[Federal Register Volume 78, Number 192 (Thursday, October 3, 2013)]
[Proposed Rules]
[Pages 61227-61249]
[FR Doc No: 2013-23258]

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DEPARTMENT OF HOMELAND SECURITY

Federal Emergency Management Agency

44 CFR Part 206

[Docket ID FEMA-2013-0042]
RIN 1660-AA73

Public Assistance Cost Estimating Format for Large Projects

AGENCY: Federal Emergency Management Agency, DHS.

ACTION: Notice of proposed rulemaking.

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SUMMARY: In this rule the Federal Emergency Management Agency (FEMA)
proposes the implementation of the Cost Estimating Format (CEF) as the
standard estimating procedure for large permanent work projects
authorized under the Public Assistance program. Under the Public
Assistance Program, FEMA awards grants to State and local governments,
Indian tribes, and certain private nonprofit organizations to assist
them in responding to and recovering from Presidentially-declared
emergencies and other disasters. The CEF provides a uniform method of
estimating costs for large projects. In this rule, FEMA also proposes
to establish reimbursement thresholds to govern situations in which the
actual cost of a work project is higher or lower than the CEF estimate.

DATES: Submit comments on or before December 2, 2013.

ADDRESSES: You may submit comments, identified by Docket ID FEMA-2013-
0042, by one of the following methods:
    Federal eRulemaking Portal: http://www.regulations.gov. Follow the
instructions for submitting comments.
    Mail/Hand Delivery/Courier: Regulatory Affairs Division, Office of
Chief Counsel, Federal Emergency Management Agency, 8NE, 500 C Street
SW., Washington, DC 20472-3100.

FOR FURTHER INFORMATION CONTACT: William Roche, Director, Public
Assistance Division, Federal Emergency Management Agency, 500 C Street
SW., Washington, DC 20472-3100, (phone)<PHONE_NUMBER>; (facsimile) 202-
646-3363; or (email<EMAIL_ADDRESS>
SUPPLEMENTARY INFORMATION:

Table of Contents

I. Public Participation
II. Background
    A. Public Assistance Program
    B. Traditional Method for Estimating Eligible Cost
    C. Development of the Cost Estimating Format Version 1.0: Grant
Acceleration Program
    D. Cost Estimating Format Version 2.0
    1. General
    2. Part A--Estimated Base Cost
    3. Part B Factor--General Requirements and General Conditions
    4. Part C Factor--Construction Cost Contingencies/Uncertainties
(Design and Construction)
    5. Part D Factor--General Contractor's Overhead and Profit
    6. Part E Factor--Cost Escalation Allowance
    7. Part F Factor--Plan Review and Construction Permit Costs
    8. Part G Factor--Applicant's Reserve for Construction
    9. Part H Factor--Applicant's Project Management and Design
Costs
    10. Summary and Application of the Parts B Through H Factors
III. The Disaster Mitigation Act of 2000
IV. The Expert Panel on Cost Estimating
    A. Establishment of the Panel
    B. Meetings of the Panel
    C. Panel Recommendation Report
    1. Official Endorsement of the CEF
    2. Recommendation of Plus or Minus 10 Percent as the Reasonable
Floor and Ceiling Thresholds for Project Cost
    3. Close Attention Must Be Made to the Degree of Documentation
Detail Required for Developing CEF Estimates
    4. Important Points That Must Be Considered When Using the CEF
    5. CEF Training Offered at Disaster Field Offices Should Be Made
a Resident Course Offering of FEMA's Emergency Management Institute
    6. The Lower-Bound Percentile of Factor C.1 (Preliminary
Engineering Analysis Stage) Should Be Revised To More Accurately
Reflect the Risk in Bidding Simple Projects
    7. Cost Data Should Be Obtained for Use in Analyzing Results for
Each Large Project Estimated by the CEF
    8. The Engineering and Design Services Curves (A and B) Should
Be Updated as Soon as Practicable When Received From the American
Society of Civil Engineers (ASCE) Committee of Professional Practice
    9. Incorporate Lessons Learned Into the CEF
V. Proposed Rule
    A. General
    B. CEF Version 2.1
    C. Floor and Ceiling Thresholds
    1. Establishment of Set 10 Percent Floor and Ceiling Thresholds
    2. Ceiling Threshold
    3. Floor Threshold
    4. Improved Projects
    5. Alternate Projects
    D. Appeals
    E. Consideration of Phased Funding
    F. Effective Date
VI. Regulatory Analyses
    A. Executive Order 12866, Regulatory Planning and Review;
Executive Order 13563, Improving Regulation and Regulatory Review
    B. The Paperwork Reduction Act
    C. The Unfunded Mandates Reform Act
    D. OMB Circular No. A-119, Federal Participation in the
Development and Use of Voluntary Consensus Standards and in
Conformity Assessment Activities
    1. Construction Specifications Institute
    2. Reed Construction Data
    E. Executive Order 13132, Federalism
    F. Executive Order 13175, Consultation and Coordination With
Indian Tribal Governments
    G. Regulatory Flexibility Act
    H. National Environmental Policy Act
    I. Executive Order 12630, Governmental Actions and Interference
With Constitutionally Protected Property Rights
    J. Executive Order 12988, Civil Justice Reform

Table of Acronyms

A&E Architectural and Engineering
AASHTO American Association of State and Highway Transportation
Officials
AGCA Associated General Contractors of America, Inc.
AIA American Institute of Architects
APWA American Public Works Association
ASPE American Society of Professional Estimators
BCI Building Cost Index
CCI Construction Cost Index
CEF Cost Estimating Format
CFR Code of Federal Regulations
CSI Construction Specifications Institute
DMA 2000 Disaster Mitigation Act of 2000 (Pub. L. 106-390)
E.O. Executive Order
EA Environmental Assessment
EIS Environmental Impact Statement
EMI Emergency Management Institute
FEMA Federal Emergency Management Agency
FONSI Finding of No Significant Impact
FR Federal Register
FY Fiscal Year
GAP Grant Acceleration Program
HMP Hazard Mitigation Planning
HVAC Heating, Ventilation, and Air-Conditioning
NACE National Association of County Engineers
NEMIS National Emergency Management Information System
NEPA National Environmental Policy Act (42 U.S.C. 4321 et seq.)
NETC National Emergency Training Center
NSPE National Society of Professional Engineers
NTTA National Technology Transfer and Advancement Act of 1995 (Pub.
L. 104-113)
OMB Office of Management and Budget
PAC Public Assistance Coordinator
PNP Private Non-Profit
PRA Paperwork Reduction Act (44 U.S.C. 3501 et seq.)
RFA Regulatory Flexibility Act (5. U.S.C. 601-612)
TAC Technical Assistance Contractor
UMRA Unfunded Mandates Reform Act (2 U.S.C. 1531-1538)

I. Public Participation

    We encourage you to participate in this rulemaking by submitting

comments and related materials. We will consider all comments and
material received during the comment period.
    If you submit a comment, identify the agency name and the docket ID
for this rulemaking, indicate the specific section of this document to
which each comment applies, and give the reason for each comment. You
may submit your comments and material by electronic means, mail, or
delivery to the address under the ADDRESSES section. Please submit your
comments and material by only one means.
    Regardless of the method used for submitting comments or material,
all submissions will be posted, without change, to the Federal e-
Rulemaking Portal at http://www.regulations.gov, and will include any
personal information you provide. Therefore, submitting this
information makes it public. You may wish to read the Privacy Act
notice that is available via a link on the homepage of
www.regulations.gov.
    Viewing comments and documents: For access to the docket to read
background documents or comments received, go to the Federal e-
Rulemaking Portal at http://www.regulations.gov. Background documents
and submitted comments may also be inspected at FEMA, Office of Chief
Counsel, 8NE, 500 C Street SW., Washington, DC 20472-3100.
    Public Meeting: We do not plan to hold a public meeting, but you
may submit a request for one at the address under the ADDRESSES section
explaining why one would be beneficial. If FEMA determines that a
public meeting would aid this rulemaking, it will hold one at a time
and place announced by a notice in the Federal Register.

II. Background

A. Public Assistance Program

    Under the Public Assistance program, authorized by the Robert T.
Stafford Disaster Relief and Emergency Assistance Act \1\ (Stafford
Act) and implemented through regulations in title 44 of the Code of
Federal Regulations (CFR), the Federal Emergency Management Agency
(FEMA) awards grants to State and local governments, Indian tribes, and
certain private nonprofit organizations to assist them in responding to
and recovering from Presidentially-declared emergencies and major
disasters. Specifically, the program provides assistance for debris
removal, emergency protective measures, and permanent restoration of
infrastructure. FEMA refers to debris removal and emergency protective
measures as ``emergency work.'' \2\ FEMA also categorizes these types
of work as Category A (debris removal) and Category B (emergency
protective measures). Permanent restoration of infrastructure, which
FEMA refers to as ``permanent work,'' \3\ includes several categories,
including Roads and Bridges (Category C), Water Control Facilities
(Category D), Buildings and Equipment (Category E), Utilities (Category
F), and Parks, Recreational Facilities, and Other Items (Category G).
The Cost Estimating Format (CEF) proposed by this rulemaking applies to
permanent work only (Categories C-G).
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    \1\ Disaster Relief Act of 1974, Public Law 93-288, 88 Stat. 143
(May 22, 1974), as amended, 42 U.S.C. 5121 et seq.
    \2\ See 44 CFR 206.201(b).
    \3\ See 44 CFR 206.201(j).
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    FEMA may only provide assistance under the Public Assistance
program after the President issues an emergency or major disaster
declaration. See 44 CFR 206.1. Under the Public Assistance program, the
``grantee'' of a FEMA grant of financial assistance is generally the
government of the State for which an emergency or major disaster has
been declared, but may also be an Indian Tribal government. See 44 CFR
206.201(e). Additionally, a State agency, local government, eligible
private nonprofit organization, or Indian tribe may submit an
application to the grantee for assistance as a ``subgrantee'' under the
State's grant. See 44 CFR 206.201(a); 206.222. Public assistance is
provided at a cost share, set by the President in the declaration.
Usually, the Federal share is 75 percent of the total eligible cost,
and the subgrantee share is 25 percent of the total eligible cost. See
42 U.S.C. 5172; 44 CFR. 206.47.
    To apply for a Public Assistance grant, the applicant submits a
Request for Public Assistance (FEMA Form 009-0-49 \4\) to FEMA through
the grantee. Upon FEMA's approval of the grant application, the grantee
notifies the applicant, and the applicant becomes a subgrantee. See 44
CFR 206.202.
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    \4\ The Office of Management and Budget has approved the Request
for Public Assistance form (FEMA Form 009-0-49) under information
collection number 1660-0017 through July 31, 2016.
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    The basis for the amount of a Public Assistance grant is provided
in a Project Worksheet (FEMA Form 009-0-91 \5\). The Project Worksheet
documents the details of the project, which is a logical grouping of
eligible work required as a result of a declared major disaster or
emergency. A project may include eligible work at several sites, and
may include more than one Project Worksheet. A Project Worksheet is the
primary form used to document the location, damage description and
dimensions, scope of work, and cost estimate for each project. The
scope of work may change as the work on the project progresses. If FEMA
approves a revised scope of work, a new version of the Project
Worksheet is generated. Some projects may have several versions of a
Project Worksheet. An applicant may appeal FEMA determinations made in
each version of the Project Worksheet pursuant to 44 CFR 206.206.
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    \5\ The Office of Management and Budget has approved the Project
Worksheet form (FEMA Form 009-0-91) under information collection
number 1660-0017 through July 31, 2016.
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    FEMA divides applications for Public Assistance into two groups--
large projects and small projects--based on the dollar amount of the
project. See 44 CFR 206.203(c). The threshold for large and small
projects is adjusted annually to reflect changes in the Consumer Price
Index for All Urban Consumers published by the United States Department
of Labor. The threshold for large projects in Fiscal Year 2013 is
$67,500 (77 FR 61423, Oct. 9, 2012). This proposed rule only affects
large projects.
    Project Worksheets for large projects are developed by a FEMA
Project Specialist, working with the applicant/subgrantee, and are
submitted to a FEMA Public Assistance Coordinator (PAC) Crew Leader for
review and processing. Large projects are funded on documented actual
costs; however, work typically is not complete at the time of project
approval. Therefore, FEMA obligates large project grants based on
estimated costs. The obligation process is the process by which funds
are made available to the grantee. The funds reside in a Federal
account until drawn down by the grantee and paid to the subgrantee as
the project progresses and actual costs are incurred. If FEMA approves
a revised scope of work, a revised Project Worksheet is issued with a
revised estimate, and funds are obligated or deobligated based on the
revised estimate.

