Insider’s Perspective Article: Guaranteed Fixed Price Remediation – A Paradigm Shift in Environmental Services Contracting
 
May 4, 2006
 

Guest Author: Brad A. Maurer, Esq. CPCU, TerraSure®

The environmental services industry grew out of the demand for professional services to handle the sudden responsibilities generated by the Resource Conservation and Recovery Act (RCRA) and the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), shortly thereafter. Both of these laws promulgated a complex web of regulations and liability concerning the remediation of hazardous waste and substances. In response, the environmental services industry created its own procedures and service standards to deal with not only the physical challenges of remediating contaminated land and water, but also documenting the process in a manner to satisfy both regulator and litigator. And so in these bright new days that are the brownfield redevelopment era, our success in remediating brownfields is in part hampered by the very industry that is essential for it. In these days of voluntary clean-up programs and innocent party liability protection, we have seen government turn from arch nemesis of remedial closure to its promoter, while the environmental services industry in its now-antiquated form acts as a bureaucratic deadweight stalling project completion.

Today’s environmental services customer is no longer interested in a long, drawn-out legal battle over liability for the cleanup, but instead desires a cleanup performed quickly and efficiently. This new customer is more often than not a real estate company or local government economic development agency that does not see the cleanup as a liability, but rather one of the necessary steps which must be quickly done to get the real estate back into the market. Unfortunately, they will find the majority of the environmental services industry less enthusiastic about their aspiration of expedited cleanup. For the general environmental services industry, time is money and the less time spent on a project, the less revenue they extract from it. But while this may sound like commercial libel of a vast industry, it only accentuates the extraordinary achievement of some forward-thinking environmental firms that have not only recognized the needs of this new customer class, but have also embraced them by altering the way they do business. Guaranteed Fixed Price Remediation (GFPR) is one of the many ways that firms have redesigned their approach to provide goal-oriented services – with the goal being the completion of the project and the product being a quick and efficient environmental remediation. GFPR promotes not only quicker and more efficient cleanups, but also invites even more of these new classes to Brownfields projects by accepting the risk of cost variations that are so endemic in environmental remediation projects.

GFPR is a contracting method by which an environmental services firm sets a fixed price to accomplish complete remediation of a property. The consumer in essence outsources not only the execution of the remediation, but also transfers the risks of failure and its associated costs to the provider. In exchange, the GFPR provider takes complete control of the execution of the project although most contracts do provide for customer referral of all documents submitted to regulators prior to finalization. And in addition to the transfer of control, the GFPR provider will embed a “risk premium” into its price – an amount of potential extra profit that the provider may enjoy if the project costs are incurred in the amounts as planned.

Remediation is an imperfect applied science because it involves an uncertain physical environment as well as a variable regulatory and political environment. Uncertainty translates into risk of either an unsuccessful or a more expensive and time-consuming project. The following table highlights some of the major risks associated with remediation projects:

Table 1: Remediation Project Uncertainties

Physical	Regulatory/Political
Characterization:  The exact location of the contamination vertically and horizontally	Closure Standard(s):  Some standards are discreet amounts (e.g., 5 ppm) while some are risk-based and are subject to varying opinions.
Characterization:  The exact concentration(s) of the contamination	Interpretation:  Many standards are subjective and regulator may have a different interpretation of the same data.
Characterization: A property’s underground (i.e., hidden) soil and groundwater conditions must be known to apply remediation technology.	Interpretation:  A dispute may arise regarding whether or not a substance is a “contaminant” and must be remediated.
Technology:  A remedial technology may work in the laboratory, but fail to be effective in the field.  Even a proven technology (i.e., excavation) may not produce the results necessary to achieve closure.	Disposal Options:  Offsite disposal requires a negotiation with disposal companies whether they will accept the material and at what price.
Contractor Management:  Remediation often resembles a construction project – contractors must be closely monitored and guided to avoid errors and increased costs.	Area Stakeholders:  A politically unpopular project may encounter neighborhood resistance resulting in enhanced regulator scrutiny and cost.
Property Configuration:  The best-planned project must conform to the practical limitations of the property.  Issues such as truck access, abutting structures and adjacent property uses affect the efficiency of project execution.	Permitting:  Remediations require permits not only from environmental agencies, but also local non-environmental agencies which may need an education about the remediation and its hazards and benefits.

