Common Sense For Cleanups: Pay For Performance
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Common Sense For Cleanups:
Pay For Performance
William H. FoskettOUST/USEPA/HQ
703 603-7153
National Governors Association
9/23/01
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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
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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
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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
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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
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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
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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
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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
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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
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Current PFP States
Florida* South Carolina* Oklahoma* Utah Vermont Nebraska Michigan West Virginia California Colorado**
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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
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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
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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
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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
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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
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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)
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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
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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”
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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