Pay For Performance (PFP) Toolbox: 1. Introduction to PFP
What is pay for performance (PFP)?
"Pay for performance" (PFP) as used in this toolbox refers to a contracting system that a public or private entity can use to contract for environmental cleanups. In this toolbox, all of the information provided about PFP refers specifically to cleanups at leaking underground storage tank (LUST) sites. (This does not mean that the use of PFP principles at other types of environmental cleanup sites is not possible-only that that information is not provided here.)
Customarily, cleanups at LUST sites are conducted on a "time-and-materials" (T&M) basis. The contractor performs the work and bills for the hours recorded and the cost of equipment and materials used during the billing period-regardless of the environmental results. In such a system, spending for environmental cleanups by private and government entities has been difficult to contain and actual contamination reduction has been slow.
Pay for performance cleanups are an alternative way to contract for environmental cleanups. Pay for performance uses economic incentives and market forces to encourage cleanup contractors to keep cleanup expenditures under control and meet cleanup goals as soon as possible. In pay for performance cleanups, contractors are paid a set amount of money for reaching specific contamination reduction goals, which are predetermined by state cleanup experts.
What is this PFP Toolbox?
The PFP Toolbox is a collection of information about the use of pay for performance (PFP) contracting for cleanups at leaking underground storage tank (LUST) sites. The Toolbox is designed to help users understand PFP contracting and includes definitions and information on how to implement PFP in a LUST program.
Users can skip around to any topic in the Contents (see left sidebar) at any time and get the information they need immediately. Topics covered in the toolbox include:
- What is pay for performance (PFP)?
- Why would I use PFP contracting for LUST cleanups?
- What is a PFP contract?
- Which states have successfully implemented PFP in their LUST programs?
- How do I know if my state is ready for PFP?
- How do I begin to implement PFP?
- And much, much more
Please note that this Toolbox is a dynamic site-that is, the information at this Web site will be updated and added to on a routine basis. As state programs and others interesting in PFP cleanups provide EPA OUST with information on PFP topics, the new information will be included here so that this database continues to accumulate and expand as an information source.
Why would I use PFP contracting for LUST cleanups?
As of September 2001 there were more than 425,000 confirmed releases from leaking underground storage tanks (LUSTs) in the United States. More than 270,000 cleanups of these leaks have been completed, but 150,000 still need to be completed. State and federal governments combined spend about $1 billion annually to clean up soil and groundwater contaminated by leaks from underground storage tanks. The U.S. Environmental Protection Agency's (EPA) goal is to reduce this sizeable number of remaining underground storage tank cleanups as expeditiously as possible. It also hopes to lower the costs of these cleanups using proven streamlining processes without compromising the quality of cleanups. Pay for performance (PFP) contracting is one way to accomplish these goals.
Benefits Of Using PFP
States with experience using both time-and-materials (T&M) and PFP contracting report that LUST cleanups are being done faster and cheaper at PFP sites. In addition to saving money that can be leveraged for more cleanups, there are other benefits. State officials report a greater use of innovative cleanup technologies and more aggressive approaches to cleaning up "hot spots" at PFP sites. States also have reported that their paperwork burden is reduced substantially under PFP because they no longer monitor the details of a contractor's expenditures. Chuck Schwer of the Vermont Department of Environmental Conservation noted: "No longer would we need detailed monthly invoices that require of us such tasks as comparing the submitted invoices with the preapproved work plan, checking for proper documentation of subcontractor work, and checking for proof of payment." (LUSTLine, Bulletin # 38, June 2001 (PDF) (2 pp, 2K, About PDF)).
Using PFP cleanup agreements programmatically saves money and promotes environmental protection by:
- Focusing cleanup dollars on contamination reduction;
- Focusing state staff work on environmental results;
- Reducing administrative costs and paperwork for reimbursement;
- Enabling more accurate budgeting and spending projections;
- Making financial audits of cleanups much clearer;
- Rewarding effective, efficient cleanup contractors and technologies; and
- Creating market incentives for innovation in cleanup technology.
These states have successfully implemented PFP (PDF) (1 pg, 837K, About PDF) in their LUST cleanup programs. You can read case studies from Oklahoma (PDF) (3 pp, 52K, About PDF), South Carolina (2 pp, 45K, About PDF), and Florida (PDF) (2 pp, 47K, About PDF) and find out what state staff have to say about the benefits of using PFP contracting (all from LUSTLine, Bulletin # 36, November 2000)
What is a PFP contract?