B. Traditional Method for Estimating Eligible Cost

    This section describes the traditional method FEMA has used to
estimate a project's eligible costs. For a more detailed explanation of
this method, please refer to FEMA's Public Assistance Guide, available
online at http://www.fema.gov/public-assistance-policy-and-guidance/public-assistance-guide. If work on a project is complete at the time
of the applicant's request for

Public Assistance funding, the grant amount is based on the actual
cost. However, if work on a project is not complete at the time of the
applicant's request for Public Assistance funding, FEMA must use a cost
estimate to determine the base cost of the project. The base cost is
the amount obligated for the project prior to project completion. The
base cost is also known as construction costs, and includes the cost of
labor, materials, and equipment. The base cost (construction costs)
plus nonconstruction costs equal the total eligible cost.
Traditionally, FEMA does not reimburse nonconstruction costs until the
project is complete.
    Typically, FEMA uses the unit cost method to determine the
estimated base cost. Unit costs are line items representing the
itemized breakdown of construction costs for completing the project.
For example, a typical project will have line items for labor costs,
such as an equipment operator, a foreman, a dispatcher, and a laborer,
each representing a unit cost. There will also be line items for
material costs, such as concrete, paint, or stone. Finally, there will
be line items for equipment, such as a flatbed truck, a tractor, or a
bulldozer. FEMA may use several cost data sources to determine unit
costs. These sources include State or local data from previously
completed projects, commercial estimating sources, and FEMA cost codes.
    Once the base cost is estimated, and the Project Worksheet is
approved, FEMA obligates the amount of the base cost to the grantee for
disbursement to the subgrantee. This may occur before the subgrantee
has begun work on the project, or after the subgrantee has already
started work on the project. (If the entire scope of work has already
been completed, the amount would be for actual eligible costs and an
estimate of eligible costs would not be necessary.)
    As work progresses on a project, the subgrantee may request
additional funding for cost overruns, either if the scope of work
changes, or if the scope of work costs more than originally estimated.
There are several reasons why a subgrantee may need additional funding,
but usually it is because additional damage is discovered that was not
visible at the time the estimate was determined, or there have been
variations in unit prices, or there have been delays in timely starts
or completion of the scope of work. The subgrantee must evaluate each
cost overrun and, when justified, submit a request for additional
funding through the grantee to the FEMA Regional Administrator for a
final determination. The process for FEMA's approval of additional
funding is the same as for the initial approval of funds--FEMA will
perform a site inspection and formulate a scope of work. This will
generate an additional version of the original Project Worksheet that
was initially formulated and approved for the project. All requests for
additional funding must contain sufficient documentation to support the
eligibility of all claimed work and costs. See 44 CFR 206.204(e). If
the Regional Administrator determines that eligible costs exceed the
initial approval, the Regional Administrator will obligate additional
funds as necessary. See 44 CFR 206.205(b)(2).
    Once the project is complete, the project enters the reconciliation
phase. It is during this phase that FEMA calculates the amount of
eligible nonconstruction costs and adds them to the base cost. Eligible
nonconstruction costs include project design and management costs,
contractor overhead and profit, fees, cost escalation due to inflation,
and other factors affecting the overall cost of the project, such as
safety and security, including guard services, first aid, barricades,
and traffic control personnel. FEMA obligates the amount of eligible
nonconstruction costs at the end of the reconciliation phase of the
project. The final eligible cost of the project is based upon the
reasonable, actual construction and nonconstruction costs incurred by
the subgrantee in completing the eligible scope of work.
    This process can be problematic in several ways. The main problem
is that the total eligible cost of the project is not known until the
project reconciliation phase, after work has been completed. There is
no clear budget during the beginning stages of the project. The
subgrantee can request additional funding as the project progresses,
but the subgrantee's expectation of funding at the beginning could be
much higher than approved costs at the end. Often, a subgrantee appeals
the estimated amounts before even embarking on construction, which
greatly slows the process of reconstruction.
    Another significant problem with this method is that the subgrantee
incurs nonconstruction costs during the life of the project but is not
able to recover those expenditures until the work is complete. The
subgrantee cannot be certain that all of its nonconstruction costs will
be reimbursed until FEMA makes an eligibility determination after
project completion, and nonconstruction costs could be large. Even if
the estimated base cost at the beginning of the project is accurate, it
could end up being only half of the total project cost once the
nonconstruction costs are added to it after project completion (during
the project reconciliation phase). In such cases, only half of the
total project cost would be funded at the beginning, resulting in
hardship for the subgrantee because the subgrantee must cover the other
half of the costs from its own pocket until project closeout.
    Another problem is that the process is time-consuming because
funding for base costs often occurs in stages due to cost overruns. If
the subgrantee encounters a cost overrun, which is common in large
projects, work on the project is often halted until the approval
process for additional funding is complete. This approval in stages
also leads to more opportunities for disagreement over cost estimates
and methods of repair. Also, there is no cost-saving incentive for the
subgrantee because the subgrantee does not have a clear idea of its
budget at the beginning, and knows that it can continue to request
additional funding throughout the life of the project.
    Finally, the process necessitates FEMA's presence throughout the
life of the project to oversee and administer cost overruns, resulting
in large administrative costs for the agency.

C. Development of the Cost Estimating Format (CEF) Version 1.0: the
Grant Acceleration Program (GAP)

    After the Northridge California earthquake in 1994, FEMA began to
develop a new cost estimating method, referred to as the Grant
Acceleration Program, in an attempt to correct the problems just
outlined with the traditional method of estimating costs. The
Northridge earthquake occurred in a large metropolitan area, so much of
the damage was to large, complex buildings. The damage was often not
apparent during the initial inspection (which is common with earthquake
damage), and there were many cases of serious underlying structural
damage that required sophisticated engineering analysis. To provide
adequate funding for subgrantees to cover the repair to this damage
earlier in the grant process, FEMA established a voluntary program
using the GAP method that allowed participants to receive a fair and
reasonable fixed budget amount up-front, thereby accelerating the
normal funding procedure (hence the name Grant Acceleration Program).
    Unlike the traditional method, which provided funding for the
estimated base cost at the beginning of the project but did not
reimburse nonconstruction costs until after the project was completed,

the GAP method provided subgrantees with funding for the total
estimated cost of the project (construction and nonconstruction costs)
at the beginning. The estimated total cost under GAP included the
estimated base cost plus the estimated nonconstruction costs. Under the
traditional method, FEMA did not need to estimate nonconstruction
costs, because these costs are reimbursed after they are incurred, and
therefore the actual amount is known. Under the GAP method, FEMA
obligated funding for these costs before they were incurred, so FEMA
had to estimate them.
    To determine the amount of the nonconstruction costs under GAP,
FEMA used a pre-established percentage markup. The amount of the markup
is determined using RS Means Reed Construction Data. RS Means supplies
construction cost information to the construction industry, and
publishes a collection of annual construction cost data books which are
widely used by the construction industry. This established percentage
markup provided a systematic and uniform method of estimating
nonconstruction costs consistent with industry practice.
    Under the GAP system, once FEMA determined the estimated total cost
of the project, that amount was offered to the subgrantee as a fixed
sum. If the subgrantee accepted the offer, the subgrantee could not
request additional funding as the project progressed. The idea was that
further funding would not be necessary, since the amount that was
offered to the subgrantee was for the total cost of the project, not
just the base cost as with the traditional method. The GAP method was
designed to be much more accurate and consistent than the traditional
method and allowed the subgrantee to draw down funds for
nonconstruction costs as they were incurred. Under GAP, if there were
any cost overruns, the subgrantee could not request reimbursement for
the amount of the overrun, and there was no right to appeal. If there
was a cost underrun, the subgrantee could use the unspent balance for
approved mitigation activities pursuant to section 406 of the Stafford
Act. See 42 U.S.C. 5172.
    The creation of GAP was the first step in addressing the problems
with the traditional method of estimating and reimbursing project
costs. There were some drawbacks to GAP, however. The main drawback was
that the subgrantee could not request additional funding. This is
problematic if there are large cost overruns. GAP was modified to
address this and other problems, and eventually evolved into a new
version of the cost estimating format in 1998, which is referred to as
CEF 2.0.

D. Cost Estimating Format (CEF) Version 2.0

1. General
    CEF 2.0 provides a uniform method of estimating costs for large
projects. It accounts for costs incurred across the entire spectrum of
eligible work (from design to project completion). Under the CEF, FEMA
obligates the entire amount of the Federal share of the estimate up-
front to the grantee, and payments are made by the grantee to the
subgrantee in increments as items of work are completed or near
completion (i.e., less than a week from completion). The subgrantee can
request additional amounts for cost overruns pursuant to 44 CFR
206.204.
    CEF 2.0 is made up of various parts, categorized as parts A through
H, that are compiled by a FEMA estimator (who is either the Public
Assistance Project Specialist or is supervised by the Public Assistance
Project Specialist) in a CEF Spreadsheet. Note that an applicant may
provide its own estimate of the project cost; if so, the Public
Assistance Project Specialist uses the CEF to validate that estimate.
The main part of the CEF is Part A, which is the base cost
(construction costs) required to complete the approved scope of work. A
FEMA cost estimator uses a Part A worksheet to determine the estimated
base cost. After estimating the Part A base cost, the FEMA estimator
applies a series of factors (referred to as Parts B through H) to the
Part A base cost estimate. With the exception of Part F, these factors
are percentage factors. For example, if a Part B percentage factor is 2
percent, the estimator adds 2 percent of the Part A estimated base cost
to the total estimate. Sometimes the CEF provides a recommended range
of percents for each factor, such as 3 to 6 percent, and it is up to
the discretion of the FEMA estimator which percentage to apply,
depending on the specifics of the project. The FEMA estimator must
detail why he or she chose a specific percentage in a special section
of the CEF worksheet designed for this purpose. This flexibility in the
CEF methodology allows it to more accurately estimate the many
different types of large projects under the Public Assistance program.
    The Part B through H factors represent the nonconstruction costs
(also referred to as construction-related costs), and are used only if
the costs represented by the Parts B through H factors are not
otherwise itemized in Part A. The costs represented by the factors are
allowable project costs under 44 CFR part 13, Uniform Administrative
Requirements for Grants and Cooperative Agreements to State and Local
Governments. The cost estimator adds the estimated nonconstruction
costs to the Part A base construction cost using a CEF Worksheet to
estimate the total cost of completing the project. This ``forward-
pricing'' methodology provides an estimate of the total eligible
funding at the beginning of the project. The estimate, which FEMA uses
to approve funds for the project, allows the subgrantee to more
accurately manage the budget with a greater degree of confidence.
    Typically, a subgrantee uses a general contractor and a number of
subcontractors to complete a large construction project in a
competitively bid environment. The structure of the CEF mirrors the
subgrantee/general contractor/subcontractor relationship for eligible
work. Part A costs are representative of the construction efforts
required to complete the eligible work; it represents the costs of the
trade or subcontractor(s). Parts B, C, D, and E represent the general
contractor or equivalent costs; they represent the costs of completing
the construction work over and above the base construction costs
itemized in Part A. Parts F, G, and H represent the subgrantee's non-
construction project costs, including preparation of design or contract
documents, plan review and permit fees, and managing project design and
construction. The CEF Parts are described in detail below.
2. Part A--Estimated Base Cost
    Preparing a precise base cost estimate in Part A is critical to the
accuracy of the total project estimate developed with CEF 2.0. All
construction work activities must be itemized and quantified in Part A.
Construction work activities include labor, equipment, and materials,
including small tools, incidentals, and hauling costs necessary to
complete the work. (Part A also includes the subcontractor's overhead
and profit, but not the general contractor's overhead and profit, which
is included in the Part D factor.) Once the construction work
activities are itemized, the estimator enters a unit cost for each
item. There are various types of cost data that the estimator may use
for the unit costs. The preferred cost data is a bid-tab (short for bid
tabulation), which is a bidder's amount for each pay item in a
contract. The next preferred cost data is local cost data (also
referred to as average weighted unit price data). The estimator can
usually obtain local cost data from local completed project

