United States Solid Waste And EPA 510-B-96-OO2
Environmental Protection Emergency Response June 1996
Agency ^ 5403G
«-EPA Pay-For-Performance
Cleanups
Effectively Managing
Underground Storage Tank
Cleanups
Printed on Recycled Paper
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Contents
Introduction: Pay-For-Performance Cleanups
O
1 Whv Use Pay-For-Performance Cleanup Agreements? . . . . .
Most UST cleanups do not justify a time-and-matenals contract ............ , . 2
Time-and-materials contracting creates numerous problems. .............. £
P™y for-performance agreements reward environmental results .............. 2
Pay-for-performance cleanups save money and sustain ^
........
*cus cleanup do,,ars on cleanup w6rk ^
-- *
Pay-for-performance cleanups strengthen finance/integrity .............
Pay-for-performance yields more accurate spendmg, pred,ct,on, ^
--
Pay-for-performance tends itself to broad opportunities ofuse....
2 How To Implement A Pay-For-Performance Cleanup
tasks to set up a pay-for-performance cleanup program. ... .......
standard pract.ce ..... 8
Developing stakeholder support for pay
-for-Perfo,-mance cleanups .......... 14
17
17
22
3. How To Construct Pay-For-Performance Cleanup Agreements
Set the maximum cleanup price • -;
npcide on cleanup performance measurements.
EstablishContamination-level data reporting and contractor payment L-kage. . 24
Define escape clauses
Conclusion: The Future of UST Cleanups
28
31
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I
ntroduction: Pay-For-Performance Cleanups
Underground storage tank (LIST) cleanups are often "bought" using time-and-materials
agreements that can result in high cleanup costs, slow cleanup progress, and failure to reach
cleanup goals. In contrast, pay-for-performance cleanup agreements pay contractors a fixed
price as measurable environmental goals are reached. Paying for cleanups through such
agreements rewards contractors for quickly and efficiently reaching cleanup goals. Pay-for-
performance agreements produce speedier cleanups that protect public health and the
environment sooner. They enable state staff to focus their attention on environmental results
instead of on auditing contractors' internal costs. They minimize paperwork and administrative
costs and delays. Incentives that otherwise inflate cleanup costs are curtailed by pay-for-
performance agreements. As a result, cleanup financing can stabilize in a cleanup program
based on pay-for-performance contracts.
Using pay-for-performance cleanup agreements programmatically saves money and sustains
environmental protection by:
Focusing cleanup dollars on cleanup work,
Focusing state staff work on environmental results,
Reducing administrative costs and paperwork for the state and for contractors,
Enabling more accurate budgeting and spending projections,
Making financial audits of cleanups much clearer, and
Rewarding effective, efficient cleanup contractors and technologies.
This booklet originates in the experience of the UST Bureau of the New Mexico Environmental
Department as it introduced pay-for-performance UST cleanups. However, this booklet both
extends and supplements New Mexico's experience with ideas from other state officials,
experienced cleanup contractors who have commented on its drafts, and the U.S.
Environmental Protection Agency. This booklet is intended as a starting point from which state
officials, cleanup contractors, and UST owners can design pay-for-performance cleanup
programs tailored to their own special circumstances.
How policy makers, program managers, and cleanup overseers can use this booklet-
Section 1
(pages 2-4)
Section 2
(pages 5- 16)
Section 3
(pages 17-30)
For policy makers...
For managers of
cleanup funds or
programs...
For hands-on
cleanup overseers...
Why pay-for-performance cleanups can achieve cleanup
goals faster and more cost-effectively than time-and-
materials cleanups.
How to start, scale up, and maintain a program of pay-
for-performance UST cleanups.
How to draft an iffdividual pay-for-performance UST
cleanup agreement.
Pay-For-Performance Cleanups
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1
Why Use Pav-For-Performance Cleanup Agreements?
Most UST cleanups do not justify a time-and-materials contract
more effectively, more quickly, and more econom.cally using pay-for-performance agreements.
Time-and-materials contracting creates numerous problems.
down Review rejection, and rework of time-and-materials work plans delay the start of
political pressure for fast, generous payments that inflate cleanup prices and undermine public
and political confidence in a state's cleanup program. Despite state and federal effortslo
streamline this aspect of UST cleanup programs, many still have long backogs m' Pav^
cleanup work and delays in reaching cleanup goals that anse d-re^ly from *'m^nd ^^
cleanup agreements. Using pay-for-performance agreements routinely can eliminate most OT ,
the problems associated with time-and-matenals agreements.
Pay-for-performance agreements reward environmental results.
Pav-for-oerformance UST agreements save money on deanuH- by rewarding c°ntractr"" f°^
S-effertive^llanSps that meet environmental goals sooner. Instead of reward.ng failure to
achieve contamination reductions with payment for further 1;ime-^d;m^na™*™^veemenis
oerformance agreements pay when the contractor succeeds. Pay-for-performance agreements
afso sh!?t£ Xnflon of state staff from cost-accounting details and second-guessing
contractor engineering decisions to risk-reduction and environmental results.
Pay-for-performance cleanups save money and sustain environmental protection.
In programs driven by pay-for-performance agreements, payments to d*™^ factors
depend on their reaching *™™« quick,y
aSe^
and environment by linking contractor payment to measured contamination level re
Instead of diminishing environmental goals to cut cleanup costs, pay-tc
Pay-For-Performance Cleanups
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agreements can stimulate contractors to make better use of better cleanup technology, trigger
market competition that drives down cleanup prices, and reduce administrative costs of
contractors and of government. %k, •'•:&'•' •• '
Pay-for-performance cleanups focus cleanup dollars on cleanup work and reduce
paperwork.
