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Pay For Performance (PFP) Toolbox: 2. Details of PFP Contracting

What is the role of site characterization in PFP?

An accurate and complete site characterization is the first step towards securing the contamination reductions on which pay for performance (PFP) focuses. Site characterization plays two roles in cleanups:

  1. It provides essential information about the scope of the problem needed to estimate time and price for the cleanup, and
  2. It provides the basic information needed to make important technical decisions about treatment technology and contamination reduction measurement.

For example, it will help state project managers determine where soil sample points or monitoring wells need to be placed to ensure the whole site is cleaned up, not just groundwater in the immediate vicinity of the monitoring wells, and confirm that contamination reduction goals are met.

Site characterization gives a snapshot of the site at a fixed point in time. This section discusses how site characterization fits into PFP cleanups administratively, since PFP is a contracting mechanism, not a cleanup technology. (For more information on site characterization in general click here.)

Good Site Characterization Is Basic To Getting Cost-Effective PFP Cleanups

The contamination reductions produced by the cleanup can seem greater or smaller than they really are if the performance payment data collection points are located incorrectly as a result of an erroneous or incomplete site characterization. PFP contracting will be a win-win for everyone if the site characterization is complete and accurate. To ensure fairness, some states are providing escape clauses to ensure a contractor does not unfairly carry the burden for incomplete site characterizations. An example of PFP contract escape clause language comes from the State of Vermont:

The Agreement will be final and will not be increased, canceled, or renegotiated for any reason....with the exception of the following conditions:

  • a. identification of a new release that affects attainment of a milestone;
  • b. migration of off site contamination onto the subject site that affects attainment of a milestone;
  • c. changes in applicable regulatory requirements or policies that affect remedial design, operations or cleanup goals;
  • d. events beyond the control of the parties that make performance or timely performance impossible; and/or
  • e. other conditions that are mutually agreed to by the Contractor and the DEC.

A thorough site characterization may cost more at the beginning of the cleanup but may be money well spent, because it can result in a savings later on from getting more effective cleanups. The rules of a good site characterization apply here just as in a T&M cleanup.

Decide Up Front Who Assumes The Financial Risk Of An Incomplete/Incorrect Site Characterization

When designing a PFP program, it is important to decide up front how the state will handle the cost and consequences of an incorrect or incomplete site characterization. Who will assume the financial risk?

A reasoned argument can be made for putting the financial risk posed by an incorrect or incomplete site characterization on the state, the site characterization contractor, or the cleanup contractor. Some states use escape clauses to be fair to everyone involved.

Some States Perform Site Characterizations And PFP Cleanup Work Separately

Some states believe it is best to conduct the site characterization for a PFP cleanup independently of the actual remedial contract at a PFP site. Some states allow the contractor who did the site characterization an opportunity to compete for the remedial work. Other states believe having separate contractors perform the characterization is the best approach. Some stakeholders believe that having the site characterization and the cleanup performed by the same contractor could be interpreted as a conflict-of-interest. Also, consider that a very competent site characterization contractor may not necessarily be equally strong in design and operation of the site's PFP cleanup.

Regardless of whether the same or different contractors do the site characterization and the PFP cleanup, site characterization should be performed under a separate scope of work and priced separately from the PFP remediation work.

Make The Site Characterization Available To Bidders And Negotiators

As is the case for any competitive bidding process, the site characterization must be available to all bidders. When negotiating to set the price of a PFP cleanup, the characterization of the site is not open to negotiation along with negotiation of the cleanup price. It is the responsibility of the state project manager to determine the proper extent of a site characterization.

If bidders or price-negotiators for the contractor submit a legitimate reason why the site characterization is incomplete and the state project manager agrees, then the request for bids or negotiation should be terminated and the flaws in the site characterization should be remedied.

Formal Concurrence In The Site Characterization By The PFP Cleanup Contractor Is Critical

When formally agreeing to perform a PFP cleanup, the cleanup buyer (such as the state) should require that the cleanup contractor explicitly stipulate that the given site characterization is valid and complete for purposes of scoping the cleanup and estimating its cost. If the site characterization subsequently is discovered to be invalid or incomplete in some significant respect, this should be a reasonable condition for escape from the original PFP cleanup agreement terms.

If prospective cleanup contractors believe they will need more site-characteristics data to fine-tune the design, installation, or operation of the treatment technology to be used, then the cost of data collection should be included in the overall price that is bid or negotiated for the PFP cleanup.

