The definition of cost eligibility states that a cost must be reasonable and necessary to be eligible. What is a Reasonable Cost? 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 decision  was made  to incur  the cost. In other words, a reasonable cost is a cost that  is both  fair and  equitable for the type of work being  performed. For example, charging $50/hour for a backhoe is unreasonable when the going  rate  for a backhoe is $25/hour. There are several ways reasonable costs are established, such as:

 Historic  documentation for similar work

 Average costs for similar work in the area

 Published unit costs from national cost estimating databases

 FEMA cost codes, equipment rates, and engineering and design service curves

The reasonable cost requirement applies to all labor, materials, equipment, and contract costs awarded  for the performance of eligible work.

To be eligible, costs must be:

• Directly tied to the performance of eligible work;

• Adequately documented;78

78 2 CFR § 200.403(g).

Figure 10. Cost Eligibility

• Reduced by all applicable credits, such as insurance proceeds and salvage values;79

• Authorized and not prohibited under Federal, State, Territorial, Tribal, or local government laws or regulations;

• Consistent with the Applicant’s internal policies, regulations, and procedures that apply uniformly to both Federal awards and other activities of the Applicant; and

• Necessary and reasonable to accomplish the work properly and efficiently.80

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.81

FEMA determines reasonableness by evaluating whether:

• The cost is of a type generally recognized as ordinary and necessary for the type of facility or work.82

• The cost is comparable to the current market price83 for similar goods or services based on:

o Historical documentation;

o Average costs in the area; or

o Published unit costs from national cost estimating databases.

• Any of the following factors caused escalation of costs:

o Shortages in equipment, materials, supplies, labor, or contractors. When escalating costs are due to shortages, FEMA considers whether the Applicant’s work continued beyond the period of shortages and whether there was an opportunity for the Applicant to obtain more reasonable pricing;

o Project-specific complexities, such as environmental or historic issues, remote access or location, provision of a unique service with few providers, or elements requiring an extraordinary level of effort; or

o The Applicant deviated from its established practices.84

• Exigent circumstances existed. If so, FEMA evaluates the length of time the circumstances existed compared to the length of time costs were incurred.

• The Applicant participated in ethical business practices, ensuring parties to a transaction are independent of each other, without familial ties or shared interests and on equal footing without one party having control of the other.85

• The Applicant complied with procurement requirements (see Chapter 2:V.G.).

The Applicant is responsible for providing documentation to demonstrate its claimed costs are reasonable. If FEMA determines any of the costs to be unreasonable based on its evaluation,

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