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Audit of U.S. Army Corps of Engineers Oversight of Contracts for Repair and Restoration of the Electric Power Grid in Puerto Rico DODIG-2019-128

Audit

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Publicly released: October 3, 2019

Objective

We determined whether the U.S. Army Corps of Engineers (USACE) properly monitored contractor labor hours and accurately reviewed and paid invoices for the Puerto Rico power grid repair and restoration contracts in accordance with Federal and DoD guidance.

Background

On September 20, 2017, Hurricane Maria severely damaged the Puerto Rico power grid and left nearly all of Puerto Rico’s 1.5 million electric customers without power or communications. USACE Huntsville awarded two time-and-materials contracts to one contractor for the repair and restoration of the Puerto Rico power grid. Contract W912DY-18-F-0003 (F-0003), awarded on October 15, 2017, was valued at $505.8 million as of November 2018. Contract W912DY-18-F-0032 (F-0032), awarded on December 1, 2017, was valued at $276.4 million as of November 2018.

USACE Jacksonville awarded a time‑and-materials contract to a second contractor for the repair and restoration of the Puerto Rico power grid. Contract W912EP‑18-C-0003 (C‑0003), awarded on October 18, 2017, was valued at $523 million as of the contract modification in May 2018.

According to Federal and DoD guidance, time-and-materials contracts are the least favorable Government contract type because they provide no positive profit incentive to the contractor for cost control or labor efficiency. The Federal Acquisition Regulation requires appropriate Government surveillance of contractor performance under time-and-materials contracts to give reasonable assurance that efficient methods and effective cost controls are being used by the contractor. The Federal Acquisition Regulation also states that a contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles. The contracting officer may disallow all or part of claimed costs that are inadequately supported or improperly charged.

Findings

We determined that USACE Huntsville did not adequately monitor contractor labor hours worked or accurately review invoices to ensure contractor invoices corresponded to actual work performed on its two power grid repair and restoration contracts. Specifically, USACE Huntsville contracting officials did not:

  • provide appropriate surveillance of contractor performance to verify that labor hours billed were accurate;
     
  • obtain adequate supporting documentation for labor hours billed before approving invoices for payment, such as individually certified timesheets, support for work that employees performed before their arrival in Puerto Rico, and support for work performed and overtime charged that was not specifically for power grid repair and restoration work;
     
  • verify whether contractor employees met qualifications for labor categories included in the contracts before approving invoices for payment; or
     
  • verify whether contractor employees exceeded the weekly labor hours allowed by USACE policy before approving invoices for payment.

This occurred because USACE Huntsville contracting officials did not have quality assurance procedures or written invoice review procedures that ensured adequate Government oversight of contractor labor hours worked and adequate documentation from the contractor to support labor hours billed before payment.

As a result, USACE Huntsville did not know whether contractor labor costs paid on 11 invoices, valued at $258.9 million, were allowable in accordance with the terms of the contracts. Based on our testing of a sample of labor costs, we identified at least $20.9 million paid by USACE that was unsupported and potentially unallowable.

Additionally, USACE Jacksonville did not adequately monitor contractor labor hours worked or accurately review invoices to ensure contractor invoices corresponded to actual work performed on a third power grid repair and restoration contract. Specifically, USACE Jacksonville contracting officials did not:

  • provide appropriate surveillance of contractor performance to verify that labor hours billed were accurate;
     
  • obtain adequate supporting documentation for labor hours billed before approving invoices for payment, such as individually certified timesheets; or
     
  • review contractor labor rates or verify whether contractor employees met labor qualifications included in the contract.

This occurred because USACE Jacksonville contracting officials did not incorporate required elements of a time-and-materials contract into contract C-0003, such as labor qualifications and hourly rates, before approving invoices for payment, in accordance with Federal regulations. In addition, Defense Contract Audit Agency officials could not provide audit assistance because USACE Jacksonville contracting officials did not incorporate required elements of a time-and-materials contract, such as labor qualifications and required contract clauses, into contract C-0003. Furthermore, USACE Jacksonville contracting officials awarded a time-and-materials contract without determining whether the contractor’s accounting system was acceptable, as required by DoD regulations. In addition, USACE Jacksonville contracting officials did not have quality assurance procedures or written invoice review procedures that ensured adequate Government oversight of contractor labor hours worked and adequate documentation from the contractor to support labor hours billed before payment.

As a result, USACE Jacksonville did not know whether contractor labor costs paid on seven invoices, valued at $61.3 million, were allowable in accordance with Federal regulations or terms of the contract. Based on our testing of labor costs, we identified at least $29.2 million paid by USACE that was unsupported and potentially unallowable.

