The Puerto Rico Electric Power Authority (PREPA) has announced that it has cancelled the $300 million no-bid contract that it had awarded to an obscure Montana power company called Whitefish Energy.
There have been a lot of allegations made against the company involved but rather than attacks on the ability of company to perform, they seem a lot more like an effort to tie Interior Secretary Ryan Zinke to the contract–he was raised in the same town as the guys running Whitefish–and take him out. With both Zinke and the White House running from the deal, it was doomed.
While a lot of the provisions of the contract are unusual, the fact is that the circumstances surrounding this contract were anything but usual. First, as I’ve posted earlier, PREPA is in the midst of a mulit-billion-dollar bankruptcy. To cut personnel costs they’ve, over a period of years, eliminated their most experienced, and expensive, staff, so they simply don’t have the personnel, in quantity or quality, to repair the damage that is done. The fact that this was a no-bid contract was driven by the fact that no one was interested in working with PREPA and then not get paid. Wanting to get paid really isn’t a scandal in the private sector, and wanting to work of clients who might be able to pay you is considered to be a manifestly good thing.
NPR has a good run down, on the controversy but they really don’t seem to underestand what they are writing about and could have filled in some of the controversies by talking to anyone with a little experience in government contracting:
Much of the controversy that has surrounded the contract has focused on the high rates Whitefish is charging for labor. The contract shows those labor rates are pricey indeed: $240 an hour for a general foreman and $227 for a lineman. The per diems are also expensive: almost $80 a day for meals, and $332 a day for lodging. Employee flights are billed at $1,000 each way.
For subcontractors, the bulk of Whitefish’s workforce, the prices go even higher. A general foreman costs $336 an hour and a lineman, $319
The contract reads like a fairly standard time and materials contract, that is, where you agree upon a price list of costs you will charge rather than the price of the completed project. Nothing unusual about that. There is no way Puerto Rico has enough information to develop a firm-fixed price contract nor would there be anyone insane enough to take it. The only unusual thing is that Puerto Rico agrees to approve invoices within seven days of submission. I can see why Whitefish wanted this because PREPA is bankrupt and they don’t want to get too exposed. Also, the quick payments will let Whitefish have a steady stream of client revenue rather than using their own funding sources.
I don’t know what the hourly rate is for guys who do this work but when your company doesn’t have them, they have the hire them (Whitefish has two full time employees). The staff they hire will be paid a huge premium because you are asking guys to give up a job they have for another job that is only going to last a year or so. The rest you hire by hiring subcontractors. Those subcontractors may very well have hired another subcontractor. You may not know that because you decided to not ask or the sub you hired was less than candid with you. In addition, this hurricane season has driven up the cost of anyone in the industry who is willing to chase hurricane recovery work. So what you have is the hourly rate loaded with the allowable Profit, Fringe, Overhead, and General & Administrative (G&A) accounts.
Let me give you an example of what the at can look like, I was a senior vice president of a 25-person advertising and public relations agency that did a lot of government work. On a project in which we were allowed a 6% (which is very high in government contracting) profit margin, we loaded the hourly rate billed to the government by a factor of 2.2. So an entry level account assistant that got paid $10/hr was legitimately billed to the government client at $22. If we were hired by a larger firm, then the rates were loaded again by the Profit and the G&A of the prime contractor, so that $10/hr person started pushing $40/hr on the billing end.
Same way with flights. You don’t bill the government at cost for plane fare. You are authorized to load them with Profit and with G&A rates.
These prices are also bid prices. In every contract I’ve been involved in you bid based on averages but you get paid based on invoices submitted. Those hourly rates and plane fares are not a price list, they are estimates to develop an overall ceiling cost for the project.
So, I’m pretty underwhelmed by all of this but the Governor of Puerto Rico was facing a firestorm and demanded PREPA cancel the deal.
“Following the information that has emerged, and with the goal of protecting public interest, as governor I am asking government and energy authorities to immediately activate the clause to cancel the contract to Whitefish Energy,” Rosselló said in a statement to reporters.
This is not a cheap decision. PREPA is legally obligated to pay for all work done, for all contracts signed by Whitefish to do this contract, and for any cancellation fees that Whitefish incurs. So it is safe to say this will cost some tens of millions of dollars.
Now, six weeks after the Hurricane Maria, there is no one hired to repair Puerto Rico’s infrastructure. I suppose we’ll see how that works out now.