costs or a comparable bid-tab. If there hasn't been a bid on the
contract, local cost data is the preferred cost data because it is the
most accurate reflection of what a project will cost; it is data from
actual projects that took place in the general vicinity of the project
being estimated. Other types of cost data, described below, are less
accurate because they reflect national averages.
    If the FEMA estimator cannot obtain appropriate local cost data,
the next preferred cost data is the most current nationally-recognized
construction data warehouse publications, such as RS Means, BNi
Costbooks, Marshall & Swift, or Sweets Unit Cost Guide. For ease of
reference, cost data publications are readily available to the FEMA
estimator in the disaster field office.
    If the estimator is unable to use local cost data or a cost data
publication from a nationally-recognized construction data warehouse,
then FEMA cost codes or other commercial cost data estimating sources
are a last source of reference for unit prices in preparing Part A base
costs. These are the least preferred sources of cost data, however,
because they are the least accurate. Local cost data best represent
actual costs because the local economic factor is already incorporated.
The construction data warehouses are the next preferred because they
are updated quarterly. FEMA cost codes are generally averages or
estimates for a large geographical area and are not updated as
frequently as local cost data; therefore, they are the least preferred.
    In addition to the itemization of each item of work, Part A costs
are split into permanent and non-permanent work, and completed and
uncompleted work. In order to accurately apply CEF cost factors, a
project is divided into different types of work, depending on how the
restoration activities match the requirements of the Public Assistance
program. The separation of completed and uncompleted work keeps the CEF
estimate organized and easy to understand. After the FEMA estimator
completes Part A, which includes the amount for the completed permanent
and non-permanent work and the estimate for the uncompleted permanent
and non-permanent work, the estimate for Part A is entered into the CEF
spreadsheet. The FEMA cost estimator then applies the Parts B through H
factors to this estimate, as described below.
3. Part B Factor--General Requirements and General Conditions
    Part B accounts for non-permanent job site work that is not readily
itemized in Part A. Part B is split into B.1, General Requirements, and
B.2, General Conditions. General requirements are those costs typically
described in the general requirements of construction specifications.
They include safety and security items, temporary services and
utilities, quality control, and submittals, each described more fully
below.
    Safety and security items include guard service, first aid,
barricades, uniformed traffic persons, flagging, railings, toe-boards,
rented fencing, safety equipment (such as harnesses and scaffolding),
fire protection (such as fire extinguishers and temporary hydrants),
and temporary signage that may be required by a regulatory authority to
control pedestrian or vehicle detours within and around the
construction zone. For safety and security items, CEF 2.0 recommends a
4 percent factor for most construction sites, but the FEMA estimator
may choose up to a 6 percent factor for complex projects such as
airports, marinas, ports, projects in urban areas, and projects in
large segmented sites with phased construction.
    Temporary services and utilities include construction trailer or
office space, and related office equipment. The space may be for the
construction job superintendent or for inspectors. It also includes
temporary utilities such as construction water, electricity,
telephones, construction craft sanitary facilities, and any weather
protection that may be necessary for the temporary services and
utilities. CEF 2.0 recommends a 1 percent factor for temporary services
and utilities.
    Quality control is independent testing and inspection by an
organization, other than the subgrantee or contractor, with expertise
specific to the project scope of work. Examples include concrete
strength testing, water quality testing, and non-destructive
examination of welds (joints). CEF 2.0 recommends using a default of
0.5 percent for most projects and increasing the value up to 1 percent
as the overall project complexities increase.
    Submittals include the contractor's costs for preparation of shop
drawings, materials certifications and instructions, providing samples
and product data, and construction progress schedules. CEF 2.0
recommends a 5 percent factor for submittals.
    General conditions, the B.2 factor, represent the general
contractor's on-site project management costs. This factor covers field
supervision and quality control costs. The quality control costs in B.2
are different than the quality control costs in B.1. The B.1 quality
control costs are costs incurred by an inspection service or
subcontractor in meeting discipline-specific requirements to verify
conformance to specification (e.g., field testing of concrete and soil
backfill, laboratory testing of reinforcing steel, field testing of
electrical components after installation). The quality control costs in
B.2 are general contractor costs to design, manage, and report results
of the total project quality control program. CEF 2.0 recommends a 4.25
percent factor for B.2.
4. Part C Factor--Construction Cost Contingencies/Uncertainties (Design
and Construction)
    Part C addresses construction cost contingencies and uncertainties.
It accounts for the budgetary risk associated with project unknowns and
complexities in determining the scope of work. It is included in the
CEF estimate to create an appropriate level of probability for
completing the project within that estimate. Part C is made up of C.1,
Design Phase Scope Contingencies, C.2, Facility or Project
Constructability, C.3, Access, Staging, and Storage Contingencies, and
C.4, Economies of Scale.
    The C.1 factor, Design Phase Scope Contingencies, represents
standard cost estimating contingencies based on the design and
engineering process as a function of time. This contingency is based on
the concept that there are typically more unknowns and items at the
schematic design stage than at the final design stage. The unknowns
gradually decrease as the scope of work is defined, details for
completing the work are developed, and the project advances towards a
set of construction drawings and specifications that can be used by a
construction contractor. The project is evaluated to determine the
design phase at the time the estimate is prepared.
    There are two levels of design development that the estimator
considers for the C.1. factor: (1) The preliminary engineering analysis
stage, and (2) the working drawing stage. At the preliminary
engineering analysis stage, concepts have been developed but without a
significant level of detailing. It is difficult to accurately quantify
work at this stage, and contractors assume a relatively high level of
risk in bidding on a project at this stage. CEF 2.0 recommends a factor
of 15 to 20 percent (depending on the complexity of the project). At
the working drawing stage, the design is more advanced, concepts have
been determined, detailing is more complete, and work tasks and
quantities have been readily defined. Contractors would assume a low to
medium level of risk in bidding on a project at this stage.

CEF 2.0 recommends a factor of 2 to 10 percent at the working drawing
stage (depending on the level of completeness of the working drawings).
    The C.2 factor, Facility or Project Constructability, addresses
project complexity. The complexity of construction activities varies
among the different types of projects. For new projects, the
constructability factor is not applied; it is assumed that the design
process takes the complexity of the project into account. The
constructability factor is applied for repair and retrofit projects.
These projects must be accomplished within the physical and operations
constraints of existing facilities, tend to consist of tasks that are
more intensely detailed and sequenced, and require closer supervision
throughout the process.
    The constructability factor represents site conditions or
construction process complexities such as steep site embankments,
unstable soil conditions, difficult subsurface construction conditions
requiring such activities as de-watering and rock excavation, extreme
weather conditions affecting productivity (such as winter shutdowns),
urban sites, special building code requirements, availability of
adequate energy, skilled craft labor, and building materials, the
subgrantee's special requirements and restrictions, and environmental
considerations. The subgrantee's requirements and restrictions should
be reasonable; they should apply to the specific services related to
the eligible scope of construction. For example, there may be a
requirement for interstate highway construction to occur during night
hours because of peak traffic flow impacts.
    If possible, project complexity issues should be addressed in Part
A of the CEF. However, if certain project conditions cannot be
identified or quantified, CEF 2.0 recommends suitable factors depending
on the type of work. CEF 2.0 recommends a percentage range of 1 to 2
percent for roads (rural-urban), 1 to 5 percent for bridges and
culverts (simple-complex), 1 to 5 percent for water control facilities,
1 to 2 percent for simple open buildings, 1 to 5 percent for schools,
libraries, and offices, 1 to 7 percent for hospitals, museums, and
historic buildings, 1 to 5 percent for public utilities, and 1 to 5
percent for park and recreation facilities. The FEMA estimator should
assign a C.2 factor of 0 to 1 percent for simple construction projects,
and should assign a factor at the upper end of the applicable range for
projects with a combination of features that increase complexity. For
example, two bridges may require the same materials and equipment, but
if unstable soil conditions exist at one of the bridges, the work at
that bridge will require more detailed sequencing and greater
supervision.
    The C.3 factor, Access, Storage, and Staging Contingencies,
addresses project site conditions that impose additional costs on the
work activities listed in Part A. As with the C.2 factor, these items
should be addressed in Part A. But if these contingencies are not
accounted for in Part A because the need for them is unclear, then the
C.3 factor should be applied. The C.3 factor includes site access,
storage, and staging.
    Site access addresses access to the project site. There may be
difficult or long access routes for trucks delivering materials, a
temporary access roadway or driveway constructed to provide access for
equipment, site loading conditions requiring heavy equipment (such as
barges, cranes, or forklifts), off-site parking for workers, and
obstructions created by utilities or exposed systems.
    Storage addresses the storage of construction materials and
equipment on site to support proper staging and construction
activities. There may be offsite storage of materials due to space
constraints, temporary easements, and lot, sidewalk, or roadway space
rental costs.
    Staging addresses the timing and execution of the work, which could
be complicated by occupation of facilities, lack of space, and access
inside the facility. This factor should be used for sites that have
work access limitations because services must continue to run in spite
of construction (such as hospitals). CEF 2.0 recommends a factor of 1
to 4 percent for each of the C.3 factors, according to the impact each
of the C.3 factors has on project cost.
    The C.4 factor, Economies of Scale, addresses the increases or
decreases in cost resulting from task or project size. For example, the
mobilization cost for a worker is proportionally higher for one day's
work than for 30 days' work. Economies of scale are particularly
applicable to new construction projects, but are also applicable to
other types of work where there is a reduction in cost due to project
size. CEF 2.0 recommends a factor of 0 percent for projects under
$500,000, -0.5 percent for projects under $2 million, -1 percent for
projects under $10 million, and -2 percent for projects over $10
million.
5. Part D Factor--General Contractor's Overhead and Profit
    Part D includes three parts: D.1, General Contractor's Overhead;
D.2, General Contractor's Insurance, Payment, and Performance Bonds;
and D.3, General Contractor's Profit. The general contractor's overhead
includes main office expenses, including labor and salary costs for
personnel, including the principals, estimators, project managers, and
general office staff, plus all other operational expenses associated
with working out of the main office. CEF 2.0 recommends a factor of 7.7
percent for overhead. For the D.2 factors, CEF 2.0 recommends a factor
of 1.5 percent for the general contractor's payment and performance
bonds, 0.3 percent for builder's risk insurance, and 1.5 percent for
public liability insurance. The total value of the D.2 factor is fixed
at 3.3 percent. For the D.3 factor (the general contractor's profit),
CEF 2.0 recommends a range of 3 to 10 percent, depending on the size of
the project and the type of work. For example, for projects over $10
million, the recommended factor is 3 percent for repair, retrofit, or
new construction. For projects under $500,000, the recommend factor is
10 percent for repair, retrofit, or new construction.
    Part D should not be applied to projects completed using the
subgrantee's labor, equipment, and materials (i.e., ``force account''
work), nor does Part D reflect the subcontractor's overhead and profit;
the subcontractor's overhead and profit should be included in the line
items in Part A.
6. Part E Factor--Cost Escalation Allowance
    Part E accounts for cost escalation over the duration of the
project and is based upon an inflation adjustment from the time the
estimate is prepared until the mid-point of construction for the
eligible scope of work. This factor is only used for escalating the
cost of uncompleted work. The estimator applies the Part E factor by
establishing a design and construction timeline to the mid-point of
construction. The timeline will vary according to whether the eligible
work is already started or is delayed. The escalated cost of
construction is equal to the sum of Parts A through D times the number
of months to the midpoint of uncompleted construction times the
escalation factor.
    The escalation factor is based on a 2-year average of either the
Building Cost Index (BCI) or the Construction Cost Index (CCI). These
indices are published in the Engineering News-Record, a monthly trade
publication. Engineering News-Record collects and publishes monthly
price data on 75 different building materials from 20 major cities in
the United States, plus Montreal and Toronto. It uses this data to
create the

