Federal Audit Questions $8 Million Paid to HNTB

Texas’ Ike-Dolly disaster recovery program, which is funded by the federal government, is facing a potential $8 million setback.

The U.S. Department of Housing and Urban Development’s inspector general released an audit Thursday recommending that Texas pay back more than $1 million for ineligible or questioned costs and that the state find supportive documentation or repay an additional $7.59 million for what the audit says are inflated labor costs. 

The audit targets costs that are associated with contracts with HNTB, a private engineering firm that had been involved in the nonhousing portions of the recovery program. HNTB is still involved with some projects, but its role has been dramatically reduced.

Gary Hagood, the deputy commissioner of financial management at the General Land Office, which is leading the recovery program now, said he asked for the audit when he took over the program in June because he wanted to know all the issues that needed to be fixed.

“That’s before our time, and we had to go through this process to figure it out,” he said. “We don’t manage a contract like that, but there was an agreement between some state folks and HNTB to pay that.”

But Hagood also doesn’t want the state to be punished for mistakes made in the past while it is taking important steps to turn the program around. He is currently in negotiations with federal officials to lower the amount of the questioned costs, and he thinks he’ll get a “pretty good deal.” He could not say more, citing the ongoing negotiations. 

In the wake of heavy damage from Hurricanes Ike and Dolly in 2008, Congress appropriated $3 billion to Texas to help with the long-term housing and infrastructure recovery efforts. Gov. Rick Perry originally divided the administration of the program between two state agencies, the now-dissolved Texas Department of Rural Affairs and the Texas Department of Housing and Community Affairs.

Amid criticism of the slow progress of the recovery program, Perry transitioned the administration of the funding to the land office in June.

At the beginning of the program, TDRA, which had originally been charged with handling the nonhousing portion of the funds, contracted with HNTB to handle about 2,300 projects in exchange for $16.6 million. In June 2009, the state signed a second contract with HNTB to increase its role in the administration, design and management of the nonhousing portion of the project.

The amount of the second contract was more than doubled in 2011 to $144 million. And it was not compliant with federal or state requirements, according to the HUD inspector general’s audit.  

The state was unable to justify to the federal auditors how it procured the contracts and “could not show that it had performed analyses to ensure that the prices that it would pay were fair and reasonable,” the audit says.

The state told auditors that it was unable to turn over the documents because of high staff turnover.

The TDRA was a 40-employee agency to begin with, and when Perry announced in 2011 that it was headed for the budget chopping block, nearly the entire disaster recovery staff left or was laid off. HNTB was running the show for the nonhousing projects. 

According to the federal inspector general’s audit, the land office avoided “improper” spending of an additional $75 million by cancelling the HNTB contract.

“We’re going to run the show, not a contractor,” Hagood said.

HNTB is still working with the land office under a new contract to finish the nonhousing projects in round one, but the rewritten terms lessen the firm’s role dramatically.

The terminated contract contained hourly billing rates for 11-pages’ worth of “tasks” that the company could invoice. The billing rates increased the hourly wage that HNTB would pay a worker to do a task by 320 percent to account for materials and indirect costs. 

But the federal requirements of the program only allow contractors to bill 147 percent above hourly wages for indirect costs. Hagood said that requirement is currently being met.

The federal auditors examined three invoices from HNTB to the state and found the amount the bill exceeded what the state was allowed to pay contractors by $542,477 — or 23 percent. Therefore, the auditors estimated that out of $35.23 million the state paid HNTB for hourly work, $8.14 million represented inflated costs.