The contractor who agrees to perform a PFP cleanup may collect additional information about the site to confirm the site characterization at the contractor's own expense before installation of the treatment system.

Site Characterization Data May Be Unsuitable As The Source Of "Baseline" Concentration-level Data

The baseline contamination levels should be measured at the site just before the system is turned on so that the contractor is neither blamed nor paid unduly because the real-time starting contamination levels were different than those measured at the time the site characterization data were collected. Although the site-characterization data are reasonable indicators of concentration levels at an untreated site, time and seasonal factors may have pushed those levels up or down when the treatment system is turned on.

Characterize the Site Correctly To Set The Cleanup Price

Delineating the plume correctly and completely is vital given the role this plays in pricing the cleanup, designing the treatment, and in measuring contamination reduction in appropriate places. Avoid driving the PFP site characterization towards exhaustive data collection and analysis. Instead, scope PFP site characterization to the minimum needed to frame the performance agreement and estimate the cleanup cost.

Contractors should look for a site characterization that includes at least:

Even within this basic information there can still be large differences in how much sampling and analysis work is done in the site characterization and how it is done.

An accurate and complete site characterization is the first step towards securing the contamination reductions on which pay for performance (PFP) focuses.

How do I determine when to pay the PFP cleanup contractor?

There are four major points at which the contract should provide for payments for the contractor:

The relative amounts of the performance payments over the life cycle of the cleanup fine-tune the financial incentive of PFP in important ways. The initial large reductions achieved early in the cleanup may cost relatively little for the contractor to deliver. Later, as the rate of contamination reduction begins to decline, the contractor's costs may increase.

Payments When The Cleanup System Is Installed And Operating

The only instance in which payments are not based on measured contamination reductions should be at the beginning of a cleanup. One or two minimal payments may be made at early milestones such as on installation or after demonstration that the treatment system is fully operational. As a rule of thumb, early payments should not exceed 40 percent of the total maximum amount of the performance contract. Under special circumstances early-stage payments may be as high as 50 percent. Most of the amount of the performance contract (50 to 80 percent of its total value) should be paid out as contamination levels decrease to predetermined levels.

Payments As Intermediate Contamination Levels Are Reached

Contamination levels for intermediate performance payments can be referred to in either absolute or relative terms. For example, a 53.6 percent reduction in benzene is a relative performance number and 100 ppb benzene is an absolute performance criterion. Both terms refer to a cleanup goal. Many states have already set contaminant goals worded in specific terms. Whichever way is chosen to state contamination levels, the key to a PFP contract is to tie a set dollar amount to each payment milestone.

Partial Payment When Final Goal Contamination Levels Are Reached

The entire remaining value of the contract shouldn't be paid out when the cleanup goal is first reached. Modes of operating the treatment system, weather, and other factors can cause contamination levels to decline temporarily to the goal. These levels may not be retained after the treatment system has been shut off for a reasonable time or, for example, when groundwater levels rise during a wet season.

Final Payment After Retaining Goal Levels For A Set Time

Final payment of the contract amount should be paid only after contamination levels have been retained at or below the goal levels with the treatment system turned off for a reasonable time. This part of the payment schedule should set a time period or monitoring-report schedule during which specified levels of specific contaminants will not be exceeded. When the monitoring report shows sustained contamination reduction levels for the specific period of time, then final payment of the cleanup contract is made.

The amount reserved for the final payment should be large enough to ensure that the contractor has a financial incentive to stay with the cleanup until final goals are met. The amount paid on first reaching cleanup goals should be about the same as the final payment for retaining goal levels.

As a practical matter, a performance contract should produce documentation of site contamination goals attained so that the property can be transferred to another owner.

Contamination Levels And Payment Schedules: An Example

Performance is defined by the percent reduction of the initial total BTEX(benzene, toluene, ethylbenzene, and xylene) (less the standard of each parameter) from the total BTEX (less the standard of each parameter) of a performance sampling event. Wells BF1-2, BF1-3 and BF1-4 will be the performance monitoring wells used in the percent reduction calculation. The following example illustrates one methodology that might be employed in computing percent reduction and performance payment.

