United States
                  Environmental Protection
                  Office of Water
                  Programs Operations (WH-547)
                  Washington, DC 20460
February 1982
                  Water and Waste Management
Contract  Operations

     This publication was prepared with the support of a
grant from the U.S. Environmental Protection Agency's
Municipal Operations Branch.  The statements,  conclusions
and/or recommendations contained herein are those of the
authors and do not necessarily reflect the views of the
U.S. Government, the U.S. Environmental Protection Agency,
or the Municipal Finance Officers Association.

U.S.  Frvirorrp-^M Protection Agency

U.S. Environmental

                              TABLE OF CONTENTS






     •  OPERATING PROBLEMS  	      9



     •  EVALUATE THE OPTIONS 	     13
     *  SELECT THE OPTION	     16

A CONTRACT?	     16

     •  DEVELOP SCOPE OF WORK	     16

          -  COMPETITIVE SELECTION  	     21
          -  LIMITED SOLICITATION   	     23
          -  DIRECT NEGOTIATION  	     24


                             CONTRACT OPERATIONS

     There are a number  of  factors that have  created  operating and compliance
problems  at  wastewater  treatment  plants.    For   example,   strict  effluent
limitations, major  plant expansions,  complex  operating  procedures  for  newly
designed  equipment,  and  increasing  energy  costs   can  result in  compliance
violations  and  signficant  plan  operating  problems.   One  solution  to  these
problems is "contract operations," the  contracting  out of all  or  a portion of
the operating functions  of  a treatment plan  to a private firm skilled  in the
technical and management aspects of modern wastewater treatment facilities.

     This  manual  presents a discussion of  the management and operating prob-
lems that  contract  operations can address.   It  is  intended to  give utility
managers  and  local decision-makers  a  better  understanding  of  this solution
and a  better  basis  for comparing  contract  operations to  other solutions for
reducing operating and management  problems.   The discussion  will focus on the
following questions:

     •  What is contract operations?

     •  Why do municipalities use it?

     •  What concerns have been expressed by users of such services?

     •  How can a  utility manager decide if  contract operations  is the  best

     •  How should a manager select a firm and  negotiate a contract?

     •  How should a manager monitor performance and renegotiate the contract?

     Included in the discussions are several  actual  examples of how contract
operations has been used as one solution for reducing operating problems.

     At  the  end  of this chapter  is  a  brief reference  list  of  other  documents
that   further  discuss   the   technical   and  management  aspects  of  contract


     In response  to  the  needs of  the utility  manager,  private firms  have
developed a variety  of  services aimed at  improving  the operations  and  effi-
ciency of wastewater treatment plants.  As  stated  in earlier  EPA  documents,
these services can be divided into two general categories:

     •  technical assistance services; and

     •  contract operations services.

     A brief  description  of each  service  is  presented here, but  the primary
focus is on contract operations services.

Technical Assistance Services

     Technical  assistance services  have  evolved as  new,  more sophisticated
treatment plants have begun operations.  They include design-related operation
and maintenance  (O&M)  services and on-line O&M.  Design-related  O&M services
include the development of O&M manuals and provision of start-up services.

     Currently, on-line O&M  services  most  frequently  include those activities
that were defined as grant eligible in EPA PRM 77-2:*

     •  training before and after start-up;

     •  tine  tuning  to optimize process control;

     •  laboratory procedures;

     •  maintenance management  system;

     •  records management system; and

     •  revised O&M manual.

In  addition,  on-line  services  can  include  troubleshooting,  process  flow
optimization,  management  operations  evaluations,  and  special  studies such as
energy audits.
 1  EPA  Construction Grants Program Requirements Memorandum  (PRM) 77-2

 2  Ibid.,  p.  7.

Contract Operations Services

     Contract  operations  can be defined as  "the  deployment of private sector
personnel  in  a publicly  owned  treatment  works  for  a  definite  period  of
time."^  The three most common  types of contract operations include:4

     •  Operations  supervision  - A  private firm  supplies a  management  team
        (which  could  include a supervisor  and  other key  personnel,  such as
        chief  operator  or  laboratory  person) to supplement the existing staff
        and to direct certain functions at  the plant.

