficedecisionsbyan
independent,experienced,andtrainedcostestimatorattheregionalornationallevel
wouldlikelyreduceerrors.

Followingouraudits,twoFEMAregionalofficesbeganrequiringitsstafftoreview
50percentrepairorreplaceruledecisionsthatFEMAfieldofficeofficialsmade.FEMA
headquartersofficialstoldustherevisedpolicywouldincludeaformalreviewprocess
withvalueandcomplexitythresholdsfortriggeringindependentreviews.

Issue10:InsufficientSupportingDocumentation

Insomeinstances,wecouldnotfindproperdocumentationsupportingthe
assumptions,rationales,andfactsFEMAusedtoarriveatits50percentrepairor
replaceruledecision.FEMAofficialssaidthatwhileFEMAhasavarietyof
documentationrequirements,nonespecificallyaddressesthedocumentsFEMAneeds
tosupport50percentrepairorreplaceruledecisions.Insufficientdocumentationnot
onlymakesitdifficulttoreviewdecisions,butitcanalsocompromiseFEMAsabilityto

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effectivelysupportdecisionsifthegrantapplicantappealsFEMAsdecision.Federalcost
principlesrequiregranteesandsubgranteestomaintainproperdocumentationto
supportdisasterassistanceclaimsforreimbursement.

GiventheamountofmoneyFEMAspendsonthesedecisionsandcomplexitiesof
applyingtherule,FEMAofficialsshouldincludeinitsrevisedpolicyrequirementsfor
retainingsufficientsupportingdocumentation.FEMAofficialsacknowledgedour
observationandtoldustherevisedpolicywilloutlinethedocumentationrequirements
tofullysupportFEMAsdecisions.

Issue11:DecisionsMadeWithoutThoroughAssessments

Inthewakeofadisaster,FEMAofficialsneedtomakefundingdecisionsasquicklyas
possiblebecauserecoveryworkcannotmoveforwarduntilFEMAdecideswhetherit
willfundtherepairorreplacementofdamagedfacilities.However,FEMAofficialsare
sometimesinadifficultpositionregardinglargeandcomplexfacilities.AlthoughFEMA
needstomakequickdecisions,itismoreimportantforFEMAtoauthorizethespending
ofdisasterresourcescorrectly.Thus,whenmaking50percentrepairorreplacerule
decisionsFEMAneedstoobtaindesignandconstructiondetailsandperformdetailed
damageassessmentsbeforeitcommitsthespendingofprecioustaxdollars.Forlarge
andcomplexfacilities,thiscantakemonthsandmayrequirethehelpofoutside
experts.Becauseofthesignificantamountoffundingassociatedwiththesedecisions,
FEMAofficialsshouldnotrushthisdecision.

Federalregulationsetsrelativelyshortdisasterrecoverydeadlines.Federalregulation
44CodeofFederalRegulations(CFR)206.204established18monthstocomplete
permanentrecoveryworkandthegrantee(usuallythestate)mayextendthedeadline
another30monthsbasedonextenuatingcircumstances.Althoughthesedeadlinesare
short,FEMAshouldnotrushthesedecisionsbecausedisasterrecoveryformajor
disastersroutinelylastslongerthan18monthsandoftencontinuesformanyyears.
AlthoughtheseregulationscallforFEMAtocompletepermanentrecoveryworkin4
years,FEMArarelymeetsthatcompletiondeadline.Therefore,FEMAshouldconsider
addressingthisissueinitsrevisedpolicy.FEMAofficialsstatedthattheplannedformal
reviewprocesswouldhelpmitigatethisissue.




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FEMAShouldReconsiderthe50PercentRuleThresholdandFormula

Overshadowingtheseissuesisthe50percentthresholditself.5Thereplacement
thresholdis,bydefinition,muchlowerthancosteffectivenessdictates.Also,suchalow
thresholdcanmotivateapplicantswhoincurrelativelyminordisasterdamageto
exaggeratetherepaircostsofstructurallysoundbuildings,whileminimizingthe
replacementcosts,inanefforttoreachthe50percentthreshold.Also,withsuchalow
threshold,relativelyminormistakescanleadtoerroneousdecisions.Inaddition,the
current50PercentRulecalculationdoesnotincludeallcostsassociatedwiththe
repairorreplacementofadamagedfacility.Thisresultsinaratiothatdoesnot
accuratelycomparethecompletecostsforeitheroption.