BCI and CCI each month (see http://enr.construction.com/economics/default.asp). When applying CEF 2.0, the estimator uses either the BCI
or the CCI to calculate the escalation factor, depending on the nature
of the project.
7. Part F Factor--Plan Review and Construction Permit Costs
    Part F addresses fees charged by State and local agencies for plan
reviews and construction permits. It includes all fees that are paid to
obtain approvals required before construction can commence. Part F is
split into two factors: F.1, Plan Review Fees; and F.2, Construction
Permit Fees. The actual fees are included in the CEF estimate, unlike
other CEF factors where the estimator applies a percentage factor. Part
F is not applicable in situations where State and local agencies waive
fees during disaster recovery situations.
8. Part G Factor--Applicant's Reserve for Construction
    Part G is the applicant/subgrantee's reserve for potential change
orders related to eligible work and any other incident costs that may
be incurred after the construction contract is awarded. It does not
reflect discretionary change orders for upgrades or for any ineligible
work. The applicant/subgrantee's reserve is based on project size. CEF
2.0 recommends a factor of 7 percent for projects less than $200,000, 6
percent for projects ranging from $200,001 to $800,000, 5 percent for
projects ranging from $800,001 to $1,400,000, 4 percent for projects
ranging from $1,400,001 to $2 million, and 3 percent for projects
greater than $2 million.
9. Part H Factor--Applicant's Project Management and Design Costs
    Part H represents the applicant/subgrantee's costs for overall
project development and management throughout the design and
construction phases. This factor includes the applicant/subgrantee's
costs for managing the design process, basic design and inspection
services normally performed by an architecture and engineering firm,
and managing the construction phase (either third party or in-house).
Incidental development costs are also absorbed into these categories.
Part H costs are distinct from those management and administrative
costs incurred by the applicant/subgrantee to manage the Public
Assistance grant and reimbursed by FEMA pursuant to section 325 of the
Stafford Act and 44 CFR part 207.
    Part H.1 includes the Applicant's Project Management--Design Phase.
The applicant/subgrantee's costs to manage the project during the
design phase include managing the Architectural and Engineering (A&E)
contracts for final design, managing the permitting and special review
process, and interfacing with other agencies. (A&E contracts are
contracts for the provision of design services.) A value of 1 percent
has been established for this factor. The H.1 factor is not applicable
in those situations where design is not required.
    Part H.2 includes A&E design contract costs. This factor covers the
cost of basic design and inspection services, normally performed by an
A&E firm, as well as a number of additional services not necessarily
required with every construction project. The basic services consist of
preliminary engineering analysis, preliminary design, final design, and
construction inspection. Engineering curves are used to estimate the
cost of basic engineering services as a percentage of the estimated
construction cost. One of two curves, Curve A and Curve B, may be used
to determine the appropriate percentage. Curve A applies to projects
with above-average complexity and non-standard design. Curve B applies
to projects of average complexity. The curves show a correlation
between engineering costs and total construction costs. The curves are
included in the Public Assistance Guide, FEMA 322, June 2007, Chapter
2, pages 58 and 60, at http://www.fema.gov/government/grant/pa/policy.shtm and in the docket for this rulemaking. To use the curves,
the FEMA estimator starts with the estimate of construction costs. The
FEMA estimator finds the construction cost on the horizontal axis and
then finds the associated percentage of engineering and design services
from the vertical axis. This percentage can be multiplied by the
estimated construction cost to determine an appropriate engineering and
design cost estimate. This estimate becomes the H.2 factor. The H.2
factor is not applicable in those situations where design, construction
inspection, or other basic services are not required.
    Part H.3 includes the Project Management--Construction Phase.
Project management costs during the construction phase include quality
assurance and management of additional testing during construction,
advertising and awarding of the construction contract, decisions on
construction problems and requests for information, management of
change orders for on-site construction conditions and design errors,
and omissions and unforeseen problems, such as differing site
conditions and hidden damage. The H.3 factor is applied depending on
the amount of total construction costs. For construction costs under
$500,000, FEMA applies a 6 percent factor. For construction costs of
$500,000 to $1,000,000, FEMA applies a 5 percent factor. For
construction costs of $1,000,000 to $5,000,000, FEMA applies a 4
percent factor. For construction costs of more than $5,000,000, FEMA
applies a 3 percent factor.
10. Summary and Application of the Parts B Through H Factors
    The expenses reflected in the Parts B through H factors can
reasonably be expected to occur because they are costs directly related
to the project and are almost always encountered during the course of
construction. When FEMA developed these factors for CEF 2.0, it
determined the Parts B through H percentage factors using guidance
available from the Construction Specifications Institute (CSI) and Reed
Construction Data, as well as data from closed-out grants for large
projects nationwide. CSI is an organization that maintains and advances
the standardization of construction language as it pertains to building
specifications. CSI provides structured guidelines for specification in
writing in a Project Resource Manual. CSI authored MasterFormat, which
is an indexing system for organizing construction data, particularly
construction specifications. The MasterFormat consists of 50 divisions,
reflecting the growing complexity of the construction industry, such as
masonry, electrical, finishes, and mechanical.
    It is critically important that the FEMA cost estimator determine
all elements that make up the construction costs itemized in Part A, so
that costs are not duplicated in the construction-related costs in
Parts B through H. Duplication of costs would result in an inflated
project cost. If all work is completed and actual costs are known and
itemized in Part A, the cost estimator need not apply Parts B through
G. Conversely, if all work is not completed, the cost estimator may
apply one or more of the factors in Parts B through H to the
uncompleted items of work, where appropriate.
    When applying the Parts B through H factors, the FEMA cost
estimator must choose which cost data to use. Table 1 below depicts the
hierarchy of preferred pricing with completed work favored first, and
RS Means Cost Data favored least. As explained above, the hierarchy of
preferred pricing is based on the accuracy of the data, with the most
accurate being favored first, and the least accurate being favored
last. In

Table 1, the ``Completed Work'' column applies to any work that has
been completed on a project. If work has been completed, the only
factor that is applied is Factor H. Factor H is applied to completed
work because it represents the applicant/subgrantee's costs for overall
project development and management throughout the design and
construction phases. It is applied as a percentage of the completed
work. If work is not completed, the FEMA estimator uses bid-tab data,
local-cost data, or RS Means Cost Data to estimate the cost of the
uncompleted work. If the FEMA estimator uses bid-tab data, only Factors
F, G, and H apply. Factors B through E do not apply because bid-tab
data includes the items that make up those factors. For example, Factor
C, which reflects construction cost contingencies, would not be
applicable if bid-tab data is used because the cost is already known
and, therefore, there is no contingency. Part G, however, would be
applicable if bid-tab data is used because change orders and differing
site conditions may still be a possibility. If local cost data is used,
only Factors E through H apply, and if RS Means Cost Data is used, all
factors apply.

                                                               Table 1--Hierarchy of Costs
--------------------------------------------------------------------------------------------------------------------------------------------------------

--------------------------------------------------------------------------------------------------------------------------------------------------------
                    CEF Part                                         Types of costs used in part A and typical application of factors
--------------------------------------------------------------------------------------------------------------------------------------------------------
A...............................................                         Completed Work     Bid tab                    Local Cost Data        RS Means Cost Data
B...............................................                        *                         *                         *                         Y
C...............................................                        *                         *                         *                         Y
D...............................................                        *                         *                         *                         Y
E...............................................                        *                         *                         Y                         Y
F...............................................                        *                         Y                         Y                         Y
G...............................................                        *                         Y                         Y                         Y
H...............................................                        Y                         Y                         Y                         Y
--------------------------------------------------------------------------------------------------------------------------------------------------------
Y = Part or Factor Normally Applied.
* = Part or Factor Normally Not Applied.

    In all cases, the cost estimator is responsible for determining the
unit costs in Part A, before it applies one or more of the Parts B
through H factors so that there is no cost duplication of work
activities previously considered in Part A.
    CEF 2.0 is explained more thoroughly in FEMA's Cost Estimating
Format for Large Projects Instructional Guide, Version 2 (November
1998), available in the docket for this rulemaking at
www.regulations.gov.

III. The Disaster Mitigation Act of 2000

    Section 205(d) of the Disaster Mitigation Act of 2000 (DMA 2000),
Public Law 106-390, 114 Stat. 552 (October 30, 2000), 42 U.S.C. 5172,
which amends section 406(e) of the Stafford Act, directs the President,
acting through the Administrator of FEMA,\6\ to establish an expert
panel, to include ``representatives from the construction industry and
State and local government [to] develop recommendations concerning
procedures for estimating the cost of repairing, restoring,
reconstructing, or replacing a facility consistent with industry
practices.'' DMA 2000 further requires the President to promulgate
regulations that establish cost estimation procedures, taking into
account the recommendations of the expert panel, for use in determining
the eligible cost of repairing, restoring, reconstructing, or replacing
a public or private nonprofit facility under section 406 of the
Stafford Act. The statute limits use of these procedures to large
projects.
---------------------------------------------------------------------------

    \6\ The President has delegated the authorities of the Stafford
Act to the Secretary of the Department of Homeland Security.
Executive Order 13286 (February 28, 2003). The Secretary has in turn
delegated those authorities to the Administrator of FEMA. DHS
Delegation 9001.1 (December 10, 2010).
---------------------------------------------------------------------------

    DMA 2000 also requires modification of the eligible cost when the
actual cost of the project is greater than a predetermined ceiling
percentage or when the actual cost is less than the estimated cost by a
predetermined floor percentage. The statute requires the expert panel
to develop recommendations concerning floor and ceiling percentages,
and requires the President to promulgate regulations establishing
ceiling and floor percentages, taking into account the recommendations
of the panel. The statute requires application of the floor and ceiling
percentages. If the actual project cost is greater than the ceiling
percentage of the estimated cost, the President may reimburse a portion
of the actual cost that exceeds the estimated cost. If the actual
project cost is less than the estimate but more than or equal to the
floor percentage of the estimated cost, the applicant may use the
excess for mitigation activities. If the actual project cost is less
than the floor percentage of the estimated cost, the applicant must
return the difference.
    This rulemaking implements section 205(d) of DMA 2000 by proposing
the CEF as the cost estimating methodology for determining the eligible
cost for large projects under the Public Assistance program, and by
proposing floor and ceiling thresholds of +/- 10 percent, as
recommended by the expert panel. Sections IV and V of this preamble
discuss the implementation of DMA 2000 in detail.

IV. The Expert Panel on Cost Estimating

A. Establishment of the Panel

    Pursuant to section 205(d) of DMA 2000, FEMA established the Expert
Panel (Panel) on Cost Estimating for the Public Assistance Program on
April 1, 2000. FEMA invited professional organizations to nominate
candidates for membership on the Panel. There were nine panel members
including experts in design, construction, and cost estimating of
roads, water control facilities, buildings, utility systems, and
recreational facilities, who represented various geographical regions
of the country. FEMA (the Designated Federal Official) and the National
Emergency Management Association co-chaired the Panel. The other Panel
members represented the American Association of State and Highway
Transportation Officials (AASHTO), the Associated General Contractors
of America, Inc. (AGCA), the American Institute of Architects (AIA),
the American Public Works Association (APWA), the American Society of
Professional Estimators (ASPE), the National Association of County
Engineers (NACE), and the National Society of Professional Engineers
(NSPE).
    The Panel's charter established the Panel to evaluate the Public
Assistance program's methodology for estimating the cost of repairing,
restoring,

reconstructing, or replacing a public facility or private nonprofit
facility based on the design of the facility as the facility existed
immediately before the disaster and in conformity with codes,
specifications, and standards (including floodplain management and
hazard mitigation criteria required by the President or under the
Coastal Barrier Resources Act (16 U.S.C. 3501 et seq.)) applicable at
the time at which the disaster occurred. The Charter required the Panel
to review the CEF materials and determine if the CEF methodology is
appropriate for the Public Assistance program. It also required the
Panel to determine what level of technical expertise is required to
uniformly apply the recommended estimating methodology to maximize its
accuracy and national applicability.