     •  Full staffing  - The existing  plant staff,  including  supervisors,  is
        replaced or  hired by the  private   firm.   The firm agrees  to provide
        all the  services  relating to the  normal  operation and maintenance of
        the  plant.   Full  staffing  gives   the  private firm more  control  over
        the plant by enabling it to select  and employ the  operators.

     •  Comprehensive  services  - The private  firm assumes  complete respon-
        sibility   for   operation  and  maintenance  staffing,   purchase   of
        consumable materials,  and the  quality of  the  plant's  effluent.   In
        some  cases,   the   private  firm  assists  in  replacement   and  capital
        investment decisions.   The community pays  a single monthly fee to the
        private  firm,  and  the  firm assumes  complete  responsibility for plant

These services  represent  an increasing level  of  participation by the private
firm and its staff in  the  control and  operation of the  treatment plant.  Some
municipalities have  found  that  the operations supervision option allowed  the
municipality sufficient control over  the plant and at the same time, provided
the necessary  expertise to meet effluent  restrictions.   In other cases,  com-
munities have  felt the  need  to  turn  the plant's operations over  to a private
firm which provides full staffing for the plant.

     In operations supervision, the utility manager  would bring in contractor
personnel to fill management positions  as  shown by  the  darkened  boxes  in the
top half  of Exhibit     1.  In the  comprehensive  service  option,  the  con-
tractor will play  a much  larger  role  in  control and  staffing,  coordinating
all of  the plant's  maintenance and  operating staff as  shown in  the  bottom
half of Exhibit    1.   A  more  detailed discussion  of  comprehensive services
is  provided  below  to give  the  reader a more  thorough  understanding  of  this
type of contract operation.
3 Ibid., p. 8.

4 Ibid., p. 8.

                      EXHIBIT   1
                  CONTRACT OPERATIONS
         MAYOR OR
             Operations Supervision

             Contractor's financial and managerial
             responsibility shown by darkened boxes.
                                                 AND PERSONNEL
       MAYOR OR
                          Comprehensive Service

                          Contractor's financial and managerial
                          responsibilities shown by darkened boxes.

Comprehensive Services

     In the comprehensive, or as it is sometimes referred to as "full service"
option,  the  private  firm  basically  takes  complete  responsibility for  the
plant, its effluent quality,  and fines  that the municipality  may be required
to  pay for  compliance  failures.   These  comprehensive  agreements  are  often
entered into when a municipality is faced with  increasing compliance problems
or when a  major  plant expansion or upgrading  is required which  the existing
staff  is not capable of operating effectively.

     Under  a comprehensive  service  agreement,  the  activities  and  respon-
sibility of the contractor would include:^

     •  Management:

             Assume responsibility  for non-compliance  fines  up to a specified
             1imi t;

             Improve general  management  control including accounting,  sched-
             uling,  staff planning, and technical control;

             Define plant deficiencies and identify corrective action;

             Implement personnel training and performance review program;

             Develop job descriptions;

             Implement cost accounting and inventory control  system;

             Review computer and management information systems;

             Develop a record keeping system;

             Coordinate supervision and evaluation of plant personnel.

     •  Operations:

             Assume complete responsibility for proper operation;

          -  Develop process control strategies;

          -  Direct operations according to city's objectives;

             Identify modifications to plant process and  operation  that  would
             improve effluent quality and reduce operating costs;
^"Management  by Contract  Operations  and  Maintenance  Solutions,"  John  A.
  Sedwick, Envirotech Corporation, delivered at EPA Seminars.

         -   Improve  solids processing operation;

         -   Implement a  safety review program;

             Study  and reduce unit operations costs;

         -   Improve  laboratory quality.