Time-and-materials cleanup contracts require extensive documentation of costs be submitted in
support of bills. Pay-for-performance cleanup agreements require documentation of
environmental results instead of documentation of the contractor's internal costs. Compiling,
submitting, and occasionally defending cleanup time-and-materials billings adds to the cost of a
cleanup, but does not get a site any cleaner. Using pay-for-performance agreements can
reduce paperwork significantly by eliminating reporting of contractors' time and materials. This
also eliminates the staff time needed to sort, file, review, cross-check, and resolve disputes
about how the contractor is managing the business aspects of a cleanup. The state receives
and reviews only information about measurable environmental results as specified in the
performance agreement. Contractors can focus their managerial attention on closer internal
cost controls and more effective cleanup technology to enhance their profitability. State agency
staff can focus their attention on environmental results rather than on contractors' invoices.
Pay-for-performance cleanups focus state staff on environmental results.
Pay-for-performance agreements focus state staffs' work on environmental results instead of on
contractors' internal financial management. Most engineers and scientists who were hired into
state UST cleanup programs neither intended nor trained to work at financial accounting. The
use of time-and-materials cleanup contracting diverts technical staff to financial tasks beyond
their interests and training. The use of pay-for-performance cleanup agreements frees the
state's technical and scientific staff to focus their time and training on assuring that the
environmental results required for the contractor to be paid are indeed attained.
Pay-for-performance cleanups strengthen financial integrity.
The ability to support a clear, credible audit is an important practical consideration considering
the large amount of public funds UST cleanup programs are responsible forspending, the
politically sensitive quality of some sites, and the solvency problems encountered by some state
funds. The minimal paperwork required to support pay-for-performance agreements provides a
clear, clean audit trail between cleanup results and disbursement of state funds. Financial
integrity in cleanup spending is easier to document and maintain because the simplicity and
directness of pay-for-performance agreements and practices leave a much clearer audit trail
than do time-and-materials practices.
Pay-for-performance yields more accurate spending, prediction, and budgeting.
Cleanup funders can predict and plan expenditures more accurately, because pay-for-
performance sets a fixed price for each cleanup and puts severe restrictions on any price-
'ncreases and payments. By contrast, time-and-materials contracting costs go out of financial
control via change orders, which are ad hoc changes in the scope and value of an agreement.
Because change orders allow the total cost of a cleanup to increase easily, it is difficult to
budget and manage the finances of cleanup programs that rely on time-and-materials
contracting.
Pay-For-Performance Cleanups
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Pay-for-performance rewards effective, efficient cleanup contractors.
As Dav-for-performance agreements are used more widely, cleanup contractors will cut their
wsts and prfcesS compete for more individual cleanup jobs. A contractor's profit will come
Sm doinq morJ dean^ps efficiently managing them, and usiing effective cleanup technology
atheS frl spending more time and material on a cleanup. In the future, as the market for
UST deanups begins to shrink, those contractors who have honed their management and
technSsSs will be able to work efficiently, effectively, and profitably in the smaller market.
Pay-for-performance lends itself to broad opportunities of use.
There are several different administrative vehicles through which pay-for-performance cleanup
agreements can be implemented:
« In state contracts between state agencies and UST cleanup contractors;
« n state Policies that set the terms for reimbursing UST owners for cleanup costs and
n * between UST owners and deanup * ***
n
or insurance company "pre-approves" a maximum amount it will pay for a cleanup.
Desnite the oresence of a time-and-materials contract between an UST owner and a cleanup
Sartor * Estate may s«l be able to set pay-for-performance terms for state reimbursement of
th cleanup ^chameT The state may impose pay-for-performance terms on such a cleanup by
admwSvd; Sing a maximum Lai amount it win reimburse and the contammation .eve.s
(instead of time-and-materials terms) at which it will make payments.
Pay-for-performance agreements may also be applied to the free product remova! work ; that
onen must begone before a full-scale UST cleanup begins. Free product removal work often
occureouside the ordinary procedures intended to control the scope and cost of cleanup work.
As a^esuT free product removal costs can sometimes soar; and, without performance cntena,
poorly deigned free product remova. can even unintentionally spread the contamma^. Free-
product removal seems especially ripe for the application of pay-for-performance cleanup
principles, although we are not aware of its use in this way at this time.
Pay-For-Performance Cleanups
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2
How To Implement A Pay-For-Performance
Cleanup Program
For maximum benefit, pay-for-performance cleanups must be a program's standard practice,
rather than the exception. It is one thing to craft a handful of pay-for-performance agreements
at special sites, but another to scale up use of pay-for-performance agreements to become
standard practice. This section describes how a cleanup program can systematically replace
use of time-and-materials cleanups with pay-for-performance cleanups. Pay-for-performance
cleanup agreements need to be used programmatically to generate the forces that drive down
cleanup prices, sustain environmental results, and reduce administrative workloads sufficiently
to produce its full benefits.
This section describes how to establish and manage a program, of pay-for-performance
cleanups under the following three headings:
• Four basic tasks to set up a pay-for-performance cleanup program;
• Two stages in making pay-for-performance agreements standard practice; and
• Developing stakeholder support for pay-for-performance cleanups.
How to write an individual pay-for-performance cleanup agreement is addressed in Section 3.
Four basic tasks to set up a pay-for-performance cleanup program.
Pay-for-performance cleanup program managers must deploy staff and resources to:
»• Set performance goals, cleanup prices, and payment terms for each cleanup;
»• Monitor contamination levels to authorize or withhold payments;
>• Grant individual exceptions to using a pay-for-performance agreement; and
+ Invoke the escape clauses in an active pay-for-performance agreement.
Each of these types of program work is discussed below.
Set performance goals, cleanup prices, and payment terms for each cleanup.
State staff must specify performance goals for each cleanup in terms of environmental
contamination levels. A pay-for-performance agreement pays only for environmental results.
