Article 9: Reasonable Cost

(Category: costs-eligilbilty)

Article Summary

Per 2 CFR 200.404, a cost is considered eligible only if it is reasonable and necessary. A cost is deemed reasonable if, in its nature and amount, it does not exceed what a prudent person would incur under the circumstances prevailing at the time the decision was made. Reasonable costs must be fair, equitable, directly tied to eligible work, adequately documented, and compliant with all federal, state, and local procurement laws. Reasonable pricing thresholds are established via historical documentation, local market averages, national cost-estimating databases, and FEMA's own equipment rates and design service curves.

FEMA evaluates cost reasonableness by checking for ordinary/necessary facility standards, market price consistency, compliance with open procurement requirements, and ethical business practices (ensuring independent, arm's-length transactions free of familial or shared-interest conflicts).

FEMA also reviews potential cost escalation factors, such as regional resource shortages or project complexities (e.g., environmental or historic preservation issues, remote access, or unique service needs). In exigent circumstances, the duration of the emergency is compared against the duration of the elevated expenses. The applicant bears full responsibility for proving cost reasonableness. If FEMA deems a cost unreasonable, it may adjust or disallow the funding in part or in whole. For incomplete work, estimates must be unit-based (not lump sum) and certified by a licensed Professional Engineer or estimator to match the agreed scope of work.

Five Key Takeaways for CTA FEMA Compliance

1. Maintain the Prudent Person Standard: Document the precise economic conditions and circumstances present when a purchasing decision was made to prove that the cost reflects what a prudent person would spend.
2. Avoid Lump-Sum Estimations for Incomplete Work: Ensure all project estimates for work not yet finished are compiled using detailed unit-component costs rather than single, bulk lump sums.
3. Secure Professional Engineering Certifications: Validate all uncompleted project cost estimates with an official certification from a licensed Professional Engineer or certified cost estimator, proving alignment with industry standards.
4. Document and Substantiate Resource Shortages: If market shortages or project complexities drive up unit pricing, keep detailed logs of when the shortages occurred and your efforts to secure more reasonable pricing as soon as the market stabilized.
5. Enforce Conflict-Free Business Transactions: Establish clear internal controls ensuring all contractors and suppliers are independent parties operating on equal footing, completely free of familial ties, shared corporate ownership, or dual-interest conflicts.

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