Initial Sampling (ppb)
Well B T E X Total
BF1-2 2,200 7,600 4,200 3,800  
BF1-3 3,400 6,500 3,900 2,200  
BF1-4 720 985 2,450 1,630  
Sub-Total 6,320 15,085 10,550 7,630 39,850
Less Standard (X3) 30 2,250 2,250 1,860 6,390
Above Standard 6,290 12,835 8,300 5,770 33,195

The concentration of 33,195 above becomes the baseline BTEX value. If a subsequent monitoring event yielded the following water quality results:

Subsequent Sampling Event (ppb)
Well B T E X Total
BF1-2 800 2,100 1,700 1,400  
BF1-3 1,100 1,650 2,600 950  
BF1-4 330 622 1,900 870  
Sub-Total 2,230 4,372 6,200 3,220 16,022
Less Standard (X3) 30 2,250 2,250 1,860 6,390
Above Standard 2,200 2,122 3,950 1,360 9,632

A percent reduction would be computed: in this case, (33,195 - 9,632) ÷ 33,195 = 71%. Thus, the 30% and 60% performance payments would be due, if not already paid. The 90% payment would not be due yet.

Performance payments are:

30% Performance = $33,333
60% Performance = $33,333
90% Performance = $33,334

For further discussion on the relationship between performance and payments, see also the section, How do I measure and document environmental progress?

The relative amounts of the performance payments over the life cycle of the cleanup fine-tune the financial incentive of PFP in important ways.

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How do I set the environmental goals for a PFP cleanup site?

PFP cleanup goals are set however the state otherwise sets cleanup goals. Below are examples of different ways different states set PFP cleanup goals.

For more information on these four examples, see the section entitled "What are some resources for PFP information?"

How contamination level goals are to be measured and evaluated is a rather technical matter that should be incorporated into the PFP contract in specific terms. Measuring and evaluating attainment of the PFP cleanup's final environmental goals is discussed in further detail in a later section; see "How do I measure and document environmental progress?" Pay for performance (PFP) is a way to buy as much contamination reduction at a site as the state deems appropriate. Whatever the environmental goal set for a PFP site, attainment of that goal must be measured and evaluated in a way that assures a clean site, not just some clean monitoring wells.

 

Pay for performance (PFP) is a way to buy as much contamination reduction at a site as the state deems appropriate. PFP cleanup goals are set however the state otherwise sets cleanup goals.

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How do I measure and document environmental progress?

Measurement of the environmental performance-that is, the contamination reduction-is central to pay for performance (PFP) cleanups.

The basic principle of PFP is that it should buy a clean site, not just some clean sampling points. Measuring and documenting contamination reduction at PFP cleanups requires clear conceptual understanding of the PFP cleanup site as well as the administrative procedures for getting and managing the contamination reduction data. Deciding where, how, and when contamination levels at PFP cleanup sites are checked is crucial to the programmatic integrity and success of PFP cleanups.

A successful PFP program is based on setting appropriate milestones on which cleanup contractors are paid for environmental results produced. Milestone setting involves structuring contractor payments in relation to progress and results. Making one or two early-stage payments for system installation and testing can enable small contractors to compete for and perform PFP cleanups. However, most of the financial incentive (the money the contractor gets paid) comes from payments tied to contamination-level reductions.

Properly measuring environmental results that trigger PFP payments is crucial. Measurable payment criteria tied to environmental contamination reduction levels are central to cleanup performance contracts. PFP contracting done correctly yields not only clean data collection points but also a clean site. Payment under a PFP contract should only buy contamination reduction.

Measure Contamination Levels In The Right Places

In order to characterize and monitor a contaminant plume effectively, care should be taken in the correct placement of monitoring wells. The position(s) of wells may also result in more realistic readings of contaminant levels. A small, representative number of wells should be chosen as the wells from which samples will be taken (key monitoring wells). At this point, it is recommended that consideration should be given to how progress will be measured, in terms of payment for contamination reduction. In addition to these key monitoring wells, a minimal number of perimeter wells should be chosen for sampling to ensure that the plume isn't moving away.

Performance-payment data should be tailored to the cleanup technology being used. Different cleanup technologies can require different approaches to measurement of contaminant reductions at a site. More technical information about matching contamination reduction monitoring plans to specific cleanup technologies can be found in How To Evaluate Alternative Cleanup Technologies For Underground Storage Tank Sites (EPA 510-B-94-003), which is accessible from EPA's UST web site at http://www.epa.gov/swerust1/pubs/tums.htm.

 

Establish Baseline Contamination Levels For Measuring Progress

Measuring cleanup performance requires pre-cleanup baseline information. Good baseline data are the foundation for valid measurement of cleanup performance. Baseline data can become outdated by collecting it too far in advance of when treatment begins.

