WASHINGTON -- FEMA exposed taxpayers to significant waste, and possibly violated federal law, by awarding $3.6 billion worth of Hurricane Katrina contracts to companies with poor credit histories and bad paperwork, investigators say.

The report by the Homeland Security Department's office of inspector general, set to be released later this week, examines the propriety of 36 trailer contracts designated for small and local businesses in the stricken Gulf Coast region after the 2005 storm.

It found a haphazard competitive bidding process in which the winning contract prices were both unreasonably low and high. Moreover, FEMA did not take adequate legal steps to ensure that companies were small and locally operated, resulting in a questionable contract award to a large firm with ties to the Republican Party.

"Based on our analysis, we concluded that FEMA contracting officials exposed the agency to an unacceptable level of risk," according to the report by the office of inspector general Richard Skinner.

The audit, one of several expected this year on Katrina contracting, is the latest to detail mismanagement in a multibillion-dollar hurricane recovery effort that investigators say has already wasted over $1 billion.

It also comes after the Federal Emergency Management Agency acknowledged earlier this month that it would not have a federal plan ready for responding to emergencies before the hurricane season begins June 1.

In response to the audit , FEMA in the report disagreed that the wide price variations put taxpayers at risk. The agency contended that it was comfortable with bidders' financial viability based in part on past performance. In cases where contract prices appeared unreasonably high, those would be offset with lower payments later on subsequent work orders, FEMA officials said.

In the immediate aftermath of Katrina, FEMA handed out lucrative no-bid contracts for cleanup work to large, politically connected firms such as Shaw Group Inc. , Bechtel Group Inc., CH2M Hill Companies Ltd., and Fluor Corp.

After heavy criticism, FEMA Director David Paulison pledged to put those large contracts out to bid again. He ultimately reopened only a portion, awarding 36 contracts that the agency said would be prioritized for small and local businesses.

Among the winners was joint venture PRI-DJI, which received $400 million worth of contracts. That prompted complaints from small and locally operated firms that said they were unfairly shut out. DJI stands for Del-Jen Inc., a subsidiary of Fluor, which has donated more than $930,000 to mostly GOP candidates since 2000.

"It's not what you know, what your expertise is. I don't even believe it's got much to do with price. It's who you know," said Ken Edmonds, owner of River Parish RV Inc. in Louisiana, which was rejected for a contract. In the audit, investigators said PRI-DJI was eligible because DJI had partnered with PRI, a minority-owned firm based in San Diego, under a federal mentoring program.

However, investigators found that PRI-DJI was given special preference even though it was not registered as a small business. Still, the audit noted that the PRI-DJI bid probably would have been selected without the special preference because it was so low.

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