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KATRINA: Tiers of Subcontractors Bleed Off Reconstruction Money

by Gordon Russell and James VarneyNewhouse News Service
January 9th, 2006

The blue-tarp roof, a symbol of hurricane damage in south Louisiana and Mississippi as recognizable as curbside debris, may wind up as a post-Katrina emblem of government waste reminiscent of the Pentagon's fabled $435 hammers and $640 toilet seats.

Depending on the extent of damage and the size of the roof, the federal government is paying anywhere from a few hundred dollars to $5,000 to install a typical tarp. The cost to taxpayers to tack up a covering of blue vinyl is roughly the same, on a per-square-foot basis, as what a homeowner would pay to install a basic asphalt-shingle roof.

Yet the laborer putting nail to tarp typically earns only a fraction of that. The cost is driven up by layers of subcontractors, an expensive flowchart that sometimes produces the sub-sub-sub-sub-subcontractor, known in post-Katrina parlance as a "fifth-tier sub."

The arrangement isn't unique to roofing. On almost any contract let by either the Federal Emergency Management Agency or the Army Corps of Engineers, who together control most of the more than $60 billion earmarked by Congress for hurricane aid, a similar system of tiering exists. Nor are such contractual layers indigenous to a universe shattered by Katrina and Rita. Those involved in the work say similar arrangements are commonplace after natural disasters throughout the United States.

Temporary housing, for example, provides another area in which contract nesting proliferates. FEMA buys trailers from brokers, who bump up the price per unit by thousands of dollars. And on New Orleans' housing inspection contract, the federal government paid The Shaw Group nearly $80 an hour, city officials said, for building inspectors who earn about a quarter of that amount, according to city inspectors.

In other words, the guy spinning a Bobcat choked with tree limbs on a residential street may be earning as little as $1 per cubic yard of debris, although the prime contractor may be billing 20 times that amount for the service.

Federal regulators and prime contractors defend the arrangements, saying the big companies that land mammoth contracts furnish resources and oversight smaller companies couldn't possibly match. It simply wouldn't work, they say, for the government to try to cut out the middleman and hire building inspectors or roofers directly. Moreover, the emergency nature of the work -- the need to bring in thousands of workers and truckloads of provisions in a hurry -- also drives up costs.

"This is not what most people think of as a typical contract, with sealed bids for a very specific job and a one-time, specific amount of money," said Jim Pogue, a corps spokesman. "These are task-order contracts. What we basically are awarding the big contracts for is someone's ability to do a lot of different kinds of tasks."

What's more, federal contracts often require huge insurance requirements and credit lines, business costs that can be handled promptly only by bigger companies. Those companies are fewer in number, and thus are, in many cases, already known to FEMA and other federal agencies for their work on previous disasters.

Critics acknowledge some administration is needed, and that the sheer scale of the various jobs leads to increased overhead costs. Still, the difference between the price of the contract and the money collected by those doing the work appalls them, they say.

"When you have this nesting, or tiering, you're losing a lot of money to friction as it goes from sub to sub down to the worker bee who's actually turning a wrench or putting on a blue tarp," said Steve Ellis, vice president of programs at the watchdog group Taxpayers for Common Sense.

Keith Ashdown, a colleague of Ellis', decried the "blank-check mentality" that he said often results in overspending in the wake of disasters. "I guarantee we're going to come back to this after everything has been reviewed and find we paid (upscale retailer) Nordstrom prices when we should have been paying Wal-Mart costs," he said.

Not everyone collecting federal dollars turns a huge profit. While vast sums of money are being dumped into the recovery, the subcontractors at the bottom say they struggle to earn a living because of the number of hands the money must pass through. Some have decided to head home, or to go to Florida, where some have heard there is less layering and thus more money for the man on the ground.

Billions of American taxpayer dollars are being spent on the various emergency relief efforts, but the government has declined, at the request of the companies receiving the most money, to detail the spending. The corps has refused to provide breakdowns on tarping and debris removal, citing contractor objections that releasing the information could cause them "competitive harm."

"The only thing I can address is what we are paying our primes," said Jean Todd, a contracting officer for the corps. "From there, there are contractual agreements between the primes and the subs."

But, Todd conceded, "I can't release (verbally) how much we're paying our primes because that is subject to (requests under the) Freedom of Information" Act, or FOIA. Such requests have been filed by The Times-Picayune of New Orleans and others, but have yet to be honored. The corps recently posted online a list of its tarping and debris-removal contracts, but the prices were omitted.

Local government officials have been similarly frustrated in efforts to find out what contractors are being paid, particularly for debris collection. A succession of local figures -- including Plaquemines Parish President Benny Rousselle and officials from New Orleans and Jefferson and St. Bernard parishes -- complained at a recent legislative hearing that they had filed FOIA requests and gotten no response.

The information could affect local governments because FEMA has told local officials that they'll be responsible for 10 percent of the cost of debris removal after June 30, and perhaps a larger share in the future. The work is not expected to be completed until December 2006.

Despite the feds' unwillingness to disclose costs, ballpark figures -- and even some specific ones -- have leaked out.

For example, The Shaw Group of Baton Rouge, one of three companies in charge of the tarping program dubbed "Operation Blue Roof," earns $175 per "square" for each tarping job, according to a report by the Knight-Ridder news service that neither the government nor the contractors have challenged. A roofing "square" is equal to 100 square feet.