GFPR contracting shifts these risks to the party best suited to evaluate them – the environmental professional firm. But not all firms or all projects are suitable for GFPR. The following are key elements that qualify a project for GFPR:

Table 2: Essential Elements for a GFPR Project

Element	Description
Willingness to Outsource	A GFPR provider takes all project cost risk and therefore must have complete control over its execution.
Entire Cost Must Be Capitalized	GFPR employs a “fixed price” for the entire remediation, therefore the customer must be willing and able to fund a complete remediation.  Payments toward this fixed price, however, are typically made in small milestone payments throughout the duration of the project.
Contamination Must Be Exclusive to Property	A GFPR contract is complete when the provider achieves a “no further action” declaration from the regulator.  If the contamination cannot be treated at the property alone (e.g., an off-site source is contributing), the GFPR model does not work.
The Contamination Must Be Treatable	GFPR obviously does not work for properties where technology does not exist to treat the contaminants or when the contaminants are so difficult to reach physically that remediation is impractical.
An Endpoint Must Be Agreed Upon	Most remediations are dependent upon the end-use of the property.  Customer must agree on what standard of cleanup will be achieved (e.g., residential vs. non-residential).

If a project qualifies for GFPR, then the customer must qualify their GFPR provider. Remediation projects vary in costs from tens of thousands to tens of millions. A GFPR provider is accepting significant financial risk in performing its services and must have the capital to withstand cost overruns relative to the project. Nationally, there are less than 10 GFPR firms who will or can accept projects in excess of $10 million. There are a greater number of smaller firms that will perform GFPR for projects less than $1 million within their local areas of service. There are a few points to consider when selecting a GFPR provider as follows:

Table 3: Qualifications of the GFPR Provider

Qualification	Description
Technical Capability	Does the provider have the knowledge and experience to complete the work in the jurisdiction where the property lies?
Financial Capability	Does the provider have the financial strength and stability to fund any probable cost overruns?
Manpower and Resources	Does the provider have the physical resources to complete the project in the location and timeframe desired?
Contract Agreement	Does the provider have a GFPR contract that clearly states its obligations and responsibilities relative to the guaranteed fixed price with few, if any, loopholes to change the cost?

There are many elements to GFPR contracting that are merely mentioned here, but are worth knowing if you plan to employ a GFPR provider. In the last 10 years, public records show that over $500 million in GFPR contracts have been executed. The Department of Defense employs GFPR routinely in the procurement of environmental services for its closed installations and the private sector has come to rely on GFPR for many high-end brownfield redevelopment projects. In many cases, the benefit sought by the GFPR customer is not the risk transfer element, but the “partnership” element that is created when the provider agrees to be paid only upon progress milestones – the provider is thus motivated not only to perform the project efficiently, but also quickly to earn its next payment. GFPR is an innovation of the environmental services industry that is not only demonstrating its ability to react to the needs for its new customer base, but also to achieve sustainable profitability which will ensure the availability of its services for this new brownfield era.

For more information, e-mail Amy L. Edwards at amy.edwards@hklaw.com or call toll free, 1-888-688-8500.

About Our Guest Author

Brad A. Maurer, Esq. CPCU, is co-founder and principal in TerraSure^®, www.TerraSure.net, a national provider of GFPR services, where he acts as counsel and risk manager. Mr. Maurer is also the executive director of Frenkel & Company, Inc.’s Environmental Risk Services Group, a national provider of environmental insurance brokerage services for industry and environmental services firms. He may be contacted at BMaurer@TerraSure.Net.