FEATURE ARTICLE

December 2001

Fixed-Price Contracts Can Slash Cleanup Costs

Under this arrangement, companies would ‘guarantee’ the remediation work

by Ronald A. Torgerson

The Department of Defense could save up to 20 percent of environmental cleanup costs at closed military bases by using fixed-price guaranteed contracts.

This type of arrangement is called “guaranteed remediation with insurance.”

The U.S. Army decided to try the fixed-price contracting approach in 1999 at Rio Vista, Calif., and Camp Pedricktown, N.J. The two cleanup projects were worth about $6 million. Officials estimated that fixed-price contracting saved these installations 10 to 20 percent, compared to conventional contracting methods.

Additionally, this method eliminates the long delays that typically plague government environmental remediation projects, because the end date is guaranteed by the contractor.

“The contractors take on the risk of using new approaches,” said Gary Keyes, senior vice president of Arcadis, the firm hired to do the work.

“Consequently, the incentive is to be as innovative and expeditious in the execution of the project as possible, because the incentive is not to spend hours, but to complete the project in an efficient manner and move on to new projects.”

The promise to guarantee the work helped the company win contracts. “We realized that what we were selling was not so much a remediation service as it was a financial product,” said Keyes.

Fixed-price guaranteed remediation enables BRAC (base closure and realignment) projects to avoid the economic hiatus that has been associated with previous closures. When the base was closed, an environmental investigation and remediation were conducted before the property could be transferred. Under the guaranteed-work method, the remediation can be done concurrently with the base transfer, so the environmental cleanup does not become an obstruction to the project’s completion.

Changes in the remediation scope are a common occurrence in the often bumpy road to closure. Early transfer of BRAC sites requires a guarantee and a backup insurance to protect the Local Reuse Authority, the developer and the lender. The lender and the developer want to know that even though the Defense Department retains ultimate liability, they aren’t going to have to wait for a Pentagon procurement authorization to take care of an unexpected situation that could come up in the middle of a multi-million dollar development project.

Government agencies must have a cancellation-for-convenience clause. Pentagon project managers say the probability of cancellation is not high, but the possibility can’t be ruled out. The risk to the contractor, said Keyes, “is that, in every complex project, there are times when things are going well, then things may go badly for a while, then go well again. What happens if a cancellation of the contract happens right when things aren’t going well? The contractor doesn’t have a chance to make up the loss later on. So that’s the risk the contractor is accepting in a cancellation for convenience.”

The situation can get tough in active bases. “It’s hard to mobilize, say, $30 million all at once when it was expected to be spent over 10 years,” said Keyes. “There are ways of doing it. Basically you write the guarantee as a packet of guarantees, such that every Solid Waste Management Unit (SWMU) becomes a guarantee to closure, and they’re grouped into packets that are funded each year, and then those packets are guaranteed, even if there’s cancellation for convenience.”

The “tricky part,” he said, is “making sure you meet the standards of severability, that you are not committing the government to paying for something in future years that it has not funded.”

Different types of insuring agreements can be written for fixed-price contracts, including pollution legal liability that covers third-party bodily injury or property damage, remediation legal liability for investigation and cleanup expenses, legal defense expenses and remediation costs.

However, the agreement with the contractor is the primary element in a fixed-price arrangement. Insurance only acts as a backup, because it has significant limitations. If there is a change in the remediation scope, that change must be presented to the insurance company, which has the right of approval over those changes.

Keyes said that insurance backup is not always needed. “We’ve done 34 fixed-price projects, but only a little over a third of those had insurance backup,” he said. “There are many types of risk that corporations take on in their line of business, and corporations that are very good at their business are good at managing risk.”

Arden Roberts, director of the Base Realignment and Closure Division at the Army Forces Command, said that the decision to use fixed-price contracting for remediation projects is shaped by various considerations.

“If a site meets our parameters, then we [consider] using a fixed price contract,” he said. “One of the parameters is how far along is the site characterization.” If a Record of Decision is in place, he said, “we would not use a fixed price contract on that location.” A Record of Decision specifies the cleanup method to be used, so it restricts a corporation from using any new technologies.

Additionally, “if there is very little site characterization accomplished, if it’s in the very early stages of characterization, then we don’t want to do that as a fixed price either, because we understand that the actual price of that contract is going to be driven very heavily by the amount of characterization of that site.”

The decision is based on risk analysis, said Roberts. “If we know exactly what contaminants are on that site, and the basic amount of contaminant that is there, then the risk for a corporation is much lower [and] therefore, their price is lower. I am not willing to pay a large premium for a guaranteed fixed-price contract if the risk analysis reflects that there is a big risk because we don’t know what’s there.” nd

Ronald A. Torgerson is director of federal solutions at Arcadis, in Highlands Ranch, Colo.

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