Level-of-effort measurements, such as operating time for treatment equipment, are not cleanup
performance measures, as they measure effort instead of environmental results. The specific
contamination level goals for a pay-for-performance agreement may be set by Risk Based
Corrective Action (RBCA) procedures or by other standards a state normally uses.
Setting a maximum price to be paid for each individual cleanup is a major source of the overall
cost-savings possible from a pay-for-performance based cleanup program. Many states
already cap part of the price of cleanups by "pre-approval" of cost and scopes of work for parts
Pay-For-Performance Cleanups
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of a cleanup. Pay-for-performance simply extends this idea to cap the tota, price tc be paid for
the whole cleanup, not just its components.
The responsibly for sett in8 the ™^^ ~^ £ %^ cSps '°
individuals or teams fully empowered to set the prices, i ne pnc. y pressure
should not be made routine.y subjecl : to r^*^8' ^ ^^^e^eauc^o review
to do so from stakeholders who ^.^^^^"^ All the market competition
SS
respond to the demand for cleanups.
The practica, question is how to set a maximum , prta , ta -.
down acfua/ prices beto* (ftat max,mUm. * ^""dm Whei the cleanup is
reimbursement amount.
addressed by a state-lead contractor.
be based on individual price estimates
a sinale price could simply be ™W«d
lump
were similar enough,
the lump sum price.
, sftes and made :
individual sfte as described beiow.
the fixed price.
Monflor confam/natf on /evefe to auf/ior«e or v//tf,/70/d payments.
Contractors are paid as contamination levels^ J^jj^^
Monitoring contamination levels and ^^^.^SSJ^te cleanup programs
- -bi"9
contamination monitoring reports.
shou,d be proactive in monitoring
Pay-For-Performance Cleanups
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should early and formally call to the attention of the cleanup contractor any indications of
insufficient contamination reductions to justify a payment.
"' ;-*%fc" • :.;^';
Because much hinges on monitoring data, there will also be staff work needed to assure that
the data are indeed valid. If there is any appearance or doubt that monitoring data -and
analyses produced by a cleanup contractor might not be valid, monitoring data can be collected
and/or analyzed by a private third-party independent of the cleanup contractor. If monitoring-
data collection is not at issue, the state can split samples with the contractor at final verification
of performance. Site monitoring systems should address the things that are put at risk by the
UST release, so that the time staff spend evaluating monitoring data bears directly on reducing
risks to health and environment, as well as on determining whether a cleanup payment is made.
How to incorporate site monitoring into individual pay-for-performance agreements is discussed
in more detail in Section 3. A technical introduction to monitoring contaminate i reductions
from alternative cleanup technologies can be found in How To Evaluate Alternative Cleanup
Technologies For Underground Storage Tank Sites (EPA 510-B-94-003).
Grant individual exceptions to using a pay-for-performance agreement
Pay-for-performance cleanup agreements can be a highly effective administrative tool, but they
are not a panacea. In some circumstances, the price or results of pay-for-performance
agreements may be challenging to predict. In such circumstances, it may be wiser to do the
cleanup with a time-and-materials agreement. Avoiding inappropriate use .of pay-for-
performance agreements is important to gaining acceptance of their use, especially among
cleanup contractors accustomed to the financial advantages that time-and-materials cleanups
give the contractors.
Program staff should have criteria and procedures that expeditiously identify sites that are not
suitable for pay-for-performance cleanup agreements. For example, pay-for-performance
agreements may be less effective where:
• The contamination to be cleaned up is known to come from different sources, some of
which are unidentified or uncontrolled;
• There is a cluster of active cleanups already in progress and affecting the pay-for-
performance cleanup being contemplated;
• The geology or hydrogeology of the site is highly complex or poses major barriers to
effective use of all the cleanup technologies ordinarily applicable to UST releases; or
• The release to be cleaned up poses an urgent and high risk to public health or
environment, such as imminent contamination of a community drinking water wellfield.
When first starting up a pay-for-performance cleanup program it is wise to avoid complicated
circumstances. As experience with pay-for-performance cleanups develops in relatively
straightforward cleanups, state staffs and contractors will become able to use pay-for-
performance for more complex cleanups.
? Wru re the sita is not eligible for cleanup at state expense, the privat > parties involved can enter
into a pay-for-performance cleanup agreement with each other. For example, pay-for-
performance cleanup may be an especially appealing instrument for insurance, real estate or
banking entities that for business reasons need a site cleaned up expeditiously and effectively.
Pay-For-Performance Cleanups
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Invoke the escape clauses in an active pay-for-performance agreement.
Even if a site is suitable for pay-for-performance cleanup at the beginning, circumstances at the
site can change. If this happens it will become necessary to either revise the pay-for-
performance agreement or to convert that cleanup to a time-and-mater,asbas,s for further
work Pay-for-performance cleanup agreements include "escape clauses (see pages 28-30)
that set conditions on which the terms of the cleanup agreement can be changed. The program
staff will also need time to respond to claims and requests for escape from the ongmal
agreement and to develop an alternative agreement. It is important to do this work
exoeditiously because it can easily expand to displace working tme that program staff need for
price estimation and for monitoring results of the pay-for-performance cleanup si**. :
Two stages in making pay-for-performance agreements standard practice.
Time-and-materials cleanups should require special justification and should be rarely used
when pay-for-performance is fully implemented. You can make the change to pay-for-
performance cleanups in two stages:
v Start-up stage carefully selects staff, sites, and contractors; and
^ Second stage widens use until it becomes standard operating procedure.
These two stages are discussed in the pages which follow;.
