Puerto Rico contracting scandal highlights risk of no-compete contracts

The contracting scandal involving Whitefish Energy Holdings will either be a big deal or a blimp.

But whatever the result, it is a warning about the risks of no-compete contracts.

The two-person Montana based company famously -- or infamously -- won a $300 million no-compete contract to help rebuild the power grid in Puerto Rico after Hurricane Maria.

The size of the company and an apparent connection to the Trump administration immediately raised eyebrows.

After a couple weeks of heated rhetoric, the Puerto Rico Power Authority cancelled the contract.

On the surface, the contract appeared to be the product of a corrupt system. The firm was located in Whitefish, Mont., the hometown of Interior Secretary Ryan Zinke. There also the company’s small size and relative youth as it was founded in 2015.

The scale of some of its previous jobs, such as rebuilding a fire-damaged power line or supplying a transformer to an electric cooperative also raised eyebrows.

It just didn’t make sense.

The Hill newspaper also reported that the contract left out some common oversight provisions such as audits over labor costs and profits.

But the other side of the coin paints a more complicated story.

The company’s business model relies on subcontractors, which allows them to hold down costs because they don’t have to maintain large overhead, according to their website.

They also have serious financial backers in HBC Investments, Flat Creek Capital and Comtrafo Transformers, a Brazilian manufacturer of transformers.

A lot of questions are being asked about how the contract was awarded. But there have been little-to-no questions raised about the work actually being done.

The New York Times reports that Whitefish has 300 utility workers on the island. They are working on high-voltage transmission lines.

The Washington Post reports that the number of Whitefish contractors would have reached 500 by the end of this week.

The company says it is nearly complete with a project that will restore power to half a million people.

Now that the contract is cancelled, it’ll be interesting to see whether the congressional hearings will take place. If they do, I’m sure there will be plenty of outrage expressed.

But I’m doubtful they’ll answer the fundamental question of whether this is corrupt contract or just a poorly executed process? What’s the lesson?

I’m going to lean toward the position that Whitefish did nothing corrupt. They saw an opportunity and pursued it.

But the scandal does emphasize the need for companies to be more vigilant about what their customer is doing and how they being hired.

Be aware. Ask your customers questions. And anticipate the worst case scenario.