The no-audit clause in the Whitefish Energy contract to restore electricity in Puerto Rico is a problem, and it actually highlights a bigger problem with many federal contracts. The clause prohibits the government from auditing contract costs and profits. While in the past such audit rights were standard practice in government contracting, they were largely dissolved during the industry-inspired “acquisition reform” era of the 1990s (under the Clinton Administration with lots of bipartisan help mainly from Members of Congress who are aligned with government contractor interests).
Thus, even if the Whitefish labor and per diem rates turn out to be high, the Puerto Rico Electric Power Authority (PREPA) is either stuck with the rates it agreed on, or PREPA would have to exercise the provision in the contract to amend them, which would be difficult because it requires Whitefish to agree. Audits are an important tool to protect the government, and improved contracting needs to start at the negotiation stage, including use of pricing proposal or pre-award audits of contractor proposals.
If the PREPA-Whitefish clause is concerning, consider that so-called “commercial item” contracts throughout the federal government operate the same way, and have done so for over 20 years. That means more than $100 billion is spent annually without the government having any access to meaningful contractor cost or pricing information. Just like Puerto Rico, federal agencies are buying blind and the result is billions in wasteful spending. Simply stated: buyer beware; and unless Congress requires contractors to provide adequate support for costs or prices, Uncle Sam isn’t at liberty, under most circumstances, to see contractor cost and profit information.
Also, it should be noted that the no-audit no-review clause in the PREPA contract does not prevent investigations or audits by Congress or the Department of Homeland Security Inspector General. Nor does it prohibit audits of the work performed or the labor billed to the contract. However, absent fraud, the government has no mechanisms to recover money under the contract. For years, we have read inspector general reports that find the government is paying unreasonable prices, but little can be done because agencies agreed to them.
I share the concerns about PREPA waiving “any claims against” Whitefish for delays in the completion of work. While I hope that power is restored within a year, the waiver of a completion date prevents PREPA from holding Whitefish accountable, barring threat of contract termination. The waiver also raises concerns about whether Whitefish or its subcontractor workforce is prolonging the work to reach, and possibly extend, the contract’s $300 million ceiling.
Finally, the PREPA contract also highlights the longstanding problem with entering into contracts after a disaster strikes, when costs and demand are likely high. Had negotiations begun before Hurricane Maria spiraled out of control, there would have been more time to reach a better deal and avoid most of the concerns being raised. It’s impossible to have a powerful negotiation strategy in an electric restoration contract when you are dealing with that contract by cell phone flashlight.