Toreducerecoverycostsandminimizetheriskoferrors,FEMAshouldconsider
amendingFederalregulationtoraisethereplacementthresholdtoapercentagethat
morecloselyreflectscosteffectivenessandprivatesectorstandards.Forexample,if
FEMAraisedthethresholdto80or90percent,onlythemostseriouslydamaged
buildingswouldreachthereplacementthreshold.Changingthethresholdwouldalso
makeitmoredifficultforapplicantstosuccessfullyinfluenceormanipulatecost
estimates.FEMAofficialshavecommentedthattheissueofraisingthe50percent
thresholdhascomeupduringtheirinternaldiscussionsaboutthispolicy.

Incomparison,aninsurancecompanytypicallywouldnotpaytoreplaceafacilityif
repaircostsareonly50percentofthereplacementcosts.ItisFEMAsmissiontoassist
applicantsinrecoveringfromdisasters,butitisnotFEMAsmissiontofundexpensive
newfacilitieswhenrepairswouldrestorethefacilitytoitspredisasterdesign,function,
andcapacity.Therefore,werecommendFEMAconsiderrevisingFederalregulationto
reflectamorecosteffectivethreshold.Inconjunctionwithraisingthethreshold,FEMA
couldconsiderdevelopinganew,easiertoapply,decisionmakingformula.Asnoted
previously,thefailuretoconsiderallcostsforrepairandreplacementresultsinaratio
thatdoesnotaccuratelycomparethecompletecostsforeitheroption.FEMAcould
avoidmanyoftheambiguitiesinexistingpolicybycomparingallrepaircoststoall
replacementcosts.

FEMAsProgressinClarifyingtheRule

FEMAismakingprogresstowardrevisingits50percentrepairorreplacerule.We
workedcloselywithFEMAofficialsduringthisaudit,andtheyprovideduswithvaluable
input.Indiscussionsaboutourpreliminaryfindings,FEMAofficialsacknowledgedmany
ofourobservations,andsaidcertainissuesresultedfromvaguenessinthecurrent


The50PercentRulecalculationdoesnotincludeallcostsassociatedwitheitherrepairorreplacement
ofafacility.Thecostestimatesincludeonlydirectconstructioncosts,orhardcosts,anddonotinclude
softcostestimatesforprojectmanagement,architectural/engineeringfees,costescalation,orprofit.

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policy.Theytoldusthattheyhavecontinuedtointerviewstakeholdersfromthroughout
theFEMAregionstoobtaininputfordevelopingarevisedpolicy.Theysaidtherevised
policywillclarifythe50percentrepairorreplaceruleandtheissuesthatarecausing
confusion.FEMAofficialshaveindicatedthat,inconjunctionwithrevisingthepolicy,
theyintendtodeveloptrainingandjobaidstoassistinapplyingthispolicy.Theyalso
saidtherevisedpolicywillincludeaformalreviewprocesswithspecificthresholdsthat
willtriggerindependentreviews.

Inaddition,asaresultofouraudits,someFEMAregionsestablishedregionalpoliciesto
tightencontrolsover50percentrepairorreplaceruledecisionsuntilFEMA
headquartersissuesitsrevisedpolicies.Forexample,inresponsetoourauditof
MartinsvilleHighSchool(DD1304),FEMARegionVdevelopedaregionaloperating
procedurethatincludesregionlevelreviewsofallmajorrepairversusreplacement
determinations.Also,inresponsetoourauditoftheUniversityofIowa(DD1217),
FEMARegionVIIimplementeditsownregionalguidancefortheapplicationofthe
50percentrepairorreplacerule.However,untilFEMAheadquartersdevelopsand
implementsrevisionstothe50percentrepairorreplacerulepolicy,FEMAcontinuesto
beatriskofmakingimproper50percentrepairorreplaceruledecisionsand
improperlyspendingtaxpayerdollars.

