Case Studies In Recovery – Navigating FEMA’S DAC Policies

This is the third post in a series dedicated to exploring topics in disaster recovery relevant to communities recovering from Hurricanes Harvey, Irma, and Maria. Hagerty Consulting’s Senior Management Associate, Meghan Tosto, discusses the Federal Emergency Management Agency’s (FEMA’s) policies for claiming administrative costs, including the new pilot program, as part of a recovery. You can learn more about how Hagerty Consulting can help you structure your recovery here.

After a major disaster, FEMA provides significant support to affected communities through recovery grant funding – the majority of which come from FEMA’s Public Assistance (PA) program. Managing FEMA grants is complex and presents a new challenge for many communities. Administering PA grants is time-consuming, requiring many dedicated hours from local staff and its consultants – a logistical challenge for PA applicants. This case study focuses on how FEMA aims to simplify funding this administrative via the direct administrative costs (DAC) policy. Below, we discuss existing DAC policy, the new DAC pilot program, and how readers can navigate the nuances of each option.

What are direct administrative costs (DAC) in a recovery?

Outside of the emergency and permanent work activities that are directly-tied to recovery efforts, such as clearing debris, repairing roads, and rebuilding facilities, there are lesser known but critical administrative and clerical activities that support a recovery. These activities often fall into what FEMA defines as DAC: “direct, administrative, or other expenses the [grant] Recipient or Subrecipient incurs in administering and managing PA awards that are directly chargeable to a specific project.”

DAC activities might include administrative services that can be directly tied to the recovery projects at hand. For emergency work, this could include gathering and reviewing the invoices for the debris removal contractors and organizing them to support the formulation of a FEMA project worksheet (PW). For permanent work, this could include negotiating the PA eligibility of hazard mitigation work at a damaged facility. FEMA will reimburse these essential activities because they help move grants forward, which in turn advances recovery.

To be reimbursed for DAC activities in the FEMA PA program, Subrecipients must keep excellent records. Specifically, a Subrecipient must be able to precisely tie administrative work directly to individual PA grants, called project worksheets (PWs). Tracking administrative tasks at this level of detail can become time-consuming and sometimes impossible or impractical, particularly for larger recovery efforts or recoveries with multiple PWs. The process of tracking DAC becomes cumbersome for both the Applicant and FEMA, which must review and validate the information. Fortunately, to help reduce this administrative burden, FEMA has created a new pilot program.

How does FEMA’s new DAC pilot change existing policy?

Effective for all major disaster declarations after August 23, 2017, FEMA rolled out the new voluntary pilot program under the new pilot guidelines to streamline DAC reimbursement. Under the new pilot, PA Subrecipients can receive a flat rate of four percent of a PW’s full eligible costs for estimated DAC-related costs with a potential additional one percent bonus based on PW closeout timeliness. Awarding a flat rate eliminates the need to tie individual DAC activities to each PW and track the actual hours and costs accumulated, greatly minimizing administrative burden.

So how does this flat rate DAC amount actually get calculated? According to FEMA, here’s how it works:

• Calculating the DAC: FEMA will award DAC at four percent of the pre-award value for each PW (Version 0 only), based on the full eligible dollar value of the PW prior to any applicable reductions. An additional one percent incentive bonus is available if PWs are closed within 90 days of the end of their approved period of performance, including time extensions.
• Pulling all the DAC together: All DAC will be captured under one PW per Subrecipient (per disaster). For instance, if a Subrecipient has 10 PWs totaling $100 million of eligible costs, FEMA will award four percent for DAC, which is $4 million. To retain the full DAC amount, the Subrecipient can provide proof (through payroll records or invoices) that they support enough DAC activities to equal at least $4 million across the whole recovery portfolio (the four percent). An additional feature of the pilot is if those DAC activities actually fall short of $4 million, FEMA will allow applicants to retain the excess funds to be used for hazard mitigation or disaster preparedness activities instead. Overall, the benefit here is that unlike the current policy, DAC doesn’t have to be tracked within every individual PW and tied to each individual PW’s sites or scopes of work. However, please note that the specific mechanism for providing documentation proof of DAC and resultant underruns, if applicable, is not well specified in the current DAC pilot policy. FEMA must further refine this piece of the pilot.
• Receiving the DAC funds: Here’s where it gets a little tricky. Remember – the four percent DAC is guaranteed, but the additional one percent is actually a closeout bonus. If a Subrecipient is eligible for the one percent bonus, FEMA will disburse the five percent (federal share) down to the Recipient (state or tribe). From there, the Recipient can disburse four percent down to the Subrecipient(s) but will withhold the remaining one percent. If PWs are closed within 90 days of end of the approved period of performance (POP), including time extensions, the one percent can be released to the Subrecipient; if not, the one percent will have to be returned to FEMA. This “bonus” structure incentivizes Subrecipients to expedite PW closeouts.

To review, here’s a snapshot of the existing policy versus the new pilot program side by side:

Case study in claiming DAC on a fixed percentage

Prior to the launch of the new DAC pilot program, a Hagerty client was at the forefront of negotiating DAC on a percentage basis. During recovery from a major disaster, our client had secured billions in FEMA PA funding across hundreds of individual PWs. The volume of PWs and sheer scale of work being completed would make tracking all DACs PW-by-PW nearly impossible. However, if the client were to forego tracking DAC activities and make no DAC claims at all, millions of dollars in recovery aide would be lost. To reduce administrative burden, while also maximizing its recovery benefits, FEMA, the Applicant, and the Subrecipient were able to negotiate a flat rate DAC percentage, four percent, of eligible costs approved in the FEMA PWs. This will ultimately yield millions of DAC dollars for the client.

Is participating in the DAC Pilot worth it?

The new pilot program greatly reduces the complexity of claiming DAC, but it might not be the right program for everyone. Choosing to participate in the pilot or follow the traditional route for claiming DAC might depend on the size and complexity of the recovery portfolio. For example, if a Subrecipient can easily identify and tie to PWs DAC that exceeds five percent of its PA portfolio, then the pilot program may not be the right choice. But our experience and empirical evidence indicates such a scenario is rare; according to the US Government Accountability Office (GAO), average DAC reimbursement for Subrecipients is less than one percent of total eligible PA funding.

Given the historically small percentage of DAC claimed, communities and public institutions receiving PA funds should strongly consider the benefit of FEMA’s new DAC pilot policy.

Meghan Tosto is a Senior Management Associate with Hagerty Consulting’s Recovery Practice, supporting clients across the US.  Meghan has nearly a decade of experience providing financial management and technology services to support public and private sector clients with a focus on federal and state publicly funded programs. Currently located in Boston, MA, Meghan obtained her MBA from Tulane University’s Freeman School of Business and a BA from College of the Holy Cross. You can learn more about our Recovery Division here.