B. Meetings of the Panel

    The Panel met twice in 2001 and each meeting was open to the
general public. The meeting minutes are available for viewing in the
public docket for this rulemaking. On May 25, 2001, FEMA published a
notice in the Federal Register at 66 FR 28910 announcing the first
meeting of the Panel. The first meeting of the Panel was conducted from
June 26-27, 2001. At the meeting, FEMA provided the Panel with an
overview of the Stafford Act and section 205(d) of DMA 2000, a briefing
on the Public Assistance program and the GAP, and a briefing on the
CEF. After FEMA's CEF presentation, Panel members expressed their
general consensus that the CEF is a sound tool and discussion focused
on how to make the CEF better. The Panel indicated that the applicant/
subgrantee needs to be involved in developing the cost estimate and all
parties involved must have a clear understanding of the scope of work,
and that the scope of work must remain consistent throughout the life
of the project. The Panel noted that the Public Assistance Project
Officer is responsible for developing the Project Worksheet in a multi-
disciplinary environment, but the lead FEMA estimator is responsible
for developing the actual construction cost estimate and should
participate in the on-site review of the project conducted by the
Public Assistance Project Officer. The Panel noted that subgrantees
have been pleased with the quality of the CEF estimates, and that using
an integrated, seamless process where everyone works together as a team
has worked well. Using subgrantee-provided cost data wherever possible
is especially helpful in obtaining an accurate estimate. The Panel
members agreed that the factors used in the CEF are acceptable, and
acknowledged that some project savings and overruns would still be
realized in the real world as a result of open market conditions.
    The Panel indicated that the CEF should mirror, as closely as
possible, standard industry methods, such as those used by ASPE, and
that ASPE Committee members would be asked to help with this effort. It
discussed how the CEF is an incremental-complexity instrument (i.e.,
there is less risk as more information becomes known and as the process
moves forward).
    Next, the Panel directed that two comparative analyses be performed
between the CEF version 2.0 and ASPE's Standard Estimating Practice
(5th edition, 1998). The first comparative analysis would be performed
by each of FEMA's Technical Assistance Contractors (TACs), and the
second comparative analysis would be performed by ASPE's Standards,
Certification, and Education Boards. The results of the comparative
analyses would be used by the Panel at its second meeting to augment
and/or revise the CEF. The Panel directed that the independent
comparative analyses determine whether or not the CEF is parallel to
ASPE's level 3 (design, development/budget appropriation) estimating
approach, and if the CEF was not parallel to an ASPE level 3 estimate,
to say so and identify the ASPE level that parallels the CEF.
    ASPE cost estimates are categorized by levels. At the time of the
Panel's recommendation, the Levels used were taken from Standard
Estimating Practice, 5th ed., which includes Level 1 to Level 6. (The
current edition has revised levels, going from Level 1 to Level 5,
which will be discussed later in this preamble.) Level 1 is the lowest
level of project definition (the early planning stages of the project)
and Level 6 is the highest level of project definition (when the
project design is finalized). A Level 1 cost estimate will be less
accurate than a Level 6 cost estimate, because of the lack of
information available to the estimator at Level 1.
    According to the Standard Estimating Practice, 5th ed., a Level 1
estimate is the Order of Magnitude level; at this level, the estimate
contingency may range from 20 to 50 percent. Estimators prepare this
level of estimate from an outline of the proposed project. Level 2 is
the Schematic/Conceptual Design level; the estimate contingency may
range from 20 to 30 percent. Level 3 is the Design Development level;
the estimate contingency at this level may range from 15 to 25 percent.
Estimators prepare this level of estimate from no less than 25 percent
complete preliminary design drawings and draft specifications.
Estimates produced at ASPE Level 3 are used to verify budget
conformance as the scope and design is finalized and final materials
are selected. Information required for this level includes drawings
showing plans, elevations, typical details, engineering design
criteria, equipment layouts and detailed outline specifications. ASPE
Level 4 is the Project Control Level. Estimators prepare this level of
estimate from no less than 75 percent complete design drawings and
specifications. ASPE Level 5 is the Construction Document level; the
estimate contingency at this phase may range from 5 to 10 percent.
Estimators prepare this level of estimate from no less than 90 percent
complete design drawings and specifications. This level is used to
verify pricing as details are completed and design is modified and
completed. This estimate can be used to evaluate the subcontract
pricing during the bid phase. Information required for this level
includes detailed drawings showing plans, elevations, sections,
details, schedules, specifications, and bidding criteria. ASPE Level 6
is the bid-phase estimate. The purpose of this level is to show
probable costs in the preparation and submittal of bids. At this phase,
design drawings and specifications are complete. Estimate contingencies
should be at zero percent at ASPE Level 6.
    The Panel directed that the comparative analyses between the CEF
and the ASPE methods consist of validating whether or not a CEF
estimate (at an ASPE Level 3) would provide a level of confidence
commensurate with an ASPE Level 5 (construction documents/contract
drawings/definitive) estimate, such that the CEF estimate (at an ASPE
level 3) would be within the  10 percent floor and ceiling
thresholds.
    Regarding the floor and ceiling thresholds, FEMA reported that its
general experience with CEF to date showed that for project costs of $2
to $4 million, the project range had been (plus or minus) 10 percent;
for project costs less than $2 million, there had been cost overruns of
more than 20 percent, and for project costs greater than $4 million,
there had been cost underruns of more than 20 percent. The Panel agreed
that the following depiction expressed the intent of section 205(d) of
DMA 2000:

[GRAPHIC] [TIFF OMITTED] TP03OC13.029

    The meeting minutes state that the Panel reached consensus and
recognized that plus and minus 10 percent are reasonable floor and
ceiling thresholds for project cost, ``as derived from construction
industry standards.'' The meeting minutes indicate that it was
understood that some projects in the $50,000 to $100,000 range could
fall outside the threshold, but there was general agreement that the 10
percent threshold is appropriate and that using the same number across
the board would make the program easier to administer.
    On August 28, 2001, FEMA published a notice in the Federal Register
at 66 FR 45313 announcing the second meeting of the Panel. The second
meeting of the Panel was conducted from September 26-27, 2001. The
Panel compared and contrasted the CEF with estimating methods used by
ASPE. A representative from the ASPE gave a presentation comparing the
CEF to ASPE's Level 3 estimate. The ASPE representative noted that the
preliminary finding was that the CEF conforms to recommended estimating
practices. However, the ASPE Board of Directors, Technical Board, and
Standing Committees had not yet formalized the Society's findings. (The
findings were eventually formalized in January 2002.) Further, the ASPE
representative noted two areas of caution when using the CEF: the need
for appropriate expertise of the personnel performing the estimates,
and the quality of the construction document data that directly affects
the level of detail included in the estimate. Most estimators, he said,
would prefer to use historical and/or local cost data rather than
factored national cost data from commercial estimating manuals, and
would prefer to use the estimating expertise from the vicinity of the
disaster, when possible. This allows factors to be developed on the
project site. Regarding the ASPE Level 3 estimate, the ASPE
representative stated that that level is not designed to require
sufficient construction documentation to attain the ideal
10% range of eventual firm bids.
    Next, FEMA presented the results of its comparative analysis of the
CEF to ASPE's Level 3 estimating approach. ASPE's Level 3 estimate is a
``Design Development/Budget Appropriation'' level prepared from not
less than 25 percent complete preliminary design drawings and draft
specifications. The purpose of this estimate is to establish probable
costs within the range of available information. To perform the primary
comparison of CEF to an ASPE Level 3, the documentation and design
development criteria for both estimating methods were detailed. In its
presentation, FEMA noted that the requirements for both estimating
methodologies are very similar. Site plans, dimensions, arrangements,
and schematics are required for both. ASPE also requires detailed
preliminary plumbing, mechanical and electrical drawings. This level of
detail is not specifically defined as a requirement for CEF. FEMA noted
that while the requirements for both methodologies are generally quite
similar, they are not directly comparable. The CEF focuses on costs to
return disaster-damaged eligible facilities to their pre-disaster
condition. In this regard, the CEF

parallels the performance objective of ASPE Level 3. Under post-
disaster conditions, a CEF estimate will compare favorably with other
cost estimating methodologies (e.g., Building Construction Handbook,
United States Department of Energy Cost Estimating Guide, and the
Association for the Advancement of Cost Engineering's Cost Estimate
Classification System) and produce an estimate of approximately the
same magnitude and confidence level.
    FEMA concluded that the results of its comparison of the CEF to
ASPE Estimating procedures (Levels 1 through 6) show that the CEF
process parallels the ASPE Level 3 process in level of contingency
(design phase scope contingency) and the type and level of design
documentation required. ASPE's method does not specifically incorporate
factors in the estimate, as is done in CEF, but it does allow a
percentage to be used for general conditions in Levels 1 and 2, and
standard estimating industry practice often involves adding a
percentage of base costs to a number of items to put together a total
estimate (e.g., construction cost contingencies, reserve for change
orders, overhead, and profit).
    FEMA indicated that to ensure a high level of confidence in the CEF
estimate, a clear definition of the scope of work is required, along
with active participation by the subgrantee, and that to meet the ASPE
Level 5 criteria using the Panel's plus or minus 10 percent thresholds,
the Panel could consider refining the qualification criteria to include
all large permanent work projects on the basis of all work being done
for an individual subgrantee, rather than on a project-by-project
basis. The FEMA presenter concluded that the CEF falls well within the
range of other industry-accepted cost estimating systems.
    Each panelist voted on the behalf of their respective organizations
and unanimously endorsed the CEF 2.0 and selected the CEF as the
recommended cost estimating methodology for the Public Assistance
program.
    The minutes of both meetings are posted on FEMA's Web site at
http://www.fema.gov/government/grant/pa/meeting.shtm and in the docket
for this rulemaking at www.regulations.gov.

C. Panel Recommendation Report

    The Panel issued a Recommendation Report in October 2002. The
Report is available on FEMA's Web site at http://www.fema.gov/government/grant/pa/exppanel.shtm and in the docket for this rulemaking
at www.regulations.gov. The Panel made nine recommendations in its
report. They are:
1. Official Endorsement of the CEF
    The Panel officially endorsed the CEF 2.0 as the cost estimating
methodology and instrument of the Public Assistance program, predicated
on the following observations: The CEF mandates the use of CSI
Masterformat and estimates are prepared with the CSI number system; the
format of the CEF is designed to serve the unique requirements of the
Public Assistance program; the organized approach of the CEF promotes
consistency in documentation; the CEF has the capability to import and
incorporate cost data from other estimating programs; and the design of
the CEF is flexible and, therefore, superior to other inflexible
estimating systems.
2. Recommendation of Plus or Minus 10 Percent as the Reasonable Floor
and Ceiling Thresholds for Project Cost
    The Recommendation report indicates that the 10 percent thresholds
``best represent accepted engineering and construction industry
standards for estimating project costs.''
3. Close Attention Must Be Made to the Degree of Documentation Detail
Required for Developing CEF Estimates
    The Panel recommended that the highest level of detail that can be
made available from design and/or construction information should be
used to build the CEF estimate. When available, the use of lump sum
competitive bids is discouraged in favor of itemized unit price bids.
If used, lump sum bids require 100 percent full-detailed and complete
drawings and the work activities should be itemized. In either case,
estimate accuracy depends upon the completeness of the bid documents.
The Panel noted that the realistic starting point for developing a cost
estimate for a disaster-damaged facility is at an ASPE Level 3, which
is prepared from not less than 25 percent complete preliminary design
drawings and draft specifications. The purpose of this estimate is to
establish probable costs within the range of available information. The
Panel specified that in order to attain the plus or minus 10 percent
threshold accuracy proposed for a CEF estimate, the Public Assistance
process should progress to a level of detail corresponding to an ASPE
Level 5, which is prepared from not less than 90 percent complete
design drawings and specifications. This level shows the probable
project cost.
4. Important Points That Must Be Considered When Using the CEF
    The Panel noted that early identification of personnel with
discipline-specific, technical expertise is required to accurately
develop a complete scope of work before CEF estimates are generated,
and those estimates should include experienced cost estimators. The
individual assigned to develop the estimate must have discipline-
specific, technical expertise in the formulation of large projects.
Federal, State and local partners must collaborate in good faith when
identifying and documenting the eligible scope of work to repair or
replace a disaster-damaged facility to improve the likelihood of
realizing accurate cost estimates within the floor and ceiling
thresholds. The Panel noted that it is best to take time preparing a
CEF estimate at the outset to improve the chance that it will not have
to be revisited in the future (i.e., if it is done incorrectly, such as
not applying one of the factors). Working with the subgrantee early on
in the disaster response and recovery process is essential to
discussion and agreement on the scope of eligible work and could be
helpful in reducing the need for change orders. Hidden damage and
differing site conditions would be an exception. The Panel recommended
that whenever possible, base costs captured in Part A of the CEF should
be derived from local cost-estimating resources and cost data. The
Panel also recommended that work activities not itemized in the CEF
estimate should be eliminated from the Project Worksheet (e.g., the
deduction for depreciation, insurance recovery, and salvage value,
etc.) before the CEF estimated cost and the eligible cost of the actual
work are compared. The estimator should calculate the plus or minus 10
percent threshold between the CEF estimated cost and the eligible cost
of the actual work.
5. CEF Training Offered at Disaster Field Offices Should Be Made a
Resident Course Offering of FEMA's Emergency Management Institute
    The Panel recommended that FEMA establish a resident CEF training
program at the Emergency Management Institute (EMI) of FEMA's National
Emergency Training Center (NETC). The training would be for Public
Assistance Project Officers, Technical Specialists, FEMA's Public
Assistance Coordinators, Public Assistance Officers, and management
officials responsible for disaster operations.

