PROVIDENCE — In March 2004, an arm of Governor Carcieri’s “Fiscal Fitness” team produced a “portfolio of ideas” for cutting state Department of Transportation spending by as much as $3.6 million.

Among the top concerns of the governor’s cost-cutting advisers at that time: DOT’s growing reliance on “temporary employment contract(s)” to provide privately employed workers for everything from construction inspections to surveys.

Among the findings: “The department outsourced functions without documentation justifying cost-benefit of outsourcing.”

For example, the report said: “RIDOT spent more than $1.5 million for a temporary employment contract for construction inspection in Fiscal Year 2003 and is estimated to spend an additional $4.1 million to outsource bridge inspection and survey.”

The concern: the more money spent on these private contracts, the more contract employees being hired to pad a state and federally financed DOT payroll that already had 812 state employees, according to budget documents from that time.

The warning from the person within state government who wrote this cost-cutting proposal: “Temporary employees added more than 40 workers to RIDOT, and bridge and survey outsourcing could increase the RIDOT workforce to over 900 employees (payroll and consultant).” The recommendation: reduce the employee and consultant rolls by 80 employees.

That was three years ago.

A month later, the Carcieri administration approved another contract guaranteeing a Massachusetts engineering firm, Vanasse Hangen Brustlin, a 10-percent profit guarantee — plus a 145.99-percent markup for “overhead” — to staff a traffic-monitoring center located in a state-owned building across the street from the State House.

At last count, there were 36 VHB employees working in the so-called TMC center, including the now-famous typist for whom the state was paying the company the equivalent of $102,858 until recent exposure compelled new DOT director Jerome Williams to negotiate VHB’s markup down to 22.5 percent on 9 of the 36 VHB employees performing largely “administrative” jobs.

And the typist — a 2002 Republican candidate for the Warwick City Council who was making $38,181, while the company banked the other $64,690 — was not alone.

In a single pay period, the Watertown, Mass., engineering company billed the state a total of $156,181, of which only $59,503 reflected direct labor costs, including overtime for the draftsmen, staff engineers, TMC operators and a total of four typists.

The company billed — and the state paid — another $86,870 for unspecified “overhead” costs and a $14,3637 fixed fee for profit.

More recently, the administration extended until Dec. 31 a five-year contract with Cataldo Associates to supply highway construction inspectors. With the construction season just heating up, there are currently 19 on board. The DOT has not yet disclosed cost details of that contract.

Asked yesterday why DOT disregarded the recommendation of the governor’s fiscal advisers to cut contract-employee costs, deputy DOT director Chuck Alves said he believed the governor rejected the suggestion, as evidenced by the recommendations that made it into a final report.

Among the likely reasons, he cited: the volume of construction activity has doubled without a commensurate increase in full-time DOT workers. (DOT’s authorized state employee count currently stands at 786.7).

Beyond that, “it was not a recommendation that was fully thought out,” Alves said. “They may not have had all of the information they needed,” he explained. “When you go into a place that you know nothing about, you have ideas. Once you have an oppoprtuntiy to get the information to answer your questions, the idea may no longer have been an idea that we would go forward with.”

The March 4, 2004, cost-cutting recommendations were made public by the governor’s office this week in response to a request from The Providence Journal. Carcieri’s current Fiscal Fitness program director, Daniel Majcher, referred questions to the DOT. Spokesmen there said they did not know who authored the 10-page report.

But the report — and the red flags it raised — have new significance in light of the controversy surrounding — and a Senate committee’s investigation of — the Carcieri administration’s use of non-state employees to do state work in many pockets of state government.

The extent, and cost, went largely undetected — and unaudited — until the Senate committee put it under the spotlight as evidenced by the latest audit produced by the General Assembly’s own $177,690-a-year auditor general, Ernest Almonte.

Yesterday, state Rep. Raymond C. Church, D-North Smithfield, called for the U.S. Attorney to investigate VHB’s 145.99-percent markup, and more specifically, whether “responsible parties have committed malfeasance in the exercise of their public duties.

Almonte did not delve into contract markups.

He pointed instead to apparent DOT violations of the state’s purchasing regulations in the award of highway planning and construction contracts.

Among his findings: the eleventh-hour amendment by DOT of bid requirements which, in one cited case, led to the disqualification of an unnamed bidder who did not receive the last-minute change in instructions.

According to the audit report, the state’s “Vendor Information Program” requires that contract offerings be posted for a minimum of seven days, with no amendments “within the last five days before … an offer is due.”

The auditors looked at 18 contract offerings and found that in 14 of those 18 cases — involving contracts worth $110,938 — DOT “amended the solicitation within 5 days of the bid opening.” “In one instance,” the report said, “a contractor’s bid was not considered by RIDOT since the contractor did not receive the addenda.” (Almonte has not responded to inquiries since the audit was released early this week, so it could not be determined who was shut out.)

But the audit report said: “We brought this issue to the attention of the Department of Administration’s division of purchases, who agreed that RIDOT was in violation of state purchasing regulations and provided a memo dated April 16, 2004 indicating that effective immediately RIDOT was required to comply…”

DOT spokeswoman Heidi Cote said yesterday: “We’re aware of the issue and have been vigilant in maintaining our compliance with the purchasing regulations.”

Under the heading “questioned costs,” Almonte wrote: “None.”

kgregg@projo.com