Persuasion and leadership, not just technical prowess, are necessary to move through these
two stages and achieve program-wide use of pay-for-performance practices. People used to
working in a time-and-materials business environment may not be eager to work differently at
first To move pay-for-performance agreements to full implementation, managers and staff
must plan to repeatedly explain and discuss pay-for-performance cleanups in a widening circle
of stakeholders, including contractors, auditors, and legislators.
Start-up stage carefully selects staff, sites, and contractors.
Beam pay-for-performance cleanups at a small number of sites and use the experience thus
qained to help spread the technique to more sites, more staff, and more contractors. Begin by
assigning several experienced staffers and select some new, obviously suitable sites to be
cleaned up under pay-for-perfomiance agreements. Have the staff wnte up pay-for-
performance agreements for these sites (see Section 3). Also identify a few experienced
cleanup contractors who have already demonstrated their competence and offer them the
chance to work on a prototype cleanup. Once these cleanups are operating and several
oerformance payments have been made, your start-up staff should develop standard
documents and procedures, as well as train other staffers! to write and monitor more pay-for-
performance cleanup agreements. Staff, sites, and contractors are the basic ingredients you
need to start up pay-for-performance cleanup agreements. Select sites, staff, and contractors
that can succeed relatively quickly in your prototype set of cleanups. Some hints about what to
look for in each follow below.
Pay-For-Performance Cleanups
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Selecting staff "%;:
At first engage only a few staff in the start-up set of pay-for-performance cleanups. You may
not be able to find individual staffers who are strong in all the characteristics described here.
The person who is strong in monitoring and measurement may have trouble composing the
language of a performance agreement. Organizing staff to work in teams, rather than
independently, can solve this problem. However, if staff work as individuals, you should provide
some way for them to share and compare their experiences as their cleanups progress.
Mindset is important, so focus staffers' time exclusively on pay-for-performance cleanups,
rather than splitting them between time-and-materials and pay-for-performance contracts. Look
for staff who havt; the following attributes:
Positive attitude. Select staffers who have a positive attitude towards pay-for-performance
concepts and goals. At this stage their work is to create, not to critique this new way of
working. (There will be plenty of opportunity for critiquing once the initial set of cleanup
agreements have been put in place.) Avoid selecting staffers who think of expense as a
surrogate measure of the quality of cleanups, as tney may te-.d to overprice performance
agreements. Persuade and use these staff later when you have gotten results.
Experience pricing cleanups. Assign staffers to pricing who have sufficient experience to price
cleanups credibly. Whatever their level of experience, staff who price cleanups will find their
task is greatly facilitated by using TANK RACER software, which helps staff make consistent,
sound pricing. More information regarding TANK RACER software capacity and availability
appears on page 19.
Ability to distance themselves from concerns about "excessive" contractor profits. Staff (as well
' as managers) who are long accustomed to oversteing time-and-materials cleanups rightly
develop a concern for "excessive" contractor charges and profits. However, preoccupation with
contractors' internal methods, costs, and profits is counterproductive in pay-for-performance
agreements, where contractor profits can come only from efficient management and effective
use of technology. Assign staffers to pay-for-performance cleanups who can disengage their
belief that part of the government's responsibility is to prevent contractors from making
"excessive" profits.
Knowledge of contamination measurement and monitoring. Technical knowledge of
contamination measurement and monitoring techniques is more important than knowing how to
engineer a cleanup design in pay-for-performance cleanups. Designing an effective cleanup is
the sole responsibility of the contractor. Overseeing pay-for-performance agreements requires
clearly specified provisions for contamination monitoring data on which reimbursement or
contractor payment hinges. One or more of the pay-for-performance staff should have
sufficient technical knowledge of contamination measurement and monitoring to develop robust
contamination-monitoring criteria for paying the contractor. The monitoring "experts" on the
start-up team should have sufficient confidence in their technical knowledge of monitoring to
avoid backsliding into specifying engineering details as surrogate performance measures.
Whereas in time-and-materials contracts knowledge of the engineering of a cleanup is
important to evaluating and managing cleanup prices, pay-for-performance staff should beware
of engaging in such design detail. -
Pay-For-Performance Cleanups
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Ability to explain pay-for-performance to others. Find staffers who will become able to explam
as well as build, pay-for-performance cleanup agreements. The staff who help start up pay-for-
performance are the resources you will use to create the basic materials and procedures, tram
other staff, and nurture the individual stakeholders involved in the first batch of pay-for-
performance cleanups you do.
Selecting cleanup sites
In the start-up stage of a pay-for-performance program select sites that you expect to be
geologically simple. Keep in mind that the main object of the start-up period is to develop your
program's capability to widen use of pay-for-performance agreements relatively quickly.
Start with a set of relatively simple sites. Select sites where contamination is relatively fresh
and plumes are well-defined. Your start-up sites should have no barriers to the access
necessary to install performance-monitoring points. Leave more complex, challenging sites tor
inclusion later when the procedures and effectiveness of your pay-for-performance program
hP»<* been established and proven. However, do not make your start-up set too simple-tor
exan ,H.e, only small excavatio, i and removal jobs-lest they not be convincing to skeptical
stakeholders when it comes time to expand usage of pay-for-performance.
The start-up sites must have a valid, thorough site characterization. A good site
characterization is necessary in order to set the maximum price and to establish the
contamination-level measurements that will trigger payments to the contractor. An incorrect or
incomplete site characterization could be used as grounds to void the terms of a pay-tor-
performance agreement and open it up to change orders and tirne-and-matenals charges.
Start with a set of sites that can be completed relatively quickly. Select sites that can be
completed relatively quickly in order to provide examples to staff, contractors, and policy
makers whose support is needed to widen the use of pay-for-performance agreements.