     •  Maintenance:

         -   Develop  and  implement  an effective equipment maintenance  program
             and  spare parts  inventory procedure.

         -   Implement a  scheduled maintenance  system  to  prevent  deterioration
             of equipment.

         -   Review equipment conditions  and  prioritize  repair  and  replace-
             ment needs.

             Review equipment downtime records  and  correct.

         -   Improve  plant  appearance and  housekeeping.

     •   Personnel:

         -   Review personnel skills and develop training programs  to  supple-
             ment existing  skills.

             Develop job  descriptions.

             Prepare staffing plan.

             Implement supervisor and staff training.

          -  Increase employee  state certification levels.

With comprehensive service,  the  contractor would operate the  plant and would
provide the management,  supervisory, operating  and  support  staff necessary to
operate the facility.

Example of Operation Supervision

     An example  of an operation  supervision arrangement- would  be. the services
being provided to  a major municipality.   In this  situation,  a  private firm is
handling the management  of this treatment plant for a fixed budget.  The serv-
ices provided by the contractor under that agreement include:

      1.  Participation  and advice  in all  levels  of personnel  supervision and
          evaluation, subject to  the City's Personnel Policies  and Procedure

     Manual  and the  Master Agreement and  addenda between  the  City and
     representatives  of  the City employees' bargaining unit.

 2.   Development  and  implementation  of  an organized  equipment mainte-
     nance program.

 3.   Development  and  recommendation  of  alternatives  for  equipment and
     spare parts inventories.

 4.   Development,  recommendation,  and implementation of modifications in
     process  and  operation  to  improve  effluent  quality  and  decrease
     operations costs.

 5.   Preparation,  recommendation,   and  support  of  data  for  the  City's
     annual budgets.

 6.   In coordination with  the Organizational  Development  Section  of the
     City's Central  Personnel Division,  preparation, recommendation, and
     implementation  of technical and professional  training programs for

 7.   Recommendation  of equipment and materials  to be  purchased for use
     in treatment  plants  and  lift stations.

 8.   Preparation  of  bid documents and evaluation  of bids  for the City's
     purchase  of  equipment  and  materials  within  the requirements  of
     state and  local law concerning public purchases.  However, the con-
     tractor is required  to advise  the  City in writing, within  a reason-
     able length  of  time,  of  any  potential conflict of interest between
     its status as manager and  supplier.  The  City Corporation Counsel
     determines whether  a conflict  of interest does, in fact, exist.  In
     the event of such  a  conflict, management must  determine whether
     contractor shall:

     a. not  assist  in  the  bidding process  and  be  allowed to  bid  as  a
        supplier;  or

     b. both  assist   in  the bidding process and be  allowed to  bid  as  a

 9.   Cooperation  with City's  Construction Program  Manager  and contrac-
     tors in coordinating  treatment  plant operations  with construction
     of City's  Advanced  Wastewater  Treatment  (AWT) facilities.

10.   In cooperation  with the  Compensation  Section of  the  City's Central
     Personnel  Division, preparation of  operational staffing  plans for
     treatment  plants,  including  proposed  job  descriptions   and  wage
     scales, as they  exist  and as they may  be  modified  for  AWT.


     Municipalities have  used contract  operations  to  address the  following

     •  Management and compliance problems:

          -  compliance violations;
          -  cost inefficiencies;
             inaccurate budget estimates;
          -  growing administrative burden;  and
          -  complicated insurance requirements.

     •  Operating problems:

             inadequate operating data and reports;
          -  poor performance; and
          -  plant design constraints.

     •  Maintenance problems:

             deterioration of equipment;
             unorganized maintenance scheduling system; and
             inadequate  spare parts inventory.

     •  Personnel training problem:

          -  inadequate  training;
             salary ceiling;
             no  incentives; and
             little opportunity  for advancement.