Establish Contamination Reduction Milestones And Goals

PFP cleanup site milestones are intermediate contamination reduction goals agreed to by the state and the contractor. The specific cleanup milestone contamination levels and how they will be measured and evaluated are stated explicitly in the PFP contract for the site. On reaching each milestone, the cleanup contractor will get a pre-determined partial payment of the full price set for the PFP cleanup.

Relative Size of Performance Payments

The relative size of the payments and the contamination-reduction milestones that trigger each payment are structured to give cleanup contractors financial incentives to reach cleanup goals quickly and efficiently.

Making one or two early-stage payments for system installation and testing can enable small contractors to compete for and perform PFP cleanups. Early-stage payments for system installation and testing are an incentive for the contractor to start the PFP cleanup quickly. However, most of the contractor's financial incentive comes from payments tied to contamination-level reductions.

The relative amounts of the performance payments over the life cycle of the cleanup can help fine-tune the financial incentive of PFP in important ways. Initial large reductions achieved early in the cleanup may cost relatively little for the contractor to deliver. Later, as the rate of contamination reduction begins to decline, the contractor's costs may increase or decrease. The amount of payments should be set high enough towards the end of the cleanup to provide incentive for the contractor to continue treatment after recovery rates begin to flatten out. Typically the performance payments scheduled towards the end of the cleanup should be relatively larger than intermediate performance payments.

Establish Stable, Specific Contamination-Level Performance Goals

Cleanup goals should be clearly set before the PFP cleanup is priced and started. The contamination-reduction goals for a PFP cleanup are the same as for T&M cleanups and should be established the same way. PFP cleanup goals should not become a moving target: fixed, clear-cut contamination-level goals are essential.

State project managers must specify performance goals for each cleanup in terms of environmental contamination levels. A PFP agreement pays only for environmental results. Level-of-effort measurements, such as operating time for treatment equipment, are not cleanup performance measures. The specific contamination level goals for PFP agreements may be set by Risk-Based Corrective Action (RBCA) procedures or by other standards a state normally uses (for example, groundwater MCLs). Monitoring contamination levels and authorizing or withholding payments based on monitoring data is the primary work of state project managers who oversee PFP cleanups.

Produce A Pay/No-pay Signal From Valid Data

Contaminant monitoring data are used to trigger and document a pay/no-pay decision. If performance-measurement data will come from multiple locations on multiple pollutants, the agreement's payment criteria should simplify or summarize these data so that the terms of payment are clear and unarguable from the beginning. The more locations from which data are sampled, the more complex the decision to pay or not to pay will become unless the data are somehow combined into a simple pay/no-pay plan.

Although quality assurance procedures for monitoring data are already quite common, the data carry much more weight in PFP cleanups, as payment depends on them. Existing PFP agreements have incorporated split sampling taken by the state and sampling supervised by the state in contract language. PFP agreements do not necessarily require any quality-assurance/quality-control methods beyond those already available, but it is important that these methods be incorporated into a PFP agreement. Once a PFP cleanup is underway it may require more state staff attention to confirm that data quality control procedures are guarded carefully.

NOTE: For the latest version of EPA's QA documents visit The EPA Quality System.

Identify Measurement Factors

A PFP contract should specify where performance payment criterion data samples will be taken. This determination should be based on the site characterization, including the extent of the plume and on risks posed by the plume. If the site's cleanup goals are based on Risk Based Corrective Action (RBCA), the payment-criteria sample locations should be capable of measuring contaminant levels for affected, or potentially affected, receptors identified by the RBCA process. The RBCA analysis of a cleanup site will identify contamination levels that should be reached at specific points needed to minimize the risk posed at the cleanup site. The payment criteria in a PFP agreement should be focused to include these RBCA-identified risk-reduction measurement points. This linkage of payment criteria to the points at which risk reduction is measured is another key to ensuring that the cleanup really does protect human health and the environment.

Identify Contaminants To Measure

As a general rule of thumb, a contract's performance-payment criteria should focus on the specific contaminants of concern at a particular site. The more substances enumerated, the more complex and costly it becomes to administer. If RBCA analysis has been done, performance-payment criteria should be based on actionable risks. To keep the contract simple where multiple substances are being monitored, specify that interim and final reduction levels for all contaminants listed in the contract must be reached to receive interim and final payment.