A pay for performance (PFP) contract is the written document that contains the goals of a cleanup that a state (or responsible party) and a cleanup contractor have agreed to abide by during a cleanup. This section provides information about the PFP contract formulation stage. It includes tools to help write a PFP contract and links to more detailed information on how to create a PFP contract.
Basic Elements Of A PFP Contract
A PFP contract includes the following basic elements:
- A firm fixed price
- A fixed time limit for achieving the environmental goals of the cleanup
- Cleanup goals specified in terms of specific contamination levels measured at specific locations
- Criteria for system start-up and contamination reduction milestone payments, including closure
- Provisions for the state to take additional contamination measurements at its own expense and discretion; and,
- Escape clauses specifying conditions under which the contractor can be released from the contract
The PFP contract may also include other legal "boilerplate" language and requirements typical of cleanup contracts, such as requirements to meet applicable environmental permitting requirements, worker safety requirements, etc.
The following items usually are not included in a PFP contract:
- Language that locks the contractor into a particular cleanup technology
- Implicit or explicit provision for "change orders"
- Payment criteria based on services performed or materials provided
Items that should be included/excluded are discussed in more detail in the next section: Details of PFP Contracting.
Links to existing state PFP contract forms are provided in the section on PFP Resources.
What are some common misconceptions about PFP contracts?
Pay for performance (PFP) contracts are relatively new and quite innovative, so there are a variety of misconceptions out there about this type of contract. This section highlights many of those myths, especially ones that may be held by contractors in the state, and provides the reality that these myths are not in fact the case.
|Myth 1:||The contractor will not be able to make a profit under a PFP contract.|
|Reality:||A contractor has the opportunity to make an even greater profit under a PFP contract than under a T&M contract because the contractor assumes some of the risk of the cleanup. Contractors are making good profits under PFP terms because PFP frees them to manage their sites more efficiently, lowers paperwork costs, allows the contractor to purchase equipment that can be re-used on other jobs, and the government is able to pay the contractor in a more timely manner. In fact PFP contractors in pioneering states are generally doing quite well and most are looking for more PFP business.|
|Myth 2:||The contractor assumes all of the risk under a PFP cleanup, and there is no way to minimize this risk.|
|Reality:||There are several ways contractors reduce their business risk when involved in PFP. There are the escape clauses included in PFP contracts which hold the contractor harmless in case of specified events beyond the contractor's control, such as intrusion of an off-site plume or a new release at the site. Also there are relatively inexpensive business insurance products on the market such as stop-loss insurance that a contractor can use to reduce his business risk. PFP contractor business risk is reduced significantly by doing multiple PFP cleanups so that the business risk is spread over multiple jobs. An example of an escape clause can be found in contract language from the State of Vermont:
|Myth 3:||The cost of a PFP cleanup is not significantly different from that of a T&M contract.|
|Reality:||Both negotiated and competitively bid PFP contracts cost less than T&M contracts because the focus of the contract is on environmental results rather than time and labor expended. The lowest price is often with competitively bid contracts rather than negotiated ones.|
|Myth 4:||The contractor will cut corners and not do the job properly if he is not carefully monitored by state officials.|
|Reality:||While officials are not carefully monitoring contractors, it is clear that PFP contractors are using superior cleanup equipment and site management practices at many PFP sites for several reasons. One reason is that a PFP contractor gets to keep the equipment when the job is complete. The contractor can then use this high-quality equipment at another cleanup, thereby lowering internal costs and increasing company profit margins and price-competitiveness. Another reason is that superior equipment and pro-active site management produce environmental results faster and lead to faster payment. The combination of better equipment and better management is proving more cost effective, and so high quality effort produces higher profits. Finally, the contractor who "cuts corners" will not likely get the site clean quickly, if at all, and so simply cannot profit by cutting corners.|
|Myth 5:||If PFP is used for one site in the state, the state must convert all sites to PFP cleanups.|
|Reality:||Reality: PFP is a useful tool but may not be appropriate for every site across the state. Even states with an active PFP program may choose to clean up some sites under T&M contracts.|