 In many cases,  it  is a combination of these problems  which may  trigger  a
 utilities decision  to  consider contract  operations.

 Management and Compliance  Problems

     Contract operations is  a service that  appears  to be evolving as a  conse-
 quence  of the EPA  Construction  Grant compliance process  and is  particularly
 suited   to  treatment  plants  that  have  built  expansions  with   sophisticated
 equipment,  had  recurring  operating  problems,  and  face  enforcement actions.
 Utility managers have found that the comprehensive contract  operations  option
 can provide  guaranteed effluent  quality  (with  certain  limitations  on  the
 influent variability)  and can  protect  the  local  municipality  against  con-
 tinued  non-compliance citations  and fines.   The non-compliance problem  can be
 the result of  staff  training,  operating procedures, maintenance  procedures,
 or other factors  which  can be  addressed by  a comprehensive contract  opera-
 tions agreement.  In addition, contractors can identify cost  efficiencies  and
 provide improved budget  estimates for the plant operations.

     In addition  some municipalities  have  had a difficult time estimating the
annual  cost  for  operating  their  treatment   plants  and  for achieving  cost
reductions  through  operating  improvements and  implementation  of  innovative
operating procedures.   Several municipalities  have  found that the use of con-
tract operations  allows a more  stable estimate of  the  total  cost for operat-
ing the treatment plant.  This occurs because  the costs are fixed by the terms
of the contract with certain provisions  for  inflation that can be fairly well
predicted.  In one 24-million-gallons-per-day  (MGD) secondary treatment plant,
a contract  operations  agreement  saved the city  approximately $170,000 during
its first year.

     Because  the  contractor  budgets  and  accounts  for  the cost,  contract
operations  also provides  a simpler  technique for  identifying and  accounting
for all costs which should  be  included  in the user charges  for  the facility.
This makes it easier for the municipality  to  calculate its annual user charge
costs and  adds predictability and  financial  stability  to the  procedure  for
estimating needed revenues.

     In recent  years,  municipal  officials have  been required to  spend  more
and more  time  on  the  administrative details  associated  with  construction and
operating wastewater  treatment plants.  This is an  added cost  to  trie  com-
munity and  reduces  the  amount  of time that officials spend  on  the myriad  of
other local problems.   For a facility that is facing  recurring compliance and
operating problems  that require  the attention of  the  administrative  offi-
cials,, contract operations  can  provide  a means  for  reducing the  compliance
problem and provide the secondary benefit  of  reducing  the amount of  adminis-
trative time devoted to management of the treatment plant and its problems.

     A second aspect of this issue is the  reduction in the amount of  personal
liability,  worker's  compensation,  and  general  liability insurance  coverage
that a municipality would need since  this  coverage  would be  picked up by the
firm providing  contract operations  support.   This,  again,  would reduce  the
amount of administrative time devoted to looking  after  the insurance  and  lia-
bility requirements  for the  treatment plant.

Operating Problems

     Existing operating  procedures  for  control  of the  wastewater  treatment
plant and the sludge disposal  facility  may not  be  sufficient to obtain  high
quality cost-efficient  results.   Contractors  can  provide  improved  process
control expertise and  experience from  other   facilities  which could  improve
effluent  quality and,  in some  cases,  reduce operating  costs.

     Secondly,  since it is  often difficult to  obtain all unit  and  operating
costs for the existing  system,  the contractor can  implement  cost identifica-
tion procedures and  then act  to reduce cost through management  improvement

Maintenance Problems

     In addition,  through  contract  operation utility managers  can receive  a
more  sophisticated  approach to  improving maintenance  of the  plant  and  for
improving  the  general  appearance and  reliability of  the facility.   Several
private  firms  offer,  as  a part  of  their  contract  operations  package,  a
systematic  approach  to maintenance  of equipment.   These systems  can  auto-
matically  schedule maintenance,  control  inventory  of  spare  parts  and  can
include a  system  for  detecting  problems  before  they  become major  operating
problems.   A number of firms  in  this  field have  demonstrated  an ability to
assume responsibility  for  a plant and show dramatic improvements  in  effluent
quality and a  reduction  in the number  of occurrences  of maintenance related