Two other prime contractors, Simon Roofing of Ohio and LJC Construction Co. of Alabama, take home $172 and $149 per "square" respectively, according to the same report. The report did not include a per-square-foot price for the fourth prime contractor doing work in Louisiana, Ystueta Inc. of Alabama. Those figures omit the cost of the tarps and some materials, which are provided by the federal government. Prime contractors do supply other materials, including furring strips and fasteners.

Todd Woods, owner of A-1 Construction and Roofing, a subcontractor to Shaw, said Shaw pays him $75 for each square laid by subcontractors who report to him. Further down the chain, Erik Larsen, whose Wescon Construction is a subcontractor to A-1, said he gets $30 a square for tarps that he and his subcontractors lay.

But Larsen said his subcontractors also have subs, who in some cases have subs themselves. Those at the bottom sometimes earn as little as $2 per square, Larsen said.

Craig Stone, a salesman with Ace Roofing, which has been doing business in southern Louisiana for 40 years, was shocked to hear the costs associated with the government programs compared with replacing the roof. Ace, which is not involved in any FEMA contracts, generally charges between $170 and $180 a square for a basic, "three-tab" asphalt-shingle roof, he said -- about the same as what Shaw collects for a tarp job.

Charging that price for a tarp, Stone said, amounts to "gouging, pure and simple."

Shaw officials declined to address specific questions about their prices or what services they provide to justify them. Stephanie Dixon, a spokeswoman for the firm, said some of the information that has been published regarding Shaw's contract terms was "grossly inaccurate," but she declined to specify the inaccuracies.

She added that Shaw officials are "confident that we follow all rules and guidelines" and that the company is "committed to the rebuilding of our home state and to upholding the highest level of integrity in all of our business activities."

Allan Buchanan, vice president of operations for LJC, one of the other prime blue roof contractors, agreed that under ideal conditions, tarps could be installed for less. But he said conditions are anything but ideal in southeast Louisiana.

He said his firm has had to bring in food, water, ice, fuel and housing, and that hundreds of crews under LJC's supervision have worked 18-hour days during "weeks of chaos." In addition, he said the workmanship on corps-supervised tarp jobs is "far superior to that of the private contractor."

Buchanan said his firm is profiting, but added that the government, insurers, homeowners and taxpayers are saving far more than he's earning.

"How much is too much when this service is essentially preserving, in some cases, the only thing (homeowners) have left after such an event?" he said in an e-mail. "Also, how much in additional insurance claims have been saved through this service? Let's say hundreds of millions perhaps."

Officials from Simon Roofing and Ystueta Inc. did not return phone calls.

Prices for debris removal, handled by the corps, are even harder to get a handle on. The government has refused to release the proposals it received before it awarded open-ended contracts to four large prime contractors -- Ashbritt, Phillips and Jordan, ECC and Ceres. In addition, the proposals do not necessarily reflect the actual prices being paid.

Rather, each time a job is assigned -- say, the removal of debris from a defined neighborhood -- the corps negotiates a price for the specific task, using the original proposal as a starting point, Pogue said. The corps has refused to make the resulting task orders public.

"We might say, `We've got a task for you to remove 100 million pounds of rotten chicken.' And we negotiate the price for them to do that," Pogue said. "And then there's 50 blocks of city debris for you to remove. That's kind of what we're dealing with here."

Pogue said the corps believes the government is getting a fair price and would have no objection to sharing the information with the public. But he said the companies have reason to keep the numbers private.

"When prime contractors submit their bids, it's a very competitive thing, in accordance with federal acquisition regulations," he said. "But they have an expectation because of competition that their bid is going to be confidential. That is their call."

Many of those involved in the work, as well as outside observers, believe the layering is unnecessary and drives prices up.

"You're preaching to the choir there, I've been hollering about that," said Democratic state Rep. Troy Hebert. "The layers rip off the taxpayer."

Hebert wears two hats. In addition to his lawmaker duties, he has been a debris-removal contractor with the corps.

The situation was flawed from the start, Hebert believes, because the corps and FEMA essentially forced parishes to work through them. The feds pay the entire debris-removal bill only if they are allowed to handle the contracting; cities and parishes in general must pay a 10 percent share if they do it themselves and seek federal reimbursement later.

"You see, that's where the blackmail comes in," Hebert said.

The mammoth federal agencies tend to be unfamiliar with smaller, local firms, he said, making it hard for such companies to get a big piece of the action.

"FEMA went to the corps because FEMA doesn't know anything about debris cleanup," Hebert said. "But the corps doesn't know a thing about debris cleanup, either. So they turned to the big, major corporations they already know, the guys that follow the corps around all the time. ... Why not just hire the guys who are actually doing the work and save the taxpayers all this money?"

Rousselle of Plaquemines Parish made a similar point this month in a tirade against the corps' system of contracting.

"They say they don't want to send money to Louisiana because of our reputation or whatever," he said. "I would ask them to look in the mirror. If they think this is a legitimate expense of federal money, they ought to be ashamed of themselves."

Rousselle claimed that if the corps turned oversight of the work over to local governments, unnecessary overhead could be cut dramatically, saving taxpayers 30 percent to 40 percent.

The legislators running the hearing seemed to agree with Rousselle.

"The bigger disaster (than Katrina) may be the rip-off," said Republican state Rep. Ernest Wooton.

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