EffectonHurricaneSandyRecovery

AsofApril2014,FEMAhadmade15repairorreplacedecisionsasaresultofHurricane
SandyinNewJerseyandNewYork.FEMAofficialsmadenine50percentrepairor
replaceruledecisionsinNewJerseythatresultedinthreerepairdecisionswith
estimatedcoststotaling$1millionandsixreplacementdecisionswithestimatedcosts
totaling$3.1million.InNewYork,FEMAofficialscompletedsix50percentrepairor
replaceruledecisionsthatresultedinfourrepairdecisionswithestimatedcoststotaling
$1.4millionandtworeplacementdecisionswithestimatedcoststotaling$423,077.

FEMAofficialsatbothJointFieldOfficesemphasizedtheimportanceofleadership,
supervision,andselectingqualifiedpeopletoperformandreviewthecalculations.
FEMAofficialsatonefieldofficesaidtheydidnotbelievetherewereproblemswith
FEMAs50percentrepairorreplaceruleitself,onlyinitsimplementation.Atanother
fieldoffice,officialssaidsomeoftherulesinthecurrentpolicyneededclarification.

Althoughweagreethatstrongleadershipisessentialtoreducetheriskoferrors,an
agencyaslargeandcomplexasFEMAcannotrelysolelyonstrongleadership.FEMA
mustalsohaveclear,easytoapplypoliciesandformaltrainingtoensureitsfieldoffice
management,staff,andcontractorsmakeproperandconsistentdecisionsthatpromote
rapidrecoverywhileprotectingthetaxpayer.FEMAshouldalsodevelopaformal

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50percentrepairorreplacerulereviewprocesstoreducethelikelihoodthaterrors
couldoccurandgoundetected.



Conclusion

Mistakesincalculatingthe50percentrepairorreplacerulecancostthetaxpayertens
ofmillionsofdollarsonindividualprojectsandhundredsofmillionsofdollarsintotal.
ThisespeciallyoccurswhenFEMAdecidestoreplaceastructurallysoundfacilitythat
theapplicantcanrepairtoitspredisasterdesign,capacity,andfunction.Ourprevious
auditshavedisclosedsignificantproblemswithFEMAs50percentrepairorreplacerule
policy.FEMArecognizesthesechallengesandplanstoreviseitspolicy.However,ithas
beenmorethan2yearssinceweissuedourUniversityofIowareport.Inresponseto
thatreport,FEMA(1)disagreedwithourrecommendationtofundonly$213millionto
repairthebuildings,ratherthanthe$297milliontoreplacethem;but(2)agreedwith
ourrecommendationstoimproveits50percentrepairorreplacerulepolicy.However,
whileFEMAisworkingonimprovingthepolicy,FEMAhasnotcompleteddeveloping
thesenewpolicies.WecontinuetosupportFEMAsplanstodevelopimprovedpolicies,
reviewstandards,trainingprograms,andstaffminimumqualificationstohelpprevent
misapplicationofthe50PercentRule.



Recommendations

WerecommendthattheAssistantAdministrator,FEMARecoveryDirectorate:

Recommendation#1:CompletetherevisiontoFEMAs50percentrepairorreplace
rulepolicytoclarifytheruleandaddresstheconcernsweidentifyinthisreport.

Recommendation#2:Developaformal50percentrepairorreplaceruletraining
programandestablishminimumtraining,education,andexperiencelevelsforallFEMA
staffandcontractorspreparingorreviewing50percentrepairorreplacerule
calculations.

Recommendation#3:ConsideramendingFederalregulationtoincreasethe50percent
replacementthresholdandincludeallrelevantcoststomakethedecisionmoreclosely
alignedwiththedecisionscosteffectiveness.

Recommendation#4:UntilFEMAfinalizesits50percentrepairorreplacerulepolicy
revisions,requesttheOIGsassistancetoperformapreliminaryauditof50percent
repairorreplaceruledecisionsforprojectsthatexceed$5million.

