At the request of the Tennessee Valley Authority’s (TVA) Supply Chain, we examined the cost proposal submitted by a contractor for the New Caledonia Gas Plant. Our examination objective was to determine if the cost proposal was fairly stated. The contractor proposed a target cost estimate (TCE) of approximately $474.7 million for the construction of a potential simple cycle natural gas electricity generating plant at TVA’s New Caledonia site in Steens, Mississippi.
In our opinion, the cost proposal was overstated. Specifically, we found the proposal for the $474.7 million New Caledonia Gas Plant project included (1) overstated labor costs, (2) inflated subcontract costs, (3) overstated or unallowable other direct costs, (4) understated equipment costs, and (5) overstated (i.e., general and administrative, fee, and taxes). We estimated TVA could avoid $63.7 million on the proposed $474.7 million New Caledonia Gas Plant project by negotiating appropriate reductions to the proposed TCE. Additionally, we suggest TVA negotiate to revise the draft contract language and rate attachments to incorporate appropriate changes.
The proposal also included an alternative option to complete the project under a fixed price compensation method for a firm fixed price of approximately $506.4 million. We analyzed the TCE proposal and alternative fixed price proposal and determined it would be more cost efficient for TVA to (1) negotiate appropriate reductions, including any necessary scope changes, and (2) utilize the TCE instead of agreeing to the fixed price proposal.
