The Robert T. Stafford Disaster Relief and Emergency Assistance Act (Stafford Act) authorizes FEMA (Federal Emergency Management Agency) to provide grant assistance to State or local governments for the repair, restoration, reconstruction, or replacement of a public facility damaged or destroyed by a major disaster and for associated expenses incurred by the government. FEMA's regulations concerning cost allowability are based on OMB Circular A-87.
St. Tammany Parish Government, Louisiana claimed reimbursement of costs for hiring lawyers and accountants to analyze, defend, and ultimately settle claims against the Parish by debris removal contractors. The Parish maintained that such costs were allowable, FEMA maintained that such costs were categorically unallowable. So, the dispute wound up at the CBCA (Civilian Board of Contract Appeals). The CBCA agreed with the Parish. The CPCA stated that FEMA can reimburse legal and accounting fees in appropriate circumstances (the costs are "allowable" in principle) but the costs must still be allocable and reasonable.
FEMA's argument hinged on 44 CFR 13.36 which states that grantees "alone will be responsible, in accordance wiht good administrative practice and sound business judgment, for the settlement of all contractual and administrative issues arising out of procurements." The Board rules that this particular regulation was not a cost-reimbursement regulation, and "responsible" here does not mean "financially responsible".
This is not the first time that we've seen or heard of agencies pulling regulations out of context to make their point. Unfortunately, it often works, especially at small contractors with limited resources or experience to research and counter a a Government position.
You can read the entire CBCA decision here.