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ManagementCommentsandOIGAnalysis

WediscussedtheresultsofourauditwithFEMAofficialsduringourauditandincluded
theircommentsinthisreport,asappropriate.Wealsoprovidedadraftofour
preliminaryfindingsinadvancetoFEMAofficialsanddiscusseditwiththemon
January6,andFebruary7,2014.FEMAofficialsgenerallyagreedwithourfindingsand
recommendations.

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Appendix A
Additional Background Information and
Overview of Criteria Applicable to this Audit
AccordingtoFederalregulation44CFR206.226(f)(1),Afacilityisconsideredrepairable
whendisasterdamagesdonotexceed50percentofthecostofreplacingafacility....
FEMAreferstothisregulationasthe50PercentRuleandimplementsitaccordingto
itsDisasterAssistancePolicy9524.4.ThispolicyisFEMAsdecisionmakingtoolto
determinewhetheritshouldfundtherepairorreplacementofadisasterdamaged
facility.6Theapplicationofthispolicycomparescertainrepaircoststocertain
replacementcostsandresultsinafractionthatexpressesrepaircostsasapercentageof
replacementcosts.Thecalculationspecificallyexcludesmanyotherwiseallowable
repairandreplacementcoststhatFEMAwillultimatelypayunderthePublicAssistance
program.

FEMApolicyexcludesthesecostsbecauseincludingthemintherepairorreplacement
decisioncalculationcoulddistorttheresults.Forexample,accordingtoFEMA,ifthe
repairsideofthecalculationincludedseismicupgradecoststoundamagedelementsof
thebuilding,thentherepaircostsofolderbuildingswithevenminordamagecould
exceedthe50percentcostthresholdbecauseofthecomparativelyhighcostofcode
triggered,wholebuildingupgrades,seismicupgrading,andsoon.

FEMAbasesitsexclusionofcertaincostsonthepremisethat,whenafacilityisso
severelydamaged(notincludingcodetriggeredwholebuildingupgrades)thatthecost
torepairthedamageexceeds50percentofthecostofanewbuilding,itisoften
justifiableandreasonabletoreplacethebuilding.However,includingcertaincode
triggeredwholebuildingupgradecostswiththecostsoftherepairstothedamaged
elementswouldlikelycauseerroneousdecisionstofundnewfacilitiesratherthan
repairstructurallysoundandlightlydamagedfacilities.






VariousFEMApoliciesandpublicationsclarifyFederalregulation44CFR206.226(f)(1).Theseinclude
PublicAssistanceGuide(FEMA322,p.36,June2007);PublicAssistancePolicyDigest,(FEMA321,p.113,
January2008);andDisasterAssistancePolicy,(DAP9524.4,September24,1998).FEMAupdated
DAP9524.4onMarch25,2009.

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Appendix A (continued)

Specifically,thenumeratorofthefractionincludesonlythedirectcostsofrepairingthe
disasterdamage,referredtoas"hardcosts,andmayincludecostsassociatedwiththe
currentcodesandstandardsthatapplytotherepairofdamagedelementsonly.7The
numeratordoesnotincludecostsassociatedwiththefollowing:

a. upgradesandotherelementstriggeredbycodesandstandards;
b. designassociatedwithupgrades;
c. demolitionofentirefacility;
d. sitework;
e. applicableprojectmanagementcosts;
f. contents;and
g. hazardmitigationmeasures.

Thedenominatorofthefractionisthecostofreplacingthefacilitybasedonitspre
disasterdesign,designcapacity,andaccordingtoapplicablecodesandstandards
currentlyineffect.Thesecodesandstandardsmayrelatetostructuralelementssuchas
mechanicalorelectricalsystems,orthesizeofastructure.Thedenominatordoesnot
includecostsassociatedwiththefollowing:

a. demolition;
b. sitework;
c. applicableprojectmanagementcosts;
d. contents;and
e. hazardmitigationmeasures.

FEMAsdecisiontorepairafacilitymaynotnecessarilyresultincostsavingsto
taxpayersafterFEMAincludesallallowablecostsunderthePublicAssistanceprogram.
However,FEMAcapsthetotalrepaircostsattheestimatedcosttoreplacethefacility.




