EPA Wins Another Challenge To Indirect Oversight Costs Imposed Under Superfund

Article by Gregory A. Bibler, Robert L. Brennan and Charlotte L. Bednar

In August, a federal district court upheld application of the Environmental Protection Agency's controversial revised methodology for computing CERCLA response costs, awarding EPA over $11 million in indirect costs. In United States v. W.R. Grace and Co. 2003 U.S. Dist. LEXIS 15928 (D. Mont. 2003), the court rejected W.R. Grace's arguments that EPA's methodology was flawed and that EPA was asking the company to pay for more than the costs attributable to its site. In ruling against W.R. Grace, the court endorsed EPA's application of a region-wide indirect cost rate which W.R. Grace had challenged as excessive and inconsistent with generally accepted accounting standards.

While W.R. Grace represents the first judicial decision reviewing application of EPA's new indirect cost assessment calculus, it extends a line of federal court decisions that have upheld large awards under CERCLA for costs over and above site-specific labor and cleanup costs.

This Advisory reviews application of EPA's indirect cost recovery policy and discusses the methods by which responsible parties may still limit or challenge indirect costs.

What Are Indirect Costs?

Under CERCLA, EPA is authorized to recover both direct and indirect costs in connection with site remediation.

In general, "indirect costs" are costs of administering the Superfund program that cannot be identified with any particular site. They include compensation and benefits for personnel, travel, rent, communications, utilities, contracted services and supplies necessary for EPA's administrative and non-site Superfund activities. In contrast, "direct costs" are such costs as assessing, investigating and cleaning up a particular site, site-related oversight and enforcement activities, the costs of classifying a site, and research and development costs. These categories and EPA's revised methodology for calculating indirect costs were first announced in a June 2000 document entitled Guidance on Exercising CERCLA Enforcement Discretion in Anticipation of Full Cost Accounting Consistent With the "Statement of Federal Financial Accounting Standards No. 4". 65 Fed. Reg. 35,339 (June 2, 2000).

EPA's Revised Policy

Prior to the June 2000 guidance document, EPA calculated the indirect costs of a particular site as a percentage of the labor hours for that site. However, the agency revised its methodology in response to the Federal Financial Management Improvement Act of 1996 which directed all federal agencies to adopt cost accounting methods that "consistently and accurately" report the "full costs" of their activities.

Under its new policy, EPA identifies a "pool" of indirect costs to allocate to sites. The pool consists of: (i) agency-wide costs such as facilities and human resources management, (ii) the regional administrative, support, and management costs for all regions combined; and (iii) the regional and nationwide costs of running the Superfund program. Once the pool has been established, EPA calculates the percentage of nationwide...