State The Measuring Methods In The Contract

All the details of measuring contamination reduction and how it relates to payment must be spelled out in detail in the PFP contract.

Monitor Contamination Reduction Regularly At A PFP Site

Staff should be proactive in monitoring contamination reduction at PFP cleanup sites. Routinely obtain and evaluate interim contamination-reduction data for signs of interim progress regardless of whether a performance payment is requested. Typically this means applying the state's normal monitoring reporting schedule to PFP sites. State project managers should call to the attention of the contractor any indications of insufficient contamination-reduction progress early and formally, regardless of whether the contractor has requested a performance payment. For example, the State of Vermont has employed a policy of reducing milestone payment amounts if the contractor submits regular monitoring reports late:

h) Reporting of O&M and Monitoring

  • A data report should be submitted within 45 days of each quarterly sampling event. Each data report should include copies of the laboratory reports, a groundwater contour map, a contaminant distribution map, and a time-series graph with associated tabulated data for all sampled monitoring points. If a report is late, then $1,000.00 will be subtracted from the next milestone.
Base Performance Payments On Direct Measurements Of Contaminant Levels In The Cleanup Environment

There are a variety of ways in which the engineering performance of different kinds of treatment systems may be measured, such as influent and effluent data or stack-gas emissions. Such measurements of system performance are inappropriate measures for triggering PFP performance payments, regardless of how useful and significant they may be in operating and maintaining a treatment system at its peak effectiveness.

Measurements of the performance milestones for which a PFP contract are paid should be based on data from direct measurements of the affected environment. The more distant that payment criteria are from directly measured environmental data, the weaker a performance contract's power to produce the desired environmental results within cost limits. The purpose of a cleanup performance contract is to pay for the attainment of environmental goals set for the cleanup site.

Confirm Contamination-Reduction Payment Data

Because contractor payment hinges on monitoring data, confirm that the data submitted are indeed valid. Monitoring data should be collected and/or analyzed by a third party, independent of the cleanup contractor. Confirmation of sampling procedures and contamination-reduction payment data can be achieved by having a state representative on site, witnessing the sampling event, and splitting the sample and sending the splits to different labs for analysis. The method used is entirely up to the state and should be based on the comfort level that the state has with the cleanup contractor and the availability of state staff for sampling oversight.

Reserve The Right For The State To Take Additional Samples At Times And Places Of Its Own Choosing

In order to verify sampling results at each stage of the contamination reduction at the site, the state may wish to take confirmatory split samples of groundwater and soil. The State of Utah has included language in its PFP contracts to ensure that contamination reduction goals are met:

2.

a. The Contractor shall submit water sample analysis results to the Executive Secretary. The report need only include a transmittal letter and a table with current and historical results. Water sample reports used to support performance base criteria for payment must also include the laboratory data sheets. Payment verification reports shall include tables for all contaminants showing total percent reduction in contamination from baseline data.

b. The Executive Secretary shall be given 48 hours notice prior to any sampling event that will used for performance payment verification to allow the Executive Secretary or its representative the opportunity to take split samples. If notification and opportunity for the Executive Secretary to obtain split samples is not given, the Executive Secretary may reject the sample results.

Elements Of Performance Payment Criteria
Specification For Monitoring Measurements

Performance-payment criteria levels can be expressed in percentage reduction from baseline levels of contamination. Payment allocations can be made according to the percentage reductions. Making the end payment large can provide an incentive for the contractor to persist when contaminant recovery rates begin to diminish. Linking performance levels to payments places a significant financial burden on the data that are used to trigger payment. Beware of measurement or analysis errors that would trigger payment prematurely.

Criteria For System Start-up And Contamination Reduction Milestone Payments: An Example

The criteria for the PFP system installation or start-up payment is typically set in narrative language. For example, from the State of Vermont Department of Environmental Conservation:

Payment: Payments will be made when the DEC determines that performance criteria are achieved and will be paid at the following cleanup milestones:

Milestone #1: ___% ($____) of the total contract amount will be payable when all work outlined in Attachment A, "1." (a-d) has been completed.