6. The Lower-Bound Percentile for Factor C.1 (Preliminary Engineering
Analysis Stage) Should Be Revised to More Accurately Reflect the Risk
in Bidding Simple Projects
    As noted in this preamble, the Part C factor accounts for the
budgetary risk associated with project unknowns and complexities in
determining the scope of work. It is included in the CEF estimate to
create an appropriate level of probability for completing the project
within that estimate. The C.1 factor, Design Phase Scope Contingencies,
represents standard cost estimating contingencies based on the design
and engineering process as a function of time. This contingency is
based on the concept that there are typically more unknowns and items
at the schematic design stage than at the final design stage. The
unknowns gradually decrease as the scope of work is defined, details
for completing the work are developed, and the project advances towards
a set of construction drawings and specifications that can be used by a
construction contractor. The project is evaluated to determine the
design phase at the time the estimate is prepared.
    At the preliminary engineering analysis stage, concepts have been
developed but without a significant level of detailing. It is difficult
to accurately quantify work at this stage, and contractors assume a
relatively high level of risk in bidding a project at this stage. CEF
2.0 recommends a factor of 15 to 20 percent (depending on the
complexity of the project). The Panel's recommendation is that the
current lower-bound percentile of 15 percent does not accurately depict
the actual risk of bidding a simple project; the lower-bound percentile
of 7 percent is more realistic.
7. Cost Data Should Be Obtained for Use in Analyzing Results for Each
Large Project Estimated by the CEF
    The Panel noted that the Public Assistance Officer forwards a CEF
Large Project Report to FEMA Headquarters, and this report includes the
CEF estimate of the large project and the actual cost of the completed
large project. To facilitate FEMA's efforts in collecting this
information, the Panel encouraged FEMA to incorporate CEF data
collection into its existing database (the National Emergency
Management Information System (NEMIS)), to allow FEMA the ability to
standardize information reporting requirements, facilitate project cost
data development, and to electronically access data for analysis.
    The Panel emphasized that data collection for estimated and actual
costs should be designed for comparison of like work activities between
the final CEF estimated costs and the eligible costs of actual work. It
is critical that work activities not itemized in the CEF estimate be
eliminated from the Project Worksheet (such as the deduction for
insurance recovery), before comparing the CEF estimated cost and the
eligible cost of the actual work. Only when like items of work exist is
the plus or minus 10 percent threshold between the CEF estimated cost
and the eligible cost of the actual work properly calculated.
8. The Engineering and Design Services Curves (A and B) Should Be
Updated as Soon as Practicable When Received From the American Society
of Civil Engineers (ASCE) Committee on Professional Practice
    As addressed in this preamble's discussion of the Part H factor,
engineering curves are used to estimate the cost of basic engineering
services as a percentage of the estimated construction cost. One of two
curves, Curve A and Curve B, may be used to determine the appropriate
percentage. Curve A applies to projects with above-average complexity
and non-standard design. Curve B applies to projects of average
complexity. In its recommendation, the Panel indicated that the 1975
curves being used by FEMA are lower than current engineering and
construction costs, and that a better estimate of A&E costs is
necessary.
9. Incorporate Lessons Learned Into the CEF
    The Panel recommended that FEMA make periodic revisions and
incorporate lessons learned from previous disasters into the CEF
Instructional Guide and/or worksheet to better ensure that user
guidance remains current.

V. Proposed Rule

A. General

    FEMA accepts the Panel's recommendation to adopt the CEF as the
cost estimating procedure for large permanent work projects. FEMA has
made several changes to CEF 2.0 as a result of the Panel's
recommendations as well as other general improvements made as a result
of using CEF in the field. The new version reflecting these changes is
called CEF 2.1. FEMA also accepts the Panel's recommendation of a 10
percent floor threshold for underruns and a 10 percent ceiling
threshold for overruns.
    Pursuant to DMA 2000, FEMA will apply the CEF to large projects
(projects above $67,500 for fiscal year (FY) 2013) involving permanent
work (Categories C through G) only. These restrictions are implemented
pursuant to section 2(d) of DMA 2000, which specifically limits
applicability of the cost estimation procedures to large projects, and
to projects authorized by section 406 of the Stafford Act, which are
projects involving repairing, restoring, reconstructing, or replacing a
disaster-damaged public facility or private nonprofit facility. FEMA
categorizes such projects as permanent work.
    FEMA proposes to apply the CEF only to projects that are less than
90 percent complete. By the time a project is 90 percent complete, most
of the actual costs of the project are known, rendering little need for
the CEF, which is designed to determine unknown costs. FEMA determines
whether a project is 90 percent complete by dividing the total amount
of the approved invoices for completed eligible work by the total
construction contract award amount for eligible work, and then
multiplying by 100. For example, if the total contract award is
$100,000, and the total amount of approved invoices is $87,000, FEMA
would divide $87,000 by $100,000 to get 0.87, and then FEMA would
multiply 0.87 by 100 to get 87 percent complete.
    Once FEMA completes the CEF estimate, FEMA will attach the CEF
Spreadsheet to the Project Worksheet, along with all supporting
documentation. After FEMA approves the Project Worksheet, FEMA will
obligate the Federal share of the total project cost estimate to the
grantee. The grantee is responsible for drawing down funds from
Smartlink \7\ and for using those funds to make incremental payments to
the subgrantee in accordance with local rules and procedures as work is
completed and documentation is submitted. Once FEMA has established a
total eligible project cost of an approved scope of work, FEMA will not
alter that amount, and any cost overruns or underruns will be addressed
at project closeout. FEMA will not allow for revised scopes of work
because the CEF estimate takes into account the possibility of any such
revisions in the Part C Factor: Construction Cost Contingencies/
Uncertainties (Design and

Construction). The Part C factor accounts for the budgetary risk
associated with project unknowns and complexities in determining the
scope of work. It is included in the CEF estimate to create an
appropriate level of probability for completing the project within that
estimate.
---------------------------------------------------------------------------

    \7\ Smartlink is an electronic money transferring system. When
FEMA obligates funds for an approved Project Worksheet, FEMA
transfers the approved funds to the Smartlink system. The grantee
uses an identification number and password to access the Smartlink
system to draw down the funds to pay the subgrantee.
---------------------------------------------------------------------------

B. CEF Version 2.1

    FEMA proposes in this rulemaking to use CEF version 2.1 as the cost
estimating procedure for determining the total project cost estimate of
a large permanent work project. FEMA has incorporated the Panel's
recommendations and lessons learned from version 2.0 into version 2.1.
    One of the major changes in version 2.1 is the revision of Factor
C.1 (Preliminary Engineering Analysis). In accordance with the Panel's
recommendation, the lower-bound percentile of bidding simple projects
has been changed from 15 percent to 7 percent. For Factor C.2 (Facility
or Project Constructability), the input of percentages is restricted to
a maximum of 7 percent. The recommended range was not higher than 7
percent in CEF 2.0, but the estimator had the option of using a higher
percentage. CEF 2.1 no longer allows the estimator to use a percentage
higher than 7 percent. This will help ensure that the CEF estimates are
consistent and that the estimator chooses factors within the
recommended ranges. If the FEMA estimator has sufficient information to
support costs outside the recommended range, then that cost should be
itemized in Part A rather than use a CEF Factor. For similar reasons,
Factors B.1, C.2 and C.3 have been restricted to their recommended
ranges.
    Regarding Factor C.4 (Economies of scale), Factor D.3 (General
contractor's profit), and Factor G (Applicant's reserve for change
orders), the step functions for these factors have been changed to a
curve function. When using a step function, a certain percentage is
applied to a project based on the dollar amount of the project. This
approach is reasonable, except for projects at the boundary of the
range, which resulted in sharp dollar changes at arbitrary boundaries.
By changing to a curve function, the FEMA estimator can adjust the
factors based on the size of the project in a way that avoids these
sharp dollar changes. For example, for a project of $2,950,000 (the sum
of CEF Parts A, B, C, D.1 and D.2) CEF version 2.0 assigned a general
contractor profit of 7 percent for repair/retrofit work or 6.5 percent
for new construction (for projects from $1.5 million to $3.0 million).
For a similar project of $3,150,000 the general contractor profit
decreases to 5.5 percent for repair/retrofit work and 5 percent for new
work. As shown in Table 2, the increase in project size results in a
substantial decrease in the dollar amount of the profit.
    In CEF version 2.1 the change in profit is continuous as the
project size changes. The percentage continues to decrease but a drop
in dollars at the boundaries is avoided.

                                                     Table 2
----------------------------------------------------------------------------------------------------------------
                                                           Repair/retrofit                New construction
            CEF Version              Project size  -------------------------------------------------------------
                                                       % Profit       $ Profit        % Profit       $ Profit
----------------------------------------------------------------------------------------------------------------
CEF V.2...........................      $2,950,000            7          $206,500            6.5        $191,750
                                         3,150,000            5.5         173,250            5           157,500
CEF V2.1..........................       2,950,000            5.7         167,863            5           146,708
                                         3,150,000            5.5         174,409            4.8         157,509
----------------------------------------------------------------------------------------------------------------

    FEMA has not included the specific recommended percentages for the
factors in the regulatory text. The percentages are listed in the CEF
for Large Projects Instructional Guide V2.1 and in the CEF Spreadsheet.
FEMA did not include them in the regulatory text because application of
a specific percentage is in the discretion of the FEMA estimator. This
allows the FEMA estimator the flexibility to adjust the percentages as
necessary for each specific project. This flexibility will allow the
FEMA estimator to reach the most accurate estimate possible, thus
avoiding the possibility of large overruns or underruns. It also allows
FEMA to adjust the recommended percentages for each factor if necessary
due to lessons learned or any change of circumstances such as: (1)
Inflation, (2) publication by the ASCE of new cost data requiring an
update to the engineering design curves, (3) updated recommendations of
the CEF Expert Panel, or (4) any other changes that affect the
engineering and construction industry.
    Another major change to CEF 2.0 affects the Part H.2 Factor (A&E
Design Cost Curves). FEMA has updated the A&E curves to be consistent
with the Public Assistance Guide (FEMA 322/June 2007) and the 2005 ASCE
data, as recommended by the CEF Panel.
    The Panel recommended that an appropriate amount of time be taken
in preparing the eligible scope of work and in estimating the Part A
costs. FEMA agrees, as this will result in a more accurate CEF
estimate. FEMA has stressed the importance of preparing an accurate
scope of work in the CEF Instructional Guide for version 2.1, as well
as the importance of a detailed and thorough estimate in Part A.
    The Panel also recommended that FEMA identify personnel with
discipline-specific, technical expertise to more accurately develop a
complete scope of work before CEF estimates are generated and to
include experienced cost estimators. FEMA recognizes that the success
of the CEF system is predicated upon the development of an accurate
scope of work in Part A and selection of the appropriate factors in
Parts B through H, and that the professional experience of the
estimator is an important consideration. Members of the CEF team should
be engineers, cost estimators, or technicians with experience in
design, construction, and cost estimating. FEMA generally recognizes
that an individual with cost estimating experience who qualifies as an
Engineer IV, according to the ASCE, or a U.S. Army Corps of Engineers
GS-11, is qualified to use the CEF. The Panel also recommended that
FEMA establish a resident CEF training program at the EMI FEMA's NETC.
FEMA has implemented a training and credentialing program for CEF
users.
    The CEF Instructional Guide for CEF 2.1 is available in the docket
for this rulemaking at www.regulations.gov.

C. Floor and Ceiling Thresholds

1. Establishment of Set 10 Percent Floor and Ceiling Thresholds
    Due to the time that has elapsed between the Panel's Recommendation
Report in 2002 and the publication of this proposed rulemaking, FEMA
contacted individual panel members to

re-validate the 10 percent threshold recommendation.\8\ FEMA received
responses from three panel members; all three re-validated the 10
percent recommendation. FEMA also reached out to individual industry
experts, who also supported the 10 percent recommendation. In addition,
the 10 percent threshold is supported by industry research. See Ray R.
Venkataraman and Jeffrey K. Pinto, Cost and Value Management in
Projects, 43-57 (2008); J. Thomas Tanner, ``Construction Cost
Estimating,'' in Land Development Handbook, 831-847 (2002); Nigel J.
Smith, Project Cost Estimating, 51-59 (1995); Anghel Patrascu,
Construction Cost Engineering Handbook, 75-95 (1988). The responses
from the individual Panel members and the individual industry experts,
as well as the supporting research, are available for viewing in the
docket for this rulemaking.
---------------------------------------------------------------------------

    \8\ FEMA did not request that the Panel validate any other
portion of its recommendation, as the other portions of the
recommendation are not meaningfully effected by the time that has
elapsed.
---------------------------------------------------------------------------