Working with cleanup contractors
Being a direct party to the cleanup contract is not necessary. Your state may establish pay-for-
performance agreements either directly with a state-hired contractor or indirectly as terms tor
reimbursement of work performed under contract to an UST owner. You need not have a d.rect
contractual relationship with the contractor to create a de facto pay-for-performance cleanup
agreement. In most cleanups the contractor's direct legal relationship is with the owner of the
UST site. In this context, you can create the functional equivalent of a pay-for-performance
agreement by setting terms of reimbursement that are tied strictly to pre-specified, measured
contamination reductions. If you are starting up a program of pay-for-performance cleanups in
a state reimbursement-fund context, your program may already "pre-approve the^amount a
contractor will be paid, regardless of how much the contractor bills. Ydu can use pre-approvai
to set the maximum price the state will reimburse for a cleanup. Then you can divide this
amount up in reimbursements to be made as the cleanup attains contamination-reduction
milestones the state sets. If your state government contracting regulations pose obstacles to
pay-for-performance agreements, it may be quicker to start up pay-for-performance
agreements as criteria for reimbursement of UST owner-hired cleanup contractors.
Pay-For-Performance Cleanups 10
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Financial strength of the contractor**Q\earvjp coltfactors participating in the start-up phase of
your program should have sufficient financial resources to continue operating if a cleanup is late
in meeting the performance levels required for payment. Because contamination measurement
and monitoring are the key to getting paid, start-up phase contractors should also have a good
track record in collecting and managing the kind of data needed to document their performance-
payments. It is very important to maintain the discipline of payment-for-performance to assure
that the program's incentive effects really work on the contractor. If the financial survival of the
contractor, rather than meeting a contamination-reduction milestone, becomes justification for a
payment, the driving force of your pay-for-performance program will be weakened.
Financial strength of the cleanup fund. Reliable and prompt payment of contractors as a
cleanup site's performance criteria are met is essential to sustaining the incentive effects of a
pay-for-performance program. The prospect that a state may delay making performance
payments due to lack of funds or administrative bottlenecks heightens the financial risks that a
contractor takes when doing a pay-for-performance cleanup. This risk can have two bad side
effects on a pay-for-performance program. Contractors may bid higher prices to compensate
f^r the cost of financing delayed payments, or contractors may simply decide not to work on
pay-for-performance cleanups. Neither of these responses will serve a state's cleanup program
well. Enduring damage can be done to a pay-for-performance cleanup program if payments
falter at the start-up stage of the program.
Second stage widens use until it becomes standard operating procedure.
The start-up stage provides a toehold *-om which to widen the use of pay-for-performance
agreements to more staff, more sites, and more contractors. At this widening stage, the pay-
for-performance program begins including more and more newly reported leak sites. More staff
divert more time from time-and-materials cleanups until most staff and cleanup sites are
covered by pay-for-performance agreements. At this stage you should also develop a simple
database in which the milestone and payment data for each pay-for-performance agreement
can be stored and compared to performance data submitted electronicallly by the contractor
requesting a performance payment. Aspects of developing this stage follow below.
Leverage start-up sites, staff, and contractors
A pay-for-performance cleanup program can be implemented on-the-run by leveraging the
start-up staff, sites, and contractors. Use the start-up staff and cleanups to generate basic
procedures and documentation to be used with subsequent pay-for-performance cleanups and
staff. Take care that these "training" sites are relatively straightforward because their strategic
function is to build staff competence and external stakeholders' confidence in pay-for-
performance agreements. Start-up staff will first get a set of pay-for-performance cleanups
underway. Once this first set of cleanups is started, the start-up staff will train other staffers to
draft more pay-for-performance agreements with a comparable set of sites. While "in-training1
staff are working with new cleanups being done ty the first set of pay-for-performance
contractors, the start-up staffers can develop pay-for-performance agreements involving new
sites and different contractors. During the start-up stage participating staffers will have to
spend some of their time building the pay-for-performance program, training fellow staff and
contractors. After staff and contractors are trained and working procedures are in place, staff
will be able to oversee significantly more pay-for-performance cleanup sites.
Pay-For-Performance Cleanups 11
-------
Use simple information management tools
Yo ur,re^
^^™™^~
approve or withhold payment at aPPr°P' '* whether the contamination levels
cleanup oversight is the meas ^^^^^^^ but data-intensive question
required to approve payment hfne.^m^felecj "nic data reporting forms should be kept
to answer. Thus *£**£™^ thekey information will be the
as simple as possible. For each i pay tor p > contaminant at each data collection
baseline and the te^^^T^^^^tor will submit dated, corresponding data
point stipulated in the a9reemenL_ rne a ^ P agreement. The required reporting
™ the axemen, ,s s,rucK and base»ne
contamination levels are entered.
Cultivate a competitive set of pay-for-performance cleanup contractors
Meanwhile also use a co^^^ ,
administrative incentives to rec™*™™™™™erformanCe staffers to conduct half-day pay-for-
cleanup jobs. Use your '^^^S^^^^Q should include the rest of the
cont^aoto
who becomes overburdened ^h f^ult pay TO^ ^ ^ ^ ^ R does ^
"—
Redistribute staff workload
Because each pay-for-performance
materials agreements, s^ «,i» be;
Meanwhile the time-and
r included as quickly as
state funds until they are
resources between the need to expand
close time-and-materials sites. In such
incentives that would encourage '
., 1—| them
they w,n
5
^m^ be cost-controlled and
excessive staff time and
attention gnd
ace sites and the need to control and
search for positive Or negative financial
completion of time-and-matenals
contracts
.for^rforn,ance conr
-------
materials cleanups can be given a lower priority^than processing of new pay-for-performance
cleanups (except at high-risk sites). '*:,_-. '...'**
Widen usage in small increments
Repeat the activities described above until all agency cleanup staff are competent in crafting
and overseeing pay-for-performance cleanups and most of your cleanups are being conducted
under pay-for-performance agreements. It will probably take most cleanup programs several
years to reach a point where pay-for-performance agreements are predominant. Most cleanup
agencies will have an ongoing legacy of time-and-materials agreements. Once your pay-for-
performance program has gained a toehold you may be able to convert some unsuccessful
time-and-materials agreements to pay-for-performance agreements to bring these cleanups to
closure standards. (It is expected that a cleanup agency will have an occasional few sites
where conditions are so complex and uncertain that a time-and-materials agreement will remain
the most appropriate approach.)