Onlydirectconstructioncosts,orhardcosts,canbeincludedinthenumeratorordenominatorof
eithertherepairorthereplacementcosts.Softcostsincludethecostsforprojectmanagement,
architecturalfees,costescalation,andprofit.

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Appendix B
Objective, Scope, and Methodology

TheDepartmentofHomelandSecurityOfficeofInspectorGeneralwasestablishedby
theHomelandSecurityActof2002(PublicLaw107296)byamendmenttotheInspector
GeneralActof1978.Thisisoneofaseriesofaudit,inspection,andspecialreports
preparedaspartofouroversightresponsibilitiestopromoteeconomy,efficiency,and
effectivenesswithintheDepartment.

TheobjectivesofthisauditweretoassessFEMAsprogressinclarifyingitspoliciesfor
applyingthe50percentrepairorreplaceruleandtodeterminethepotentialeffecton
HurricaneSandyrepairversusreplacementdecisionsifFEMAdoesnotclarifythese
policies.

WeconductedthisperformanceauditbetweenJuly2013andApril2014,pursuantto
theInspectorGeneralActof1978,asamended,andaccordingtogenerallyaccepted
governmentauditingstandards.Thosestandardsrequirethatweplanandperformthe
audittoobtainsufficient,appropriateevidencetoprovideareasonablebasisforour
findingsandconclusionsbaseduponourauditobjectives.Webelievethattheevidence
obtainedprovidesareasonablebasisforourfindingsandconclusionsbaseduponour
auditobjectives.

Weperformedthefollowingproceduresaspartofourreview:

x deployedstafftotheFEMAsHurricaneSandyJointFieldOfficesinNewYorkand
NewJersey,
x interviewedofficialsatFEMARegionIIandtheNewYorkandNewJerseyJoint
FieldOffices,
x revieweddisasterspecificinitiatives,plans,andreports,
x reviewedHurricaneSandyspecificlegislation,and
x reviewedDHSOIGreportsandpreliminaryfindingsinongoingauditswith50
PercentRulefindings.

Wealsoperformedotherproceduresconsiderednecessarytoaccomplishourobjective.
WedidnotassesstheadequacyofFEMAsinternalcontrolsapplicabletodisaster
responsebecauseitwasnotnecessarytoaccomplishourauditobjective.



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Appendix C
Report Distribution

DepartmentofHomelandSecurity
Secretary
ChiefofStaff
ChiefFinancialOfficer
UnderSecretaryforManagement
ChiefPrivacyOfficer
AuditLiaison,DHS

FederalEmergencyManagementAgency
Administrator
ChiefCounsel
ChiefofStaff
ChiefFinancialOfficer
DeputyAssociateAdministrator,ResponseandRecovery
Director,RiskManagementandCompliance
Director,NewYorkSandyRecoveryOffice
Director,NewJerseySandyRecoveryOffice
RegionalAdministrator,FEMARegionII
AuditLiaison,FEMA(JobCodeG13050)
AuditLiaison,FEMARegionII

RecoveryAccountabilityandTransparencyBoard
Director,Investigations,RecoveryAccountabilityandTransparencyBoard

OfficeofManagementandBudget
Chief,HomelandSecurityBranch
DHSOIGBudgetExaminer

Congress
SenateCommitteeonAppropriations,SubcommitteeonHomelandSecurity
SenateCommitteeonHomelandSecurityandGovernmentalAffairs
HouseCommitteeonAppropriations,SubcommitteeonHomelandSecurity
HouseCommitteeonHomelandSecurity
HouseCommitteeonOversightandGovernmentReform
HouseCommitteeonTransportationandInfrastructure

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ADDITIONAL INFORMATION
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For further information or questions, please contact Office of Inspector General (OIG)
Office of Public Affairs at: DHS-OIG.OfficePublicAffairs@oig.dhs.gov, or follow us on
Twitter at: @dhsoig.
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Should you be unable to access our website, you may submit your complaint in writing
to:
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Office of Inspector General, Mail Stop 0305

Attention: Office of Investigations Hotline

245 Murray Drive, SW

Washington, DC 20528-0305

You may also call 1(800) 323-8603 or fax the complaint directly to us at
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