Management Comments on the Findings and Our Response

The USACE Commanding General stated that the magnitude of the destruction, complexity of the mission, urgency for Federal action, and degree of human suffering could not be overstated, and that Hurricane Maria in Puerto Rico was not business as usual. The Commanding General also stated that, in this case, life, health, and safety considerations dictated expediency at the expense of established processes. He stated that sustaining the required number of quality assurance personnel was a challenge and USACE provided oversight for contractors in a dynamic environment. The Commanding General stated the repair and restoration of an electrical power grid is not a core USACE mission. The Commanding General explained that the Puerto Rico Electric Power Authority did not have the necessary capability, capacity, or structure to respond to the hurricane damage, and the U.S. Department of Energy did not have the expeditionary tools and resources in place to perform the mission.  Therefore, FEMA relied on USACE to restore the power grid. We acknowledged in the report that Hurricane Maria devastated Puerto Rico and the hurricane affected the lives, safety, and health of the island’s citizens. We recognized that the hurricane left 1.5 million electric customers without power or communication and knocked down 80 percent of the island’s utility poles and all transmission lines.                                                                                      

We recognize the conditions that USACE faced in Puerto Rico and the urgency of the necessary actions. However, proper controls are also important to implement, even in these circumstances. According to the Council of Inspector Generals for Integrity and Efficiency, disasters provide unique opportunities for fraud, abuse, and mismanagement, and proper controls and oversight of these contracts are important to ensure the proper use of taxpayer dollars and also to ensure that the proper recipients receive the full benefit and use of Federal funds designated for relief and recovery.

Recommendations

We recommend that the USACE Commanding General develop, implement, and require training on standard operating procedures for time-and-materials contracts that require detailed quality assurance surveillance plans and invoice review procedures, and that the contracts include labor qualifications for all labor categories in the contract and individually certified timesheets from contractors to support labor billed. We also recommend that the USACE Commanding General initiate a review of all contracting officials’ actions on contract C-0003, and, as appropriate, initiate management action to hold them accountable.

We recommend that the Commander of U.S. Army Engineering and Support Center, Huntsville, direct contracting officials to validate all labor and material costs on contracts F-0003 and F-0032, and determine whether they are supportable and allowable in accordance with Federal regulations. If the contractor cannot support the costs, the contracting officers should determine those costs as unallowable and take action to recoup those costs.

We recommend that the Commander of USACE’s Jacksonville District direct contracting officials to review all labor and material costs for contract C-0003 and determine whether they are supportable and allowable in accordance with Federal regulations. If contracting officials are unable to determine whether costs are allowable, they should work with Defense Contract Audit Agency officials to develop a total contract cost reduction to reduce total contract costs for contract C-0003.

Management Comments and Our Response

The USACE Commanding General agreed with our recommendations. The Commanding General stated that the USACE Director of Contracting tasked all contracting officers to take a time-and-materials contract training course and agreed to review this DoD Office of Inspector General report and prepare an after action report and provide lessons learned to the contracting community. The Commanding General also stated that the Director of Contracting distributed quality assurance surveillance plan and payment approval and recommendation checklists to be used by contracting officer’s representatives. The Director of Contracting will perform a review of contract C-0003 and make any necessary corrections and recommendations to ensure future responses to contingency operations are executed consistently. Furthermore, the contracting officers are performing an audit of the vouchers and supporting documentation before final payment on the contracts. The Commanding General added that the Defense Contract Audit Agency is assisting USACE and the planned completion of the audit is January 2020.

The USACE Commanding General’s comments partially addressed the recommendations; therefore, the recommendations are unresolved. Although the Director of Contracting distributed checklists for the contracting officer representatives and tasked the USACE contracting officers to take a time-and-materials contract training course, the response was not clear on whether the checklists would provide enough information for contracting officials to verify labor hours on contractor invoices on time-and-materials contracts. The Commanding General’s comments do not address requiring specific labor qualifications and requiring contractors to submit individually certified timesheets for labor on all current and future time‑and‑materials contracts. Additionally, the Commanding General’s comments were unclear on whether the Director of Contracting will perform a review of the contracting officials' actions associated with contract C-0003 and initiate management action to hold them accountable, as appropriate. Further, the Commanding General’s comments were unclear on whether the planned reviews addressed all labor and material costs for contracts F-0003, F-0032, and C-0003 and the planned course of action if contracting officials are unable to determine whether costs are allowable on contract C-0003. The USACE Commanding General should provide comments to the final report by October 30, 2019.

This report is a result of Project No. D2018-D000AU-0128.000.