Manage oay-for-performance to succeed over the long run
The work of managing the pay-for-performance cleanup program will change and bring differing
challenges as the program matures. At first, there will be relatively few pay-for-performance
cleanups and much of the work of program management will be in program development.
Once a critical mass of staff and contractors are trained and procedures established, program
management should focus on widening the number of cleanups and contractors covered by
pay-for-performance agreements in the privately-funded as well as in state-funded cleanups.
Eventually, time-and-materials cleanup agreements will be rare and require special justification
to use.
At each stage managers should invent and initiate tactics to stimulate the competition and
technological innovation that will drive cleanup prices down and improve cleanup results.
During the start-up stage of the pay-for-performance program there may be little or no
immediate reduction in cleanup prices. Prices during the start-up stage will rely heavily on the
pricing of time-and-materials cleanups and competitive forces will not yet be in full play. Thus,
immediate cleanup price reductions should not be expected from the start-up phase of pay-for-
performance cleanups. However, start-up phase cleanups should emphatically be expected to
succeed in meeting their contamination-reduction goals within their fixed prices. A public record
of cleanup contractors' performance and price should be started and kept as the pay-for-
performance program widens and matures to foster price and quality competition in the cleanup
market.
As pay-for-performance widens to encompass more cleanups and contractors, managers must
act to reduce estimated maximum cleanup prices and to strengthen competition among cleanup
contractors. During this stage, competitive bidding could be introduced to begin driving down
prices below initial estimated prices. Program managers should beware of cleanup contractors
who do not make reasonable bids for pay-for-performance cleanups and do only lucrative time-
and-materials cleanups. For example, program managers might wish to "qualify" contractors
for time-and-materials work only if the contractor successfully completes a significant number of
pay-for-performance cleanups. During the widening-use stage, increasing pressure will come
to bear on contamination-level monitoring and performance-payment criterion data. Program
managers may have to give these concerns special attention to maintain the integrity and
Pay-For-Performance Cleanups 13
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effectiveness of pay-for-performance cleanups. In anticipation of this, program managers could
encourage development of independent third-party specialists in contam,nat,on-tevel men rtonng
and data analysis who could be used either to audit or measure performance independertfy of
the cleanup contractor. State programs can develop their own pol.c.es on how and when third-
party monitoring specialists should be used, and on who will pay for those serv.ces.
a matured pay-for-performance program will brng different challenges. Management
ncell te requifea^to prevent pay-for-performance cleanups from tnggenng escape
c auses and lapsing back into expensive time-and-materials terms. In a matured program
managei may See touah political forces as they come to deal with pay-for-performance
Slanups Jhfch have not performed. Managers will also have to sustain a steady flow of cos
and pricernformation into the cleanup market so that market forces can operate ,r .full strength,
to keen cleanup pricing very competitive and improve cost-performance levels. The
pS^To^cM responsibility for UST cleanups may even diminish the > role , of state
cleanup programs in pricing and financing UST cleanups, in which case management s
?esponsiS?eJ will focus primarily on assuring that cleanup contamination-level reduc ions are
mJasuS S and goals met/In states which continue to finance UST cleanups w,th public
Snds mproved ftank technology and leak detection systems will reduce the number and scope
of refeaTes to be cleaned up. As this occurs, pay-for-performance program managers may find
S staS ^worktng with relatively fewer deanupe and devoting mote »tte^ to*tem,,nmg
whether individual especially complex cleanup sites justify a t«me-and-mater,al cleanup.
Developing stakeholder support for pay-for-performance cleanups.
At each stage of developing and widening a pay-for-performance program, stakeholders'
Sterests wi? be affected To widen the use of pay-for-performance agreements, cleanup
program manage^ should plan time to listen to and address stakeholders' concerns about this
approach Some stakeholders and how you can respond to their typical concerns are
discussed below
State program technical staff.
The work hab.ts and ethics of many state program technical staffs have been formed primarily
in toe and-mate,als cleanup agreements that reward inefficient and 'neff^eanC'epa""PSnua"d
require close state scrutiny of contractors' plans and charges, ^^^^^JL
aoreemer's do not justify the relatively close scrutiny of cleanup plans and charges because
They do not f,nan=,a ly reward poor performance as do time-and-mater,als agreemen s.
Technical staff may oe reluctant to make the necessary shift in their attention from ptens to
e^nmema, resutts. Focusing staff work on environmental monrtonng and provid ng
Supplementary professional staff training in environmental monitonng will a,d ,n getting state
technical sta;,: to buy in to pay-for-performance cleanups, r
Pay-For-Performance Cleanups 14
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State fund reimbursement staff. •^,:
In time-and-materials programs, muctvof the time and effort of state fund reimbursement
staffers goes to financial (rather than environmental) review of cleanup work: comparing actual
expenditures (and their documentation) to cleanup plans and state allowable expenditures.
This financial review of contractors bills and their documentation is an ongoing battle that has
had limited success in controlling cleanup costs. Such staff are often so overworked that
introduction of a pay-for-performance cleanup program could reduce their workload and enable
them to review the leftover time-and-materials cleanups more effectively.
Government auditors.