Attachment A, item 1, a - d, reads as follows:

Scope of Work: The Contractor's scope of work for this Agreement consists of the tasks listed below.

a. Completion, submission, and DEC approval of a draft and final corrective action plan (CAP) to the DEC that is prepared in accordance with the DEC document, "Corrective Action Guidance," dated November 1997. [Note: costs will not need to be included.]

b. esponse to public and DEC comments, both written and verbal (this may include attending public meetings on the CAP) and, if requested by the DEC, redrafting the final CAP to take into account substantive comments.

c. Installation of the remediation system as described in the CAP. Modifications to the approved remedial system may be made in the field as site conditions warrant by the Project Engineer subject to General Terms, "17."

d. Preparation of "Remediation System Startup" and "As-built" report(s), and submission of same to the DEC within ninety (90) days of system startup. If the as-built report is late, then $3,500 will be subtracted from the first milestone.

The criteria for the PFP contamination reduction milestone payments are typically framed in a tabular form embodied or appended to the PFP contract. A typical contract issued by the Pennsylvania Department of Environmental Protection contains the following language:

Fees and Payment. ________ agrees to have the corrective action set out in this agreement performed for the total fixed price of $_______. Payment shall be made when the Fund is satisfied that interim CoC concentration reduction goals and final objectives are achieved. Baseline concentrations for the CoC - _______, are ___ and _____, respectively. These results were obtained during the most recent sampling event conducted on ______. Payments shall be made when performance criteria are achieved as follows:

A. ______, equal to 35% of the total agreement price, shall be paid when baseline concentrations for the CoC are reduced by 50%.

B. ______, equal to 35% of the total agreement price, shall be paid when baseline concentrations for the CoC are reduced by 75%.

C. The final payment of ______, equal to 30% of the total agreement price, shall be paid upon approval by the DEP of the remedial action completion report for groundwater and soil.

Consider Including Provisions For The State To Take Additional Contamination Measurements

States have found it helpful for a representative of the state to observe and oversee installation or system-start events that trigger a performance payment. A representative of the state should observe sampling taken for purposes of documenting a contamination reduction-milestone payment. Split samples should be taken and the state's sample should be analyzed independently from the contractor's sample.

How do I determine when to pay the PFP cleanup contractor?
Establish A Method For Managing PFP Cleanup Site Performance Data

Paying close enough attention to the environmental performance of a project manager's portfolio of PFP cleanup sites can become difficult to do effectively without reliable and user-friendly computerized data management capability. At the beginning of a PFP pilot is the best time to start a modest database for managing PFP site performance data. When the state is ready to scale up its PFP program the pilot database will provide both the experience and the model needed to assure effective full-scale management of PFP site performance data.

Install Simple Electronic Information Management Tools

Implementing simple information management tools such as a database and electronic data reporting forms to collect, store, and display the contamination-level data better enables project managers and staff to oversee PFP cleanup progress and to approve or withhold payment at appropriate times.

One of the most important duties of the project manager under PFP contracts is the measurement of data that show whether contamination reduction goals have been reached. This is a simple but data-intensive question to answer. Thus the database and its matching electronic data reporting forms should be kept as simple as possible. For each PFP cleanup, the key information will be the baseline, the payment-milestone, and the target contamination levels set for each contaminant at each data collection point, which is stipulated in the contract language. Through the use of simple electronic information management tools, many potential problems are avoided and results are efficiently documented.

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How do I set the price for a PFP contract?

There are several ways to determine the total fixed price for a PFP contract. Current state programs have decided to use bidding or negotiation to set the price of a cleanup.

Estimating Prices: Bidding And Negotiating PFP Agreements

PFP cleanups are done on a firm fixed price basis. This fixed price for a PFP cleanup can be set through (1) competitive bidding or (2) negotiation with a contractor. Either method for setting the price can be applied to responsible-party lead, state-lead, or federally funded LUST cleanups. Both competitive bidding and negotiation are proving to result in more cost effective cleanups than traditional contracts, but competition among cleanup contractors is the simplest and most effective way to reduce and control cleanup prices.

In both competitive bidding and negotiation, it is useful for the state to estimate the cost of a PFP cleanup prior to awarding the contract. These cost estimates can provide credible upper and lower limits for bids as well as boundaries for negotiating cleanup prices.

Many states have statutory language that requires the state pay "fair and reasonable prices" for UST cleanups. The open, competitive market is an excellent way to find this fair and reasonable price. Experience to date illustrates that competitive bidding not only results in a fair and reasonable price but produces near-term and long-term cleanup price reductions. Another way to keep contractor prices down is by creating a public record of a cleanup contractor's performance and price for particular sites, such as developing a system to collect PFP cleanup data discussed in the last section of this toolbox. As the PFP program matures, this information will help the state produce faster, more efficient cleanups.