    FEMA finds that the 10 percent threshold is an acceptable threshold
for a CEF version 2.1 cost estimate, which is an ASPE Level 4 cost
estimate. The current Level 4 is equivalent to the Level 5 at the time
of the Panel's recommendation. ASPE has revised its levels since the
Panel's recommendation. In the most recent edition of the Standard
Estimating Practice, there are now five levels rather than six.
Essentially, Levels 1 through 3 are still the same. Level 4 (project
control) was removed, and the old Level 5 (construction document)
became the new Level 4, and the old Level 6 (bid) became the new Level
5. The Panel recommendation that the CEF be a Level 5 estimate, which
is when the level of design is 90 percent complete, would now be a
Level 4 estimate.
    For an accurate estimate, estimators need a detailed scope of work,
detailed project specifications, drawings, diagrams, floor plans,
elevations, and other similar information about the project. The more
information the estimator has to define the project, the more accurate
the estimate will be. FEMA's CEF 2.1 Instruction Guide stresses to the
FEMA estimator the importance of gathering these materials before
completing an estimate.
    The Panel also stressed the importance of certain items that would
ensure that the estimator is able to produce a Level 5 (now Level 4)
estimate. The Panel recommended that the FEMA estimator should be an
experienced estimator, with discipline-specific, technical expertise,
and that the estimator take time preparing a CEF estimate at the outset
to improve the chance that it will not have to be revisited in the
future. The Panel also recommended that the FEMA estimator should work
with the subgrantee early on in the disaster response and recovery
process to determine an accurate, detailed, and clearly defined scope
of eligible work, and to make use of the greatest degree of design and/
or construction documentation detail. These recommendations are
incorporated into CEF 2.1 and ensure that the CEF estimate is a Level 4
estimate (as per current ASPE levels). If this rule is finalized, the
Instructional Guide will be revised to include a section on the
application of the floor and ceiling thresholds.
    The Panel emphasized that work activities not itemized in the CEF
estimate should be eliminated from the Project Worksheet (such as the
deduction for insurance recovery) before the CEF estimated cost and
actual costs are compared. The Panel stressed that the plus or minus 10
percent thresholds cannot be applied except when there are like items
of work in the CEF estimate and the determination of actual costs. When
FEMA calculates the actual cost, it will only include those items that
were included in the CEF estimate. This issue will be addressed in the
Instructional Guide so that there is a valid comparison between the CEF
estimate and the actual cost at the project reconciliation phase.
2. Ceiling Threshold
    The statutory language establishing a ceiling threshold under
section 406(e) of the Stafford Act, as amended by DMA 2000, states that
if the actual project cost is greater than the ceiling percentage of
the estimated cost, the President may reimburse a portion of the actual
cost that exceeds the estimated cost.
    There are at least two interpretations of the provision in the
statute stating that FEMA may reimburse a ``portion of the actual
cost.'' It could be interpreted to mean that if the actual costs exceed
the ceiling threshold: (1) FEMA may reimburse the Federal share of any
amount that exceeds the CEF estimate, or (2) FEMA may reimburse the
Federal share of any amount that exceeds the ceiling threshold. The
first interpretation views the provision as a de minimus statute,
meaning that if FEMA's estimate is fairly accurate (the amount of the
overrun is less than the ceiling percentage) then there is no need for
the administrative chore of adjusting that estimate, but if FEMA's
estimate is in error by more than the ceiling percentage, then
adjustment is necessary. With the first interpretation, FEMA would
share all of the cost if the estimate is so inaccurate that it is in
error by more than the ceiling percentage. The second interpretation is
that FEMA may reimburse any amount of the Federal share over the
ceiling threshold. This is the interpretation of the CEF Panel, and it
ensures that the subgrantee has an interest in keeping costs down
during a project. If FEMA were to determine that ``a portion of the
actual cost'' means any eligible costs over the CEF estimate, then as
soon as the subgrantee surpassed the CEF estimate, it would have an
incentive to spend more to go over the ceiling threshold in order to
avoid paying for the portion that was over the CEF estimate but was
less than the ceiling threshold.
    Thus, if the actual costs exceed the CEF estimate, but are under
the ceiling threshold, FEMA would not reimburse the subgrantee for the
excess amount. If there is a 10 percent ceiling threshold, the CEF
estimate is $100,000, and the actual costs are $125,000 (which is
$15,000 over the ceiling threshold of $110,000), then FEMA may
reimburse the Federal share of any portion of the $15,000 excess
amount.
3. Floor Threshold
    The statutory language establishing a floor percentage (referred to
by FEMA as the floor threshold) under section 406(e) of the Stafford
Act, as amended by DMA 2000, states that if the actual project cost is
less than the estimate but more than or equal to the floor percentage
of the estimated cost, the applicant may use the excess for mitigation
activities. If the actual project cost is less than the floor
percentage of the estimated cost, the applicant must return the
difference.
    Under paragraph (B)(i), if actual costs are less than the CEF
estimate but are equal to or above the floor threshold, the subgrantee
may keep the amount that is equal to or above the floor threshold.
Thus, if the floor threshold is 10 percent, and the CEF estimate is
$100,000, then the floor threshold equals $90,000. If the actual costs
are between $90,000 and $99,999.99, the subgrantee may keep the excess
amount. For example, if the actual cost is $90,000, the subgrantee may
keep the excess $10,000 and use it ``to carry out cost-effective
activities that reduce the risk of future damage, hardship, or
suffering from a major disaster.'' FEMA interprets ``cost-effective
activities that reduce the risk of future damage, hardship, or
suffering from a major disaster'' to mean activities that mitigate risk
to undamaged elements of disaster-

damaged facilities, activities that mitigate risk to undamaged elements
of undamaged facilities, and activities that mitigate risk of future
hardship and suffering. Although the CEF Panel recommended that the
mitigation activities be limited to section 406 mitigation (i.e.,
mitigation authorized under section 406 of the Stafford Act) and 44 CFR
206.226(e), FEMA notes that this is not a compelling incentive to keep
costs down because a subgrantee would already have the ability to use
section 406 hazard mitigation funds regardless of whether the
subgrantee has a CEF underrun. The Stafford Act's CEF provision did not
specify that cost-effective activities must be limited to section 406
mitigation activities, because it includes reducing the risk of
``future damage, hardship and suffering from a major disaster.''
Therefore, FEMA is interpreting such cost-effective activities broadly
to include activities that mitigate undamaged elements of any disaster-
damaged eligible facility (not just the facility that is the subject of
the grant award), activities that mitigate undamaged elements of
eligible undamaged facilities, and activities that would mitigate
future hardship and suffering. FEMA interprets hardship and suffering
to include conditions of life that are difficult to endure and that
could result from a future major disaster. Conditions of life that are
difficult to endure include lack of food, water, safe shelter, and
medical care.
    Types of activities that would mitigate undamaged elements of
disaster-damaged facilities include installing shutters over undamaged
windows similar to shutters installed over damaged windows,
strengthening undamaged columns after seismic events, upgrading a roof
in an area subject to hurricane-force winds, elevating critical
facility components, such as electrical panels and heating,
ventilation, and air-conditioning (HVAC) units, and adding berms and
floodwalls for floodproofing. Types of activities that would mitigate
undamaged facilities include flood proofing first floors, adding berms
or floodwalls around public facilities in floodplains (e.g., sewage
treatment plants), demolishing facilities, upgrading a roof in an area
subject to hurricane-force winds, reinforcing designated emergency
shelters, enlarging spillways on dams subject to overtopping by
floodwaters, and raising bridges to prevent overtopping by allowing
higher flows. Activities that would mitigate future hardship and
suffering include purchasing equipment such as emergency generators and
emergency vehicles (e.g., fire trucks and related personal protective
equipment, and ambulances), recovery planning (e.g., infrastructure
assessments and risk analyses), installing storm warning systems such
as weather/tornado warning sirens, providing training related to
emergency response and recovery training courses that would be
beneficial to communities, training for search and rescue teams,
offsetting costs to establish debris recycling programs, constructing
or rehabilitating designated shelters or safe rooms such as safe rooms
in high incident tornado areas and inside critical facilities (e.g.,
schools, hospitals, government buildings, etc.), evacuation plans and
signage in hurricane prone areas, earthquake detection and warning
devices, and new or replacement equipment for search and rescue teams.
    Under this proposed rule, the subgrantee must submit a separate
Project Worksheet for FEMA approval before it may use a CEF underrun
for a cost-effective activity. The subgrantee must submit the Project
Worksheet within 90 days of identifying the project underrun, and the
Project Worksheet must identify all projects under the same major
disaster declaration with underruns that would be used to fund the
cost-effective activity(ies). As with any other grant, if FEMA approves
the proposed use of the subgrantee's underrun, the project would be
subject to the applicable grant administration regulations at 44 CFR
part 13.
    Paragraph (B)(ii) of section 406(e) of the Stafford Act, as amended
by DMA 2000, applies to situations where the actual cost is less than
the floor threshold. There are two possible interpretations of
paragraph (B)(ii), which states that if the actual costs are less than
the floor threshold, the subgrantee must ``reimburse [FEMA] in the
amount of the difference.'' The ``amount of the difference'' may mean
either: (1) The difference between the actual cost and the CEF estimate
(i.e., the subgrantee would have to return the entire amount of the
underrun), or (2) the difference between the actual cost and the floor
threshold (i.e., the subgrantee would return the amount that is less
than the floor threshold and keep the amount that is above the floor
threshold). For example, under the first interpretation, if the CEF
estimate is $100,000 and the actual cost is $70,000, the subgrantee
would have to return the entire difference between the actual cost and
the estimated cost, which is $30,000. Under the second interpretation,
using the same fact pattern, the subgrantee would have to return the
difference between the actual cost ($70,000) and the floor threshold
($90,000), which is $20,000. The subgrantee could keep the $10,000
above the floor threshold to use for cost-effective activities.
Paragraph (B)(ii) does not contain the provision that excess funds may
be used for cost-effective activities, however. That provision is only
in paragraph (B)(i). Paragraph (B)(i) only applies when the actual cost
is greater than or equal to the floor threshold. However, the CEF Panel
endorsed the second interpretation, and FEMA's position is that the
second interpretation is in keeping with the spirit and objective of
the statute that excess funds be used for cost-effective activities to
reduce the risk of future damage, hardship, or suffering from a major
disaster. This is a logical interpretation of the statute, and within
FEMA's discretion. It does not make sense to let the subgrantee apply
the entire amount of the underrun to such cost-effective activities if
the underrun is small, but to make the subgrantee return the entire
amount of the underrun if the underrun is large. This would not be an
incentive to keep costs low, and it would not encourage cost-effective
activities to mitigate future loss. Therefore, FEMA proposes to adopt
the second interpretation and with a restriction, for the sake of
consistency with paragraph (B)(i), that excess funds greater than or
equal to the floor threshold must be used for certain cost-effective
activities.
4. Improved Projects
    When performing permanent restoration work on a disaster-damaged
facility, a subgrantee may decide to use the opportunity to make
improvements to the facility while still restoring its pre-disaster
function and at least its pre-disaster capacity. For example, the
subgrantee may decide to replace a firehouse that originally had two
bays with one that has three. Projects that incorporate such
improvements are called improved projects. An improved project could be
either a small or large project and must meet Public Assistance program
requirements.
    Funding for such projects is limited to the Federal share of the
costs that would be associated with repairing or replacing the
disaster-damaged facility to its pre-disaster design, or to the actual
costs of completing the improved project, whichever is less. The CEF is
only used to estimate the repair or replacement cost of the original
facility to its pre-disaster design. Any additional costs not required
by the original eligible scope of work are not eligible. In this
proposed rule, the floor and ceiling thresholds are applied to the CEF
estimate of the

eligible scope of work. Reimbursement for cost overruns above the
ceiling threshold is available only for projects where the approved
eligible costs are clearly tracked and documented separately from
improvement costs. If the costs cannot be separately documented, then
funding for the improved project will not exceed the Federal share of
the CEF estimate. FEMA may provide assistance with hazard mitigation
under Section 406 of the Stafford Act, if the improved project is not a
completely new facility.
5. Alternate Projects
    Alternate projects, authorized under section 406(c) of the Stafford
Act and 44 CFR 206.203, may be approved by FEMA in any case in which a
subgrantee determines that the public welfare would not be best served
by repairing, restoring, reconstructing, or replacing the disaster-
damaged facility. If a subgrantee chooses to do an alternate project,
FEMA would award a portion of the funding that would have been awarded
for the original project for use in the repair, restoration, or
expansion of another facility, to construct a new facility, or to fund
hazard mitigation measures in the disaster-affected area.
    Funding for alternate projects is limited to 90 percent (for public
facilities) or 75 percent (for eligible private nonprofit facilities)
of the Federal share of the Federal estimate of the cost to repair,
restore, reconstruct, or replace the disaster-damaged facility and of
management expenses. Alternate project funding would be based on the
CEF estimate to repair, restore, reconstruct, or replace the original
disaster-damaged eligible facility. Any additional costs not required
by the original eligible scope of work would not be eligible. FEMA
would not apply the 10 percent threshold to alternate projects as the
Stafford Act only provides for use of these thresholds for the repair,
restoration, reconstruction, or replacement of a facility damaged or
destroyed by a major disaster. Therefore, the threshold is not
applicable to alternate projects.
    FEMA would award the subgrantee 90 percent of the Federal share of
the estimate of the original project (or 75 percent of the Federal
share of the estimate if it was an eligible private nonprofit facility)
to do the alternate project. FEMA would not do a new or revised
estimate or scope of work for the alternate project itself because, at
its option, a subgrantee can apply the funding, the amount of which is
based on the estimate of the original project, to another project. The
alternate project may cost much more than the original project, but
FEMA only awards the 90 percent or 75 percent of the Federal share of
the estimate of the original project. FEMA, however, would only
reimburse for actual costs.
    For example, a subgrantee decides that instead of rebuilding the
disaster-damaged facility (the original project) estimated at $100,000,
it wants to build a school (the alternate project) several miles away
from the original project site, which is going to cost $4 million. FEMA
would award the subgrantee 90 percent of the Federal share (or 75
percent of the Federal share if it's a private nonprofit facility) of
the original project estimate of $100,000. So, if the Federal share is
75 percent, then the Federal share of $100,000 is $75,000. Ninety
percent of $75,000 is $67,500. FEMA would award $67,500 for the
alternate project.
    The Stafford Act does not provide for Federal funding to cover the
$4 million project cost, which is in excess of the $100,000 project
estimate to repair the original disaster-damaged facility. That is why
FEMA does not prepare a scope of work or a revised estimate for the
alternate project itself. Once FEMA obligates the money for the
alternate project, it does not do any further monitoring of the
project, except to make sure that the subgrantee uses the funds to
build the alternate project, along with the other general grant
requirements that FEMA must ensure that subgrantees meet (such as
environmental and historic preservation). The subgrantee cannot request
cost overruns under 44 CFR 206.205, because FEMA is not funding the
entire project, but rather a percentage based on the Federal estimate
of the cost to repair, restore, reconstruct or replace the original
disaster-damaged eligible facility. If there is an underrun, FEMA will
deobligate funds at project reconciliation and close-out.
    The amendment made by DMA 2000 that provides for modification of
eligible costs outside of the floor and ceiling only applies to ``the
actual cost of repairing, restoring, reconstructing, or replacing'' a
disaster-damaged facility. Therefore, it is not applicable to alternate
projects undertaken pursuant to section 406(c). Under that section the
subgrantee must determine that it will not repair, reconstruct, or
replace its disaster-damaged facility, and is then limited to receiving
a certain percentage of the Federal estimate of the repair,
reconstruction, or replacement of that original facility. FEMA does not
have authority to modify that estimate based on the floor and ceiling
thresholds.