Most UST cleanup programs are subject to audit by independent government auditors, such as
an auditor's office reporting to the legislature. Pay-for-performance cleanups leave a much
cleaner audit trail than do time-and-materials cleanup agreements. At first glance, auditors
accustomed to the problems of time-and-materials contracting may be skeptical of the reduced
paperwork necessary to document pay-for-performance cleanups. However, once auditors
understand the strong, simple connection between what the state pays for and the -,
environmental results it gets in pay-for-performance agreements, they will find they can do their
job more quickly and effectively in a pay-for-performance regime. A demonstrated state record
on tightening cost projections to control costs will help relieve concerns about initial pricing of
contracts and consultant profits.
Legislators and legislative staff.
Consider the following two different perspectives that often shape the attitude of legislators and
their staffs Awards pay-for-performance cleanups.
Spending as a surrogate for protection of human health and environment. One common
perspective has been that the level of spending involved is a direct indicator of political
commitment to protection of human health and environment. Efforts to control cleanup
spending may be seen as an attempt to weaken protection of human health and environment
from this perspective. However, the strong emphasis which pay-for-performance places on
holding contractors responsible for actual reductions in contamination levels can be forged into
a persuasive case for such staffers.
Government spending and "bureaucratic" delays. Legislators and their staffs are often
concerned that UST cleanup program spending may be out of the control of government
administrators. An UST cleanup program designed on pay-for-performance principles can be
shown to address the causes of such seemingly uncontrollable cleanup expenditures. Another
concern centers on delays in starting cleanups and in payment for work performed under time-
and-materials contracts. Pay-for-performance cleanup program design can be shown to
address these delays by shortening lengthy workplan review/approval procedures and by
expediting payments that are linked strictly to well-documented environmental results rather
than to the complex justifications required by time-and-materials contracts.
Pay-For-Performance Cleanups 15
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Cleanup contractors.
Cleanup contractors are likely to be concerned that pay-for-performance imposes more
financial risk than time-and-materials contracts. Under time--and-materials contracting, the state
assumes most of the financial risk when the work of a cleanup contractor proves to be
ineffective In this bargain, the contractor accepts state restrictions on profit in exchange for
relief from the financial ri jk of cleanup failui e. In contrast, in a pay-for-performa,ice clear jp,
the contractor takes on the financial risk of cleanup failure in exchange for removal of state-
imposed limits on profit within the fixed price set for the cleanup.
Although pay-for-performance may pose more financial risks for the contractor, there is also
opportunity for higher profits than in time-and-materials contracts. Cleanup contractors can
enhance their profits under pay-for-performance agreements:
• By using more efficient cleanup technology;
. By drastically reducing internal costs for reporting and documentation otherwise required
in time-and-materials agreements; and
. By receiving payments from the state more quickly, which reduces the contractors
financing costs.
Because the contractor can retain as profit the difference between actual cost of the cleanup
work and the price set for it, contractors have a powerful incentive to choose more efficient
technologies and management techniques than under time-and-materials contracts which have
no such incentive. Because the administrative burden of documenting and reporting the cost of
time-and-materials in order to get paid is eliminated in pay-for-performance, that administrative;
cost can be retained directly as profit or passed on as price cuts in competing for more
business that will enhance profitability. Financing the out-of-pocket cost of cleanup work done
while awaiting time-and-materials payments from states with long payment delays has also
imposed another hidden cost on contractors. Under pay-for-performance agreements, the
administrative delay in processing time-and-materials invoices is eliminated and contractors'
financing costs are cut by prompter payments. The reduced cost of financing can be taken as
profit directly or reinvested in improving business operation or market share.
Contractor profits: a political and philosophical issue for state staff, legislators, and contractors.
To what extent should cleanup contractors profit from their work? To date, this question has ,
been resolved in time-and-materials contracting practices that are intended to impose
government limits on the contractors' profits. However, many state program officials observe
that the cost-control tools available that are imposed on time-and-materials UST cleanups
actually drive contractors to practices that increase overall cleanup cost and profits, without
commensurate contamination reductions. Used programmatically, pay-for-performance
agreements can avoid this problem because contractors can use the profit incentive to produce
faster, better, and less expensive environmental results.
Pay-For-Performance Cleanups 16
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How To Construct Pay-For-Performance Cleanup
Ag reements ^ ^
A pay-for-performance cleanup agreement sets a fixed price to be paid on attainment of pre-
set, numerical levels of environmental contaminant reduction. A pay-for-performance cleanup
program becomes reality-or slips away—in the wording and administration of each individual
agreement that sets the terms on which cleanup contractors are paid for the environmental
results they produce. This section discusses how to create an individual pay-for-performance
cleanup agreement (given that the particular site is suitable for this approach as discussed
earlier on page 7.)
A pay-for-performance agreement to cleanup a site must address the following four matters,
which are discussed below:
• Sett fie maximum cleanup price;
• Decide on cleanup performance measurements;
• Establish contamination-level data reporting and contractor payment linkage; and
• Define escape clauses.
Set the maximum cleanup price.
A pay-for-performance cleanup agreement hinges on the maximum price, the "lump sum" that
will be paid to reach contamination-reduction goals at the given cleanup site. Setting and
sticking to the "lump sum" the state will pay (or reimburse) to reach the levels of contamination
required is crucial to making performance contracts work environmentally and financially. At
the same time, you will want to create a setting which encourages contractors to make bids that
fall below your maximum cleanup price.
Use site characterization and risk based corrective action (RBCA) analyses to take into account
the scope and complexity of cleanup work needed in the price you set, the contamination-
reduction goals to be attained, and where and how to measure the results for the contractor to
receive payment. Site characterization provides important background information for pay-for-
performance agreements. The following few pages identify basic information a site
characterization should include to enable you to frame a pay-for-performance agreement to
clean up the site.
Develop an appropriate site characterization.
