Common Sense For Cleanups: Pay For Performance

1. Common Sense For Cleanups: Pay For Performance William H. Foskett OUST/USEPA/HQ foskett.william@epa.gov 703 603-7153 National Governors Association 9/23/01

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. PFP Status Map - Draft (July 2001) ME WA MT ND MN OR VT ID NH WI MA SD NY CT MI WY RI PA IA NJ - DC NV NE OH IN UT IL DE WV MD CO KS VA CA MO KY Guam, American 9 NC TN Samoa, AZ OK AR CNMI SC NM MS GA AL LA TX State PFP Program Status - Fully Implemented Alaska FL - Started-up (first contract signed) Virgin Islands - Planning (implementation phase) Puerto Hawaii - Requesting Assistance Rico - Readiness Study and/or Training Done (but no other activity to date)

10. Current PFP States • Florida* • South Carolina* • Oklahoma* • Utah • Vermont • Nebraska • Michigan • West Virginia • California • Colorado**

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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)

17. 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 business • Cost 3% to 11% of cleanup price • Debarment from other cleanup work • Difficult to administer

18. 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”

19. 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