D. Appeals

    As proposed, a subgrantee may appeal any FEMA determination made
under the CEF. (See proposed new 44 CFR 206.211.) This includes a
determination of the CEF estimate (which can be the original estimate
and any revised estimates based on revised scopes of work, which are
reflected in new versions of the Project Worksheet), the determination
of the amount of actual costs, and the determination of the amount of
any overrun or underrun. The appeal procedures for the Public
Assistance program (44 CFR 206.206) would apply to any CEF appeals.

E. Consideration of Phased Funding

    As proposed, the rule would follow FEMA's current procedure,
whereby the Agency works with an applicant to develop a Project
Worksheet that includes a scope of work and cost estimate for the full
project. FEMA bases the amount of the Project Worksheet on the
Estimated Base Cost in Part A, with adjustments using the non-
construction cost factors B through H. As noted above, preparing a
precise base cost estimate in Part A is critical to the accuracy of the
total project estimate, as all other percentages such as initial
planning and design, contingencies, and overhead and profit, are based
upon the cost estimate in Part A. Generally, when FEMA approves that
Project Worksheet, it obligates the full amount of the cost estimate
for the entire project, from initial planning and design all the way
through construction. For certain large or complex projects, this can
result in the commitment of large amounts of money that may not be used
for months or even years until the project is ready to enter into the
construction phase. To provide for better overall financial and grant
management, and to improve the quality of the estimate in Part A, FEMA
may fund certain large and complex projects in two phases: (1) planning
and design; and (2) construction and closeout. Under this process, FEMA
would work with the applicant as it currently does to develop an
initial estimate of the entire project and an estimate of the funding
necessary for the planning and design phase of the project (CEF factors
H.1 and H.2). FEMA would then approve one Project Worksheet to obligate
the funding for the planning and design phase. FEMA and the applicant
would use the results of the planning and design phase to develop a
more accurate estimate for the construction phase, after which FEMA
would approve a second Project Worksheet to obligate funding for the
construction phase. Essentially, this

change would maintain Part A as currently written, but fund factors H.1
and H.2, limited to the costs required for planning and design, as a
separate subgrant to the applicant. Once the planning and design phase
was complete, FEMA would then run the full CEF and provide a grant
including Parts A-H for the construction and closeout. FEMA is not
proposing regulatory text at this time; however, FEMA is seeking public
comment regarding the efficacy and feasibility of such an approach.

F. Effective Date

    If FEMA publishes a final rule implementing the CEF, the rule will
be effective 60 days after the date of publication of the final rule in
the Federal Register. It will apply to large permanent work projects
authorized under emergency or major disaster declarations issued on or
after the effective date.

VI. Regulatory Analyses

A. Executive Order 12866, Regulatory Planning and Review and Executive
Order 13563, Improving Regulation and Regulatory Review

    Executive Orders 13563 and 12866 direct agencies to assess the
costs and benefits of available regulatory alternatives and, if
regulation is necessary, to select regulatory approaches that maximize
net benefits (including potential economic, environmental, public
health and safety effects, distributive impacts, and equity). Executive
Order 13563 emphasizes the importance of quantifying both costs and
benefits, of reducing costs, of harmonizing rules, and of promoting
flexibility. FEMA has prepared and reviewed this rule consistent with
Executive Orders 13563 and 12866. The annual impact (in 2010 dollars)
is estimated at $11.65 million in net transfers from FEMA to
subgrantees. Over a 10-year period from 2013 through 2022, the total
net transfers would be $116.5 million (undiscounted), or $71.5 million
(discounted at 7 percent), or $93.6 million (discounted at 3 percent).
This rule is not an economically significant regulatory action under
section 3(f)(1) of Executive Order 12866.
    FEMA provides grants to State and local governments, Indian tribes,
and to certain private non-profit (PNP) organizations for debris
removal, emergency protective measures, and the repair, restoration,
reconstruction, or replacement of facilities damaged in Presidentially-
declared major disasters. This proposed regulation would allow FEMA and
subgrantees to better estimate the actual cost to repair or replace
eligible disaster-damaged facilities.
    Public Assistance projects are processed as either small or large
projects. If the project cost is less than the annually updated cost
threshold amount ($67,500 for FY2013) the project is processed as a
small project. If the project cost equals or exceeds the threshold the
project is processed as a large project. This proposed rule would only
affect large projects. Because of the nature of most large projects,
work typically is not complete at the time of project approval;
therefore, FEMA obligates grants based on an estimated cost. Upon
completion of a large project, a subgrantee submits documentation to
account for all incurred costs. The grantee is responsible for ensuring
that all incurred costs are associated with the approved scope of work
and for certifying that work has been completed in accordance with FEMA
standards and policies. The grantee then submits documentation of
project costs to FEMA for review. FEMA may conduct a final inspection
as part of this review. Once the review is complete, FEMA determines
whether funds should be obligated or de-obligated for the project.
    This rule proposes to adopt the cost-estimating procedures
recommended by the expert panel. When a grantee/subgrantee applies for
a grant to fund a Public Assistance project, FEMA estimates the cost of
the project to determine how much the grant award should be. FEMA uses
the CEF to do that estimate. Implementation of the CEF via this rule
would not create any impacts on grantees/subgrantees because FEMA has
already been using the CEF to do these estimates since 1994. In that
year, after the Northridge California earthquake, FEMA began to develop
CEF version 1.0, referred to as the Grant Acceleration Program (GAP).
The Northridge earthquake occurred in a large metropolitan area, so
much of the damage was to large, complex buildings. The damage was
often not apparent during the initial inspection (which is common with
earthquake damage), and there were many cases of serious underlying
structural damage that required sophisticated engineering analysis. To
provide adequate funding for subgrantees to cover the repair to this
damage earlier in the grant process, FEMA established a voluntary
program using the GAP method that allowed participants to receive a
fair and reasonable fixed budget amount up-front, thereby accelerating
the normal funding procedure (hence the name Grant Acceleration
Program). The main drawback to GAP was that the subgrantee could not
request additional funding, which was problematic if there are large
cost overruns. GAP was modified to address this and other problems, and
eventually evolved into a new version of the cost estimating format in
1998, which is referred to as CEF 2.0.
    CEF 2.0, used until 2009, provided a uniform method of estimating
costs for large projects. It accounted for costs incurred across the
entire spectrum of eligible work (from design to project completion).
Under the CEF 2.0, FEMA obligated the entire amount of the Federal
share of the estimate up-front to the grantee, and payments were made
by the grantee to the subgrantee in increments as items of work were
completed or near completion (i.e., less than a week from completion).
The subgrantee could request additional amounts for cost overruns
pursuant to 44 CFR 206.204. CEF 2.1, issued in 2009, is very similar to
CEF 2.0, with a few minor differences.
    CEF 2.1 (as was CEF 2.0) is made up of various parts, categorized
as parts A through H, that are compiled by a FEMA estimator (who is
either the Public Assistance Project Specialist or is supervised by the
Public Assistance Project Specialist) in a CEF Spreadsheet. The main
part of the CEF is Part A, which is the base cost (construction costs)
required to complete the approved scope of work. A FEMA cost estimator
uses a Part A worksheet to determine the estimated base cost. After
estimating the Part A base cost, the FEMA estimator applies a series of
factors (referred to as Parts B through H) to the Part A base cost
estimate. With the exception of Part F, these factors are percentage
factors. For example, if a Part B percentage factor is 2 percent, the
estimator adds 2 percent of the Part A estimated base cost to the total
estimate. Sometimes the CEF provides a recommended range of percents
for each factor, such as 3 to 6 percent, and it is up to the discretion
of the FEMA estimator which percentage to apply, depending on the
specifics of the project. The FEMA estimator must detail why he or she
chose a specific percentage in a special section of the CEF worksheet
designed for this purpose. This flexibility in the CEF methodology
allows it to more accurately estimate the many different types of large
projects under the Public Assistance program.
    The Part B through H factors represent the nonconstruction costs
(also referred to as construction-related costs), and are used only if
the costs represented by the Parts B through H factors are not

otherwise itemized in Part A. The costs represented by the factors are
allowable project costs under 44 CFR part 13, Uniform Administrative
Requirements for Grants and Cooperative Agreements to State and Local
Governments. The cost estimator adds the estimated nonconstruction
costs to the Part A base construction cost using a CEF Worksheet to
estimate the total cost of completing the project. This ``forward-
pricing'' methodology provides an estimate of the total eligible
funding at the beginning of the project. The estimate, which FEMA uses
to approve funds for the project, allows the subgrantee to more
accurately manage the budget with a greater degree of confidence.
    As noted above, CEF 2.1 was issued in 2009. It is very similar to
CEF 2.0, but with a few substantive changes. One of the main changes in
CEF version 2.1 was the revision of Factor C.1 (Preliminary Engineering
Analysis). In accordance with the recommendation of the expert panel,
the lower-bound percentile of bidding simple projects was changed from
15 percent to 7 percent. For Factor C.2 (Facility or Project
Constructability), the input of percentages was restricted to a maximum
of 7 percent. In CEF 2.0, the recommended range was not higher than 7
percent, but the estimator had the option of using a higher percentage.
CEF 2.1 no longer allows the estimator to use a percentage higher than
7 percent. This will help ensure that the CEF estimates are consistent
and that the estimator chooses factors within the recommended ranges.
If the FEMA estimator has sufficient information to support costs
outside the recommended range, then that cost should be itemized in
Part A rather than use a CEF Factor. For similar reasons, Factors B.1,
C.2 and C.3 have been restricted to their recommended ranges. Regarding
Factor C.4 (Economies of scale), Factor D.3 (General contractor's
profit), and Factor G (Applicant's reserve for change orders), the step
functions for these factors were changed to a curve function. When
using a step function, a certain percentage is applied to a project
based on the dollar amount of the project. This approach is reasonable,
except for projects at the boundary of the range, which resulted in
sharp dollar changes at arbitrary boundaries. By changing to a curve
function, the FEMA estimator can adjust the factors based on the size
of the project in a way that avoids these sharp dollar changes.
    As described above, FEMA has used the CEF for several years, and
therefore, adoption of the CEF by this rule would have no additional
economic impact. The qualitative benefits and efficiencies this
proposed rule provides include the fact that subgrantees would now have
the incentive to finish a project at or below the estimated costs
because they can use the underruns (up to 10 percent) for other
eligible projects. In addition, subgrantees would have a clear vision
of their project and can budget up front for their project. Currently,
subgrantees do not do this because they can get reimbursed for any cost
overruns throughout the project. Under the proposed rule, subgrantees
would absorb any cost overruns (up to 10 percent), and would not get
reimbursed for any remaining cost overruns until the end at grant
closeout.