Tuesday, October 16, 2018

Home Sweet Home, By Contract: Slicing the housing program pie

By on July 27, 2018

Editor’s note: This story first appeared in the July 26 – Aug. 1 print issue of Caribbean Business.

espite alleged irregularities in the granting of Tu Hogar Renace’s management contract, the complex framework behind the effort to guarantee thousands of Puerto Rican families have a home that meets “minimal habitable standards” is on track. However, there are concerns over the effectiveness of controls over the federal funds granted by the initiative, which is subsidized by the Federal Emergency Management Agency (FEMA).

Time is of the essence for Puerto Rico’s Vivienda brigades because a cost-sharing exemption is set to expire in less than two months. Local Housing Secretary Fernando Gil Enseñat summed up to Caribbean Business what, in his opinion, have been the achievements in the execution of the Sheltering & Temporary Essential Power Program (STEP) he oversees, along with the organization PM Rising Phoenix, formerly Adjusters International.

“In the beginning, before the work began, there were a few days when there were some [court] rulings that affected…the receipt of applications. After the court acted on the first argument immediately taken to the appellate [court] and declared the work not canceled, and that [the Court of Appeals] was going to go deeper to see the case as such, we again rounded up the requests and the intake of all applicants for the STEP or Tu Hogar Renace service,” said Gil Enseñat, referring to the challenge presented by AECOM, a contractor interested in invalidating the “contract awarded to Rising Phoenix.

Housing Secretary Fernando Gil Enseñat, center, speaks to Hurrican Maria survivors.

As recently as July 13, and after several procedural errors by the Housing Department’s Bidding Review Board, the Court of Appeals received the agency and its project manager’s allegations. So, together with AECOM’s document in opposition, the court will finally put an end to the controversy, which was first reported by Caribbean Business.

AECOM currently manages the same program for the U.S. Virgin Islands, and its execution has been criticized by USVI Gov. Kenneth Mapp. “They have to bring their game up; their game is slow,” Mapp said during a July 12 press conference. He is hoping to speed up repairs by hiring APTIM, another major contractor, but only “if they are prepared to accept the fee schedule in the AECOM contract.”

In the case of Puerto Rico, repairs appear to be going full steam, judging by the most recent numbers provided by Housing, figures that can also be found on the website TuHogarRenace.com. Six months after Hurricane Maria hit, the program had barely managed to repair 300 homes, according to a press release issued by FEMA. Eleven months after the storm, Tu Hogar Renace has completed minor repairs on 31,875 of the 122,000 homes approved, which so far amounts to a cost of $306,470,040. The faster pace in great part has to do with adjustments made by Housing to the procedures, based on information collected from its seven construction managers at service areas throughout the island. As of this writing, the average repair cost was $9,614.75, less than half the $20,000 limit established for program participants.

“Their production is…735 to 1,000 houses per day. In Louisiana, the last time this program was deployed, 14,000 homes were done in a year, with seven contractors as well. Thus, this is the largest STEP program FEMA has seen. The feedback has been super-positive,” the Housing official said.

Questionable impact on economy

The Housing Department estimates the Tu Hogar Renace program has injected nearly $1 billion into the local economy because, in addition to the money assigned for home repairs, it has employed more than 14,000 workers during the rebuilding effort. Gil Enseñat said the economic impact is reflected as a blip in retail, as well as in motor vehicle sales.

At presstime, Caribbean Business’ attempts to obtain the specific source of this figure and a breakdown of the items to which this billion-dollar injection was directed were not successful. However, sources with direct knowledge of the reconstruction program question that amount. They said its operational flowchart includes multiple foreign contractors, which can delegate much of their responsibility through a chain of subcontracting services for a salary of no less than $8.25 an hour, which results in much of the money not staying on the island.

“The problem is the dignity of us Puerto Ricans and why our leaders don’t do better business to defend the interests of a people bankrupt and disadvantaged after the hurricane,” questioned a construction-industry executive, who asked to remain anonymous, adding that local businesses are placed in a disadvantaged position in that they assume a large part of the workload, making less than this type of work is worth.

“To turn Puerto Rico’s recovery into an economic development platform, we have to transform the current contracting trends,” tweeted Deepak Lamba-Nieves, research director, and Churchill G. Carey Jr., chair in Economic Development Research at the Center for a New Economy (CNE) think tank. The expert shared a chart, titled “Accumulated Post-Hurricane Maria Expenditures in Puerto Rico,” broken down by contractor, which shows a marked difference between what stateside contractors have been granted, about $4.5 billion, versus local ones, which have been awarded about $500,000,000 in contracts as of June 20. The CNE is analyzing official Puerto Rico government data on the island’s recovery after last year’s hurricane season to then publish its findings on a yet-to-be-determined date.

