Common Sense For Cleanups:

Pay For Performance

William H. FoskettOUST/USEPA/HQ

foskett.william@epa.gov

703 603-7153

National Governors Association

9/23/01

PFP: Common Sense For Cleanups

• Paying consultant for reducing contamination• Instead of paying for time-and-materials used

• Produces faster, cheaper, high-quality cleanups

• Preliminary EPA Region 4 comparative analysis• Compared PFP vs. T&M sites in FL and SC• SC: on average PFP is 58% faster, cost 79% less than T&M

• Same size plume: PFP was 69% faster, cost 67% less than T&M

• FL: on average PFP is __ % faster, cost 59% less than T&M• Numbers seem high, but they keep checking out o.k. so far

Customary Cleanup Buying: Pay For Services

• Time and materials (T&M): buy cleanup services• Pays consultant for effort and materials used in a billing

period• No fixed price, “change orders” increase price• Cleanup goals may change as cleanup proceeds • Government regulates technical design and management• Pay for paperwork

• Recognized Problems• No financial incentive for contractor to speed, finish cleanup• Very heavy paperwork burden for state and contractor• Slow cleanups tie-up property• Change orders raise initial prices

PFP: Buy Clean Sites

• Pay-For-Performance (PFP): buy environmental results• Pays consultant for amount of contamination reduced• Fixed-price, milestone payments, no change orders• Consultant finds the optimal way to meet environmental goals

• Predicted/alleged PFP problems have not materialized• Contractors will use inferior technology, take “shortcuts” -- no• Small contractors will “low-ball” bids, abandon cleanups -- no• Low-bid pricing will make cleanup business too unprofitable -- no• No contractors will participate -- no

Basic Parts Of A PFP Deal

• A firm fixed price• A time limit• Cleanup goals (set as usual) • System start-up payment• Contamination-reduction payments• Escape clauses, walkaway protection

PFP Creates Economic Incentives For Faster Cleanups

• Profit incentive: Work faster, get paid sooner, faster• Start-up payment incentivizes faster system startup • Contamination reduction milestone, goal payments spur

faster environmental results• Lower transaction costs for contractor

• Profit incentive: Work smarter, increase profit• PFP contractors are using bigger, better treatment systems• Innovative management of sites, systems and resources

• Profit incentive: Share more business risk for more profit• Higher potential profit for sharing more business risk• Risk transferred from state to business

Market Force: Competitive Pricing Can Drive Prices Down

• Open competitive bidding drives PFP prices down (SC)

• Publish bid requests statewide • Award to lowest bidder• Price set by lowest bid• Bid prices tend to go down over time• Easy to administer, transparent

• Negotiated PFP prices save, but less

• Some states negotiate PFP prices• Negotiator skill, political context may come into play • A negotiated fixed price is higher but still less than T&M prices• Negotiation time, outcome is uncertain• Complex to administer, not transparent

Results: Faster, Cheaper, Small-Business Friendly

Over 400 PFP cleanups started or completed in 7 states

PFP compared to T&M EPA Region 4 comparison of similar T&M and PFP sites At least 50% faster At least 30% lower price

No failures, no defaults so far Several intrusions of offsite plumes One attempt to cheat on measurement One faulty site assessment One permit problem

Small-business friendly Agile, strategic partnerships, specialization Low overhead

CA

WA

MT

WY

UT

AZ

NM

TX

OK

KS

NE

SD

ND MN

WI

IA

IL

OHIN

VA

NC

GA

FL

AL

MS

MO

AR

LA

MI

PA

NY

MA

VT

NH

ME

TN

MD

DE

RI

SC

Hawaii

Puerto

Rico

CO

Virgin Islands

NV

WV

Alaska

OR

NJ

KY

9American

Samoa,

Guam,

CNMI

(July 2001)

PFP Status Map - Draft

ID

State PFP Program Status

- Fully Implemented

- DC

- Started-up (first contract signed)

- Planning (implementation phase)

- Requesting Assistance

- Readiness Study and/or Training Done (but no other activity to date)

CT

Current PFP States

Florida* South Carolina* Oklahoma* Utah Vermont Nebraska Michigan West Virginia California Colorado**

Senior Leadership Is Key

OUST did PFP readiness analyses and start-up workshops in about 20 states

About 10 of these states are stalled/struggling Internal conflicts between mid-level management peers Conflicts between regulatory and funding agencies Apparent procurement policy barriers Staff philosophy, job-security “issues” Funding for PFP cleanups Staff turnover

Watch for stall-outs, press for steady implementation

What Senior Leadership Do?

Try PFP at some of your state’s cleanup sites “Flatlined” T&M cleanups Redevelopment cleanup sites

Be a PFP “champion” Support front-line PFP “champions”

Resolve conflicts Recognition, public statements

Keep it moving Don’t take weak imitations of PFP Get legislative, legal staff support Public/private partnerships

Setting Up A PFP Pilot

Designate a front-line leader/champion Manage PFP “readiness analysis” Staff/lead a PFP pilot “team” Identify and resolve obstacles

Task a PFP pilot “team” to Identify/select candidate PFP pilot sites Set contamination-reduction goals, time limits Price cleanups, award/contract the cleanup work Oversee system start-up, monitoring, payments, closure

Identifying Sites For A PFP Pilot

Convert flat-lined T&M sites to PFP Review current spending and environmental progress Set price, time-limit, payment terms

Start new cleanup sites as PFP Site-assessment complete Ordinary sites Emergency-response sites

Convert emergency-response sites in 60 days

Do free-product removal on PFP terms

Two Ways To Set Prices For PFP Cleanups

Competitive bidding Open, competitive bidding cuts PFP cleanup prices 30% -

50% Not just “get three bids”

Advertise statewide Award work to lowest bidder if state lead cleanup Site owner can select contractor, state pays only lowest bid

price

Negotiation Negotiated prices are higher than competitive-bid prices, but Lower than T&M prices over long term Because change-order inflation is avoided

Cleanup Goals And Time Limits For PFP Cleanups

Cleanup Goals Set however the state currently sets goals Dovetails with RBCA

Compatible with natural attenuation

Time Limits For PFP Cleanups Typically two to three years May be longer (e.g., MTBE)

Escape Clauses, Walkaway Protection

Escape clauses (to protect contractor) Faulty site characterization Incursion of a plume from off-site “Acts of God” (insurance?) …..

Walkaway protection (to protect state) Performance bond, irrevocable letter of credit

Common in construction businessCost 3% to 11% of cleanup price

Debarment from other cleanup workDifficult to administer

Keeping To Basic PFP Principles Is Crucial

Every state PFP program is somewhat different

All incorporate basic PFP principles: “Guaranteed,” separate site characterization Buy a clean site, not just some clean wells Focus staff work/time on environmental results Set fixed, specific contamination reduction goals Set a firm fixed price and hold hard to it Pay quickly as contamination is reduced Don’t let the consultant “walk away”

PFP: Common Sense For Cleanups

You get what you pay for: cleaned-up sites

Simple, but not necessarily easy to start

Real results in reasonable time frame

Other states can help you and your staff with PFP

EPA looking to states to lead, support PFP adoption