Article 11: Reasonable Cost (Hold/Variant)

(Category: costs-eligilbilty)

Article Summary

A cost is reasonable if, in its nature and amount, it does not exceed that which would be incurred by a prudent person under the circumstances prevailing at the time the Applicant makes the decision to incur the cost. In accordance with 2 CFR § 200.404, FEMA evaluates cost reasonableness by checking if the expense is ordinary and necessary for the type of facility or work, and comparable to current market prices for similar goods or services.

FEMA utilizes several baseline metrics to establish reasonableness thresholds, including historical documentation, local market averages, published national cost-estimating databases, and FEMA's own cost codes, equipment rates, and engineering design curves. When evaluating potential cost escalations during a disaster, FEMA looks closely at market shortages (equipment, materials, supplies, labor, or contractors), project-specific complexities (environmental or historic preservation issues, remote access or location, provision of a unique service with few providers, or elements requiring an extraordinary level of effort), and whether the applicant deviated from its established, standard non-disaster practices. The applicant bears the sole legal responsibility for proving cost reasonableness; if FEMA deems an expenditure unreasonable, it may disallow all or part of the funding by adjusting it down to an amount it determines to be reasonable.

Five Key Takeaways for CTA FEMA Compliance

1. Apply the Prudent Person Standard: Ensure all procurement decisions are thoroughly documented to show they reflect what a prudent person would spend under the exact economic conditions prevailing at that time.
2. Compile Independent Cost Estimates (ICE): For uncompleted work, avoid bulk lump-sum estimates; ensure costs are based on itemized unit components certified by a licensed Professional Engineer or estimating professional who certifies that the estimate was prepared in accordance with industry standards.
3. Document Market Shortage Impact Windows: If regional shortages or project-specific complexities drive up contractor rates, document when the shortages occurred and demonstrate whether the Applicant's work continued beyond the period of shortages and whether there was an opportunity to obtain more reasonable pricing.
4. Enforce Ethical, Conflict-Free Business Practices: Establish clear internal controls to prove that all transactions participate in ethical business practices, ensuring parties to a transaction are independent of each other, without familial ties or shared interest and on equal footing.
5. Prepare for Partial or Full Cost Disallowance: Treat the cost-reasonableness review as a major compliance checkpoint, understanding that a failure to substantiate rates allows FEMA to unilaterally adjust or deny project worksheet funding in part or in whole.

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