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Common Sense For Cleanups: Pay For Performance

This article discusses the problems with time and materials (T&M) contracts for environmental cleanups and proposes a solution: pay-for-performance (PFP). PFP would provide economic incentives, streamline paperwork, and make cleanups more predictable in terms of price and time. The article also explains the basic parts of a PFP deal and highlights the benefits for small businesses. It emphasizes the importance of strictly applying core PFP principles and shares successful examples of PFP cleanups. The article concludes by suggesting ways to set PFP prices and outlining site goals and time limits for PFP cleanups. It ends with a mention of the PFP pilot program and future plans to scale up PFP sites.

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Common Sense For Cleanups: Pay For Performance

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  1. Common Sense For Cleanups: Pay For Performance William H. Foskett OUST/USEPA/HQ foskett.william@epa.gov 703 603-7153 December 5, 2000

  2. What’s The Problem With T&M? • Slow to start, slow to pay, slow to close • Environmental effects (MTBE) • Business effects (owner, consultant) • Too much paperwork, too little cleanup • Economic incentives are upside-down • Financially unpredictable

  3. What’s the Solution? PFP • Pay-For-Performance (PFP) = common sense • Buy, pay for what you want • Buy, pay for contamination reductions • State staff focus on environmental results • Consultant decides, manages technology • PFP rewards, clears way for innovation • PFP economic incentives are right-side up • Makes cleanups predictable in price, time

  4. Basic Parts Of A PFP Deal • Cleanup goals (set before price) • A firm fixed price • A time limit • Contamination-reduction payments • Escape clauses, walkaway protection

  5. How PFP Works • Site assessment is a given, often done separately • Cleanup goals are set upfront, in the usual ways • Firm fixed price set by bidding or negotiation • Consultant selects, designs the cleanup system • Paid at Demo, 25%, 50%, 75%, Goal, Goal+2Q • Prompt payment, 3 - 30 days, minimal paperwork • Tight measurement, rebound provisions • Set escape clauses upfront; no change orders

  6. PFP Is Small Business Friendly • For consultants • Capital cost is recovered early • Minimal paperwork • Progress payments are made simply and quickly • Cash inflow exceeds payout during most of cleanup • For site owner/operators • Price, time predictablility • Common-sense terms • Faster recovery of economic value of property

  7. Strict Application Of Core PFP Principles Is Key To Success • Buy a clean site, not just some clean wells • Set fixed, specific contamination reduction goals up-front • Set a firm fixed price up-front • Consultant designs and runs the cleanup • State focus strictly on environmental results • Pay quickly when contamination is reduced • Share the financial risk by fair escape clauses, walkaway protection

  8. No PFP Failures, One Default • Over 300 PFP cleanups are started or completed • Most PFP sites are on or ahead of “schedule” • No PFP failures, one default so far • Several intrusions of offsite plumes • One attempt to cheat on measurement • Several faulty site assessments

  9. Ways To Set PFP Prices:Negotiation • Negotiated PFP prices are higher than competitive-bid prices • But lower than T&M prices over long term • Because change-order inflation is avoid • Challenging to administer long-term • Uncertain timing • Potentially labor intensive for contractor and state

  10. Ways To Set PFP Prices:Competitive Bidding • Open, competitive bidding cuts PFP cleanup prices 30% - 50% • Buying contamination reduction, not professional services • Fast, fair to administer

  11. Site Goals For PFP Cleanups • Set however the state currently sets goals • Works with free product removal goals • Dovetails with risk-based cleanup goals • Compatible with monitored natural attenuation

  12. Time Limits For PFP Cleanups • Typically two to three years • May be longer (e.g., MTBE) • May be set to reach an interim goal • May be adapted to monitor-only sites

  13. PFP In FY 2001: stop here Bill • PFP National MTBE/Small Business Pilot • Scale-up number of PFP sites in “voluntary” programs • Strengthen contamination-reduction measurement • National Governors Association • Much more info sharing via Internet

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