Personnel Training Problem

     Although  the  labor  issue  is one of  the more complex parts of  a compre-
hensive contract operations agreement,  a  number  of positive  impacts  can occur
for  the existing  treatment plant  staff.  The private  firm often will provide
training for the existing  staff,  attempt  to  solve any  existing labor problem,
provide,  in many  cases,  equal or  better pay,  and create  opportunities  for
advancement.   Since,  in some  cases, the existing staff become  employees of
the  private sector  firm, they  are now  part  of  a professional organization and
receive  greater  compensation and increased  responsibility.   A  number  of the
contract  operations  firms have  full-time   labor  relations  experts  who  are
familiar  with  the  problems faced by operating  personnel at  wastewater  treat-
ment plants.

      A summary of  the elements  of  a  contract  operations   agreement  and how
each element  relates  to  problems  identified in treatment plant management and
operations is  presented  in Exhibit    2.

An Example

      A community  in  California was experiencing a number  of  operating  com-
 pliance problems at their  facility.  They  contacted a  consulting engineering
 firm which reviewed their  design and  operating procedures   and  indicated  that
 they  needed   substantial   improvement  in  their  operating   procedures.  The
 review also  indicated that the  kinds  of expertise needed   to  run   the  plant
 were not  present  and  that it would be difficult  to  achieve  compliance  with
 the existing  staff.   This  community decided to  enter  into  a  contract  opera-
 tions agreement and contacted  several  firms with expertise  in  operations and
 entered into  an agreement  to  provide  comprehensive operation  of  the facility
 by a private firm.


      In  general,  utility  managers contacted  during  the   study  indicated  a
 favorable  reaction to contract  operations.   However,  a  number  of  issues  were
 identified which  have caused  some problems  in  the  agreements.   One  of the

                          Exhibit    2

                       CONTRACT OPERATIONS
                     AND SERVICES PROVIDED BY
                          THESE  PROBLEMS
          Problems  in
     Existing Operations
     Contract  Operations
   Services  Which  Addresses
         the Problem
Management Problems
   Compliance violations
   Inaccurate budget estimates
      for  rate making
   Administrative burden
   Inaccurate cost accounting
   Inadequate recordkeeping
   No planning
Operating Problems
   Poor performance
   Inadequate operating data
   Inconsistent laboratory
Maintenance Problems
   Deterioration of equipment
   No maintenance schedule
   Unorganized spare parts
Personnel Problems
   Salary ceilings
   Inadequate training
   No incentives
 Guarantees  plant  effluent
 Provides  fixed  annual  budget
  with  estimatable  correc-
 Reduces burden  but  requires
  some  monitoring
 Modifies  cost-accounting
 Improves  recordkeeping
 Provides  activity plan

 Defines plant deficiencies
  and identify  corrective
 Reviews computer  and manage
  ment  information  systems
 Upgrades  laboratory staff
  and procedures
Provides effective equipment
  maintenance program
Improves maintenance
  scheduling system
Upgrades inventory control
Salary based on market value
  of skills
On-site training and
Corporate incentives program

first problems identified by  one  municipality was the  fact  that the munici-
pality still had to  provide  staff to monitor  the  performance  of the private
firm operating the plant.  This was  necessary to ensure that all maintenance
was being performed and that  all  parts  of  the  contract were being fulfilled.

     In addition, the utility manager  must  continue  to  work with the private
contractor  in  making decisions  regarding long-term maintenance and capital
improvements for the facility.  This can  be a complex decision-making process
and the identification of whose responsibility it  is to perform  certain tasks
needed to be continually reviewed.

