Service Electric Company – Contract No. 16986

The Office of the Inspector General performed an audit of costs billed to the Tennessee Valley Authority (TVA) by Service Electric Company (SEC) for transmission construction services provided under Contract No. 16986. The contract provided for TVA to compensate SEC on either a fixed price or cost reimbursable basis. Our audit objectives were to determine (1) if costs were billed in accordance with contract terms, (2) the reasonableness of TVA’s process for evaluating and awarding proposed fixed price tasks issued under the contract, and (3) if tasks were issued using the most cost-efficient pricing methodology. Our audit scope included approximately $28.2 million in costs billed to TVA from March 8, 2022, through November 30, 2023. This included $24.4 million for fixed price projects and $3.8 million for cost-reimbursable projects. Our audit primarily focused on the fixed price projects under the contract. We determined the $24.4 million in fixed price billings from our audit period had been billed and paid in accordance with purchase order approval limits. Although TVA generally had a good process in place for evaluating and awarding fixed price tasks issued to SEC under the contract, we determined (1) the use of fixed price compensation terms for tasks caused TVA to pay more than it would have if the tasks had been issued under cost-reimbursable payment terms, and (2) there were opportunities to strengthen the process when fixed price tasks are used. Specifically, • The use of fixed price compensation terms for tasks caused TVA to pay at least $3.7 million more than it would have if the tasks had been issued under cost-reimbursable payment terms. Additionally, we estimated TVA could potentially avoid up to $4.69 million in future costs by issuing tasks under cost reimbursable payment terms for the remaining contract spend. • TVA did not always receive price proposals from bidders other than SEC. Without adequate competition TVA is less able to ensure it is paying a fair fixed price amount. Additionally, TVA did not receive detail cost breakouts when changes of scope resulted in significant price changes. Without a price breakout, TVA is less able to determine the reasonableness of the price increase. We also noted opportunities to improve contract administration by TVA. Specifically, (1) the contract contained incomplete terms, (2) Supply Chain was not integrated into business level processes related to procurement, and (3) the contract’s monetary limit was increased without a formal amendment as required by the contract.