Competitive Bidding

Under competitive bidding, the cleanup price is set by the lowest bid. Technical efficacy of the cleanup technology is the contractor's responsibility, yet the contractor must meet all of the state's statutory regulatory requirements. Current PFP work shows that as these types of contracts become more routine, prices for cleanups decrease even more. As more contractors bid for PFP cleanups, bids decrease and contractors learn to produce more cost-effective cleanups.

In order to use competitive bidding to clean up an UST site, the state must publish a request-for-bids information package that includes a completed state-approved site assessment, contamination-level goals, and criteria for the performance payments and other terms and conditions. Availability of the request-for-bids package (*in MS WORD format*) is advertised publicly and prospective bidders receive it on request to use in preparation of their bids, which are typically delivered to the state within 30 calendar days of the publication of the request-for-bids. While it may take additional time to put together this request-for-bids, the state will save time in the later stages of the cleanup because there is less time needed to review materials throughout the contract and to bring the cleanup to a timely and successful conclusion. Based on states' PFP experiences to date, competitive bidding leads to the lowest reasonable cleanup price (*graph in MS WORD format*) for the government.

Negotiation

Negotiating a PFP cleanup price involves price offers and counteroffers until agreement is reached or abandoned. Experience to date indicates that PFP cleanup prices set by negotiating are significantly higher than prices set by open, competitive bidding. Negotiating the price can be labor intensive for both the state and the contractor because in order to make an initial offer or counter a bid, the state and the contractor must estimate the cost of the cleanup before entering price negotiations.

In negotiations it is important not to rely on historical T&M contract costs because these should be considerably higher than PFP cleanups. It is also necessary for the state to provide simple, clear limits that define the responsibilities assumed by the state in its PFP cleanups. Negotiated PFP cleanup prices to date have not been significantly lower than traditional T&M contracts. However, negotiations can produce very significant savings over the long-term because they forestall price-inflation via change order as the work proceeds.

Both competitive bidding and negotiation are proving to result in more cost effective cleanups than traditional contracts, but competition among cleanup contractors is the simplest and most effective way to reduce and control cleanup prices.

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What is the difference between a state-lead vs. a responsible party-lead PFP cleanup?

A state may establish pay for performance (PFP) cleanups either directly with a state-hired contractor or indirectly as criteria for reimbursement of work performed under contract between an underground storage tank (UST) owner and a cleanup contractor. The state need not have a direct contractual relationship with the contractor to create a de facto PFP cleanup agreement. In most cleanups the contractor's direct legal relationship is with the owner of the UST site.

For example, in the State of Utah, PFP language was constructed to reserve the balance of the rights and interests of the state in PFP cleanup contracts made directly between the owner/operator and the cleanup contractor:

1 PURPOSE and SCOPE OF WORK

The Division of Environmental Response and Remediation (DERR) and the Executive Secretary of the Solid and Hazardous Waste Control Board (Executive Secretary), both of the Utah Department of Environmental Quality (DEQ) have determined that corrective action of the petroleum release from a regulated underground storage tank site is required. (Company Name), the owner/operator and PST Fund claimant ("Claimant") responsible for implementing the corrective action, has opted to seek the services of a contractor to perform corrective action in accordance with defined rehabilitation goals. The objective is to reduce the levels of petroleum contamination in the ground-water and soils to or below defined site specific cleanup levels (SSCLs). In this solicitation, the Executive Secretary is acting not as an agent, but as a coordinator between site rehabilitation contractors and the UST owner/operator. All bids and corrective action must be performed under the direction of a Utah Certified UST Consultant approved for PST Fund reimbursement. The scope of work defined in this bid invitation is to be implemented at Release Site EXX, Facility No. 2000000, (Facility Address)

The state can create the functional equivalent of a PFP agreement by setting criteria for reimbursement that are tied strictly to pre-specified, measured contamination reductions. If state government contracting regulations pose obstacles to PFP cleanups in state-lead cleanups, the state may be able to pilot PFP by implementing reimbursement of the owner-hired cleanup contractors directly or through the owner.

An excellent example of a responsible party that used PFP cleanups to control costs and ensure prompt cleanup is The Pantry, Inc. An article describing The Pantry, Inc.'s use of PFP cleanups on sites in the State of Florida can be found in the November 2001 edition of LUSTLine, entitled "The Win-Win Scenario (PDF) "(7 pp, 72K, About PDF)

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