Contractor pricing

One of the most criticized issues in the Tu Hogar Renace program has been the price established for items included in the repair process. Some of these are valued at almost 50 percent more than their market price. For the Housing secretary, this alleged inflation has an explanation, when comparing Puerto Rico to the USVI, another territory that mimics cost structure in the local market.

“The [USVI] has geographical and legal circumstances that are very similar to those of Puerto Rico. The Jones Act increases the cost of products in Puerto Rico by around 20 percent, especially construction and construction goods, which have increased about 30 percent,” the secretary said, adding that pricing was established by contractors based on the market value.

“After we were given the prices, we proceeded to use a mathematical formula to discard everything illusory or unreal in terms of prices that were too high or too low. After that, the market price was averaged, and that is what is paid to all contractors around the island,” said Gil Enseñat, who expressed he was extremely pleased with the work done so far and hopes the process will be used by FEMA as an example to follow in future disaster responses.

The rates include a minimum 10 percent profit margin for the contractor, plus 10 percent of general expenses, which include permits, fees and insurance.

Dubious inspection invoicing amendment

From an administrative point of view, if the trend in the average investment of $9,600 per household continues, about $1,171,200 will have been spent on minor repairs. This sum includes both the cost for materials and labor, as well as the operating expenses of Puerto Rican contractor Caribe Tecno; stateside-based firms SLS, James W. Turner Construction and Excel Contractors; and local and stateside joint ventures (JV) F&R and BLDM JV, Yates-Bird LLC / JV and 4 Contractors JV.

Since it was announced these seven construction managers would be awarded a combined $1.5 billion, residents, political figures and construction-industry representatives have appealed to the press to denounce what they call a scheme akin to disaster capitalism.

One of the moves alleged to benefit everyone except aid applicants is the inspection process. Several sources with knowledge of this process turned to Caribbean Business to detail what they believe is an overbilling scheme that consists of unlimited changes to the requirements to approve a final inspection, with the objective allegedly being that up to four reviews of the work is produced. Final inspections are billed at a rate of $425 each, while initial inspections cost $575, or a total $1,000 per household.

After examining the contracts that establish these rates, Caribbean Business identified irregularities in the language of the agreement between Housing and Rising Phoenix, specifically, an amendment signed June 7.

“The [Department of Housing] DOH shall pay the program manager for the ‘inspection’ services based on the fixed unit prices set forth in Exhibit V. The parties acknowledge that the total number of ‘inspections’ represents the maximum number of any combination of initial site property visits and final inspections that may be invoiced to the DOH by the program manager during the term. Any increase in the total cost of ‘inspections’ will require an amendment to the agreement,” reads the amendment.

The exhibit referred to in the amendment, “Schedule of Fixed Unit Prices, Fixed Rates and Lump Sums,” shows that $75 million is assigned for the inspection of 75,000 properties, or $1,000 for each unit. That figure does not account for the fact there are now more than 122,000 households under the program nor does it specify a cap on the total allowed to be billed.

More than 65,000 families await repair and final inspection of their home. The inspections include the presence of a representative of the Housing project manager and an inspector from the corresponding construction manager responsible for the repairs.

“Because of so many failures that have occurred in the construction processes, a bureaucratic system was created in which a representative of the contractor is present in the final inspection to find a solution in case a flaw is found that puts a home in a position where it wouldn’t pass final inspection. At the organizational level, it is still inefficient,” one source stressed.

“The one who’s changing the rules almost daily is Adjusters [Rising Phoenix]. That caused a lot of homes to be hung [to fail inspection]. For me, it’s a way to justify why you’re going to charge what you’re billing for inspections. This project lacks a clear rubric to establish the quality of the work. There are some practices that are not clear; the evaluation in many cases is not clear,” another source said.

Moreover, the tablet used to register the construction work forces the inspector to select that both the initial and the final inspections were completed, even if it this was not the case. Specifically, these options appear on lines 57 and 58 of the digital system intended to log the entire process, data that both Housing and FEMA have access to and, according to the department’s secretary, no more than $1,000 is paid even if multiple registered inspections appear in the system.

“I have to verify well, but it doesn’t exceed $1,000. There’s no limit, but only up to a cap is paid. It’s part of the risk of doing things right, and the risk is taken by the contractors. If they exceed [the cap], it’s not paid. If they have to go more than once [for inspection], only the initial and final [inspections] are paid,” Gil Enseñat said when shown the document.

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