For small, straightforward sites and in regions where there js minimal geological variation, you
may be able to price the cleanup without having to have a Ste characterization. In such cases
the cost of a site characterization can be included in the scope of the performance contract for
site cleanup. Where hydrogeology or other factors are more complex, it may be wiser to price
and buy the site characterization separately from other cleanup work. Keep in mind that
Pay-For-Performance Cleanups 17
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contractor competence-how efficiency and how effectively ^e cleanup con^ctor
influence the cost of a cleanup as much as the hydrogeological complexity of the site.
Site characterizations are often done by a contractor other than the one doing the cleanup
^^SSSSSitaBon. must contain sufficient information for other contactor,.to do
internal cost estimates on a cleanup, as well as enough information for state staff to price the
cleanup and set measurable terms of payment for the performance agreement.
performance agreement a site
Site information needed to set a cleanup price.
Basic information. To help you price and write a pay-for-p
characterization should include:
• Depth to groundwater
• Rock types
• Grain size
• Stratification
• Contaminant type
so test information about the potentially affected aquifer may already be on record. It .s
so, test imormauon auu H tempting to drive the site characterization towards
exhaustive data collection and analysis. Instead you should
scope site characterization to the minimum needed to frame
the performance agreement and engineer the cleanup. The
Risk Based Corrective Action process may also drive the
information that must be gathered in site-charactenzation.
(Further technical information about site charactenzation
techniques can be found in ASTM's Provisional Standard
Guide For Accelerated Site Characterization Techniques).
Technical information about the specific site charactenzation
data required for particular cleanup technologies can be
found in How To Evaluate Alternative Cleanup Technologies
for Underground Stora^ Tanks (EPA 510-B-S-, -003).
Draft and start pay-for-
performance agreements quickly
after site characterization.
Draft and implement the
performance agreement for a
cleanup site as quickly as possible
after completion of the site
characterization If you delay, site
conditions, contamination levels,
and plume delineation rr»=w change.
Such changes in site conditions can
force you to abandon the pay-for-
performance agreement because
real conditions would have changed
by the time the performance
agreement was made (See also
the section on "escape clauses" on
pages 28-30).
Commingled plumes. Presence of commingled plumes may
pose a barrier to using a pay-for-performance cleanup
agreement. If there are commingled plumes at the site, the
site characterization should try to differentiate the sources of
the plumes to determine whether they are the responsibility
of a single owner. If all the plumes can be identified as the
responsibility of one owner and are already stopped at their
source it may still be possible to use a pay-for-performance
agreement for their cleanup. (See the discussion of when to
use pay-for-performance agreements on page 7.)
If the plume crosses property lines the site characterization should
document the extent and address property accessibility. Knowledge of and access to the full
extenToHhe pfume can significantly affect the cost of a cleanup if the underground plume
Pay-For-Performance Cleanups!
18
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extends beyond aboveground property lines of the cleanup site. In residential areas, where
there are many different owners of small parcels of property, access to gather samples and to
install and operate cleanup equipmWnJ may be/djuite difficult. If the contamination has
remained-and is contained-within the^bwner's property boundaries, access may be a relatively
minor consideration. Regardless of the size or pattern of property ownership, access may also
be thwarted by property owners who simply do not want cleanup personnel or equipment on
their property.
Using TANK RACER or professional judgment *. i price cleanups.
Two methods that can be used separately or together to set a cleanup price are TANK RACER
cleanup cost-estimation software and professional judgement of staff. ••'-,•".
Using TANK RACER software to estimate a cleanup price. Price-estimation software
developed by the U.S. Environmental Protection Agency and the U.S. Air Force can provide
fast, accurate, and comprehensive cleanup price estimates on a site-specific basis. TANK
RACER software can be a powerful tool for developing reasonable and dependable cost
projections for ^ site. 1 Jsing TANK RACER cleanup software will both speed up and
standardize cleanup price setting, as well as enable less experienced staff to help set maximum
cleanup prices. Staff who price your first cleanups may have to defend whatever prices they
produce. Using TANK RACER software to estimate a price for a pay-for-performance cleanup
automatically documents the basis for the price. This can be helpful when a cleanup price must
be defended or contractors refuse to bid at or lower than the set price. Keep in mind that
contractors accustomed to working on time-and-materials basis may tend to estimate relatively
high prices because they will no longer have the "insurance" of change orders to cover the
costs of underestimated tasks, rework, and engineering-design failure. You can use TANK
RACER cost-estimation software for PC to quickly price a cleanup using data from the site
characterization, detailed built-in engineering information about cleanup technologies, and your
state's local unit-costs. TANK RACER generates a detailed cost-estimate in a standard format,
including a bottom line total price for the cleanup. These estimates can be produced and
modified very quickly, even working from default data values. TANK RACER cost-estimation
software makes it very fast and easy for a user to adjust its estimates according to the user's
judgment or experience. (Information on obtaining TANK RACER is available by contacting
Delta Research Corporation at 904 897-5380.)
Using professional staff judgement to price cleanups. There are several ways technical staff
can be deployed to set prices for individual cleanups, as individual estimators, pricing teams or
committees, and support groups for individuals. One or more senior staff may be designated to
individually set the maximum price the state will pay for each individual cleanup. (This role is
similar to that of an estimator in a private insurance company.) Or a workgroup could be tasked
to set the prices to be paid for individual cleanups. Such a group may work either by acting as
a "support group" to individual staffers who set the cleanup price or by acting as a team which
sets the price to be paid for each cleanup.
Ho*/ev,er the work of pricing cleanups is organized, state price-setters must stay currer* on
technical information and marketplace forces that could reduce or increase prices. By fixing
price and performance payment criteria, pricers challenge contractors to profit by becoming
more efficient and more effective, rather than by increasing billable hours and other internal
charges, as occurs under time-and-materials agreements.
Pay-For-Performance Cleanups 19
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