     A  third  problem was  the complexity  of   the  contract  operations  agree-
ment.  Due  to  the  uncertainties faced  by  each party in a contract  operations
agreement,  the development of  the contracts  for  this alternative can be more
complex  than   the  normal contracting  arrangements  for  obtaining  consulting
services.   Since the  contract  operations  firm will,  in many cases,  guarantee
the effluent quality from the plant, contract language must be  included which
provides  some  protection  if the   influent   to   the  plant  exceeds  certain
limits.  In addition, a  number of other  issues,  such as pension fund  conver-
sions, and  insurance changes make the contract documents more  complex.

     Also  in  some  cases the  contractors  have placed new operating  personnel
in  management  positions  and repeated   the   problems  which  had  previously

     Predicted  cost  savings  are  not always  achieved and  new  labor problems
can arise.

     Technical  problems  can  arise which  are  beyond  the  contractors  expertise
and  additional advisors  may  have to be  retained.   Finally, some  local offi-
cials have stated  that once a city  starts  contracting  out its  operation,  it
may be difficult to end  the contract and return to a municipal  operation.  The
city  becomes  dependent on the contractor's expertise  and  no longer has city
staff to operate the plant.

An Example

      In  a  western  community,  a contractor had worked several months with the
utility  manager developing  the   terms  for a contract   operations   agreement.
After  detailed discussion,  it was  learned  that  a city  labor  contract  provi-
sion stated that the city could  not contract  out  the operation  of   the  treat-
ment plant.


      The utility manager must go through a  four-step  process   in identifying
utility management needs and  selecting  solutions for  those needs.   The four
steps include:

     •  obtain adequate description of the need;

     •  define options for addressing the need;

     •  evaluate  the options; and

     •  select the option.

The  four-step process  is  reviewed  here as  it relates specifically to the con-
tract operations  option  to explain the  types  of analyses that  will  help the
utility manager decide if contract operations  is his best alternative.

Obtain Adequate Description of Needs

     Through a  Comprehensive Diagonostic  Evaluation,  specific  compliance  or
operating problems and needs of  the  utility  manager  will be  identified.   In
addition,  the  factors which  caused  the problem would be  discussed and  any
legal or  institutional  issues  which  are  related  to  the  problem   should  be
described.  This analysis gives  the  utility manager a  complete  picture  of  the
problem and places him in a better position  to determine if each option will
indeed solve the problem.

Define Options For Addressing The Need

     There are normally  several  options  for resolving an operating deficiency
including in-house solutions, temporary  outside assistance or contract opera-
tions.  In identifying each of the options,  time should be taken to  define in
some detail the  scope  of the option  and  an attempt made  to  establish as many
parameters as  possible for  the  cost and  feasibility analysis  which  will  be
performed in the  next  step.   Existing conditions should also be identified to
provide a baseline for comparison with the options developed.

Evaluate the Options

     Evaluation of the options which  address  the problem will first  require a
description of the utility manager's  objective and  criteria for screening and
selecting  the  options.  For  example if  the   utility  manager demands a 100%
compliance record that would be one of his objectives.

     An overview of a matrix  format  for  assisting  the utility manager in this
evaluation is shown in Exhibit    3.  The  options  that are to be analyzed are
listed down the left hand side of  the matrix  and across the  top of the matrix
are entries for cost, which is subdivided into  in-house direct costs, in-house
administrative and overhead  costs, outside  contractor costs,  and total costs.
Continuing across the matrix  are  entries for  risk,  feasibility and effective-
ness.  In the cost category an estimate  is  developed  for each option and par-
ticular attention is paid  to  the  cost that would be  incurred for both inside
implementation of  the  option and  for any  outside  contractors  that  might  be

        Exhibit    3



Contractor 's







     For  example,  if one of  the  options would be  contract  operations,  there
would have  to  be  costs  entered for the  in-house  personnel  that would monitor
the  contract and  for the administrative and overhead  time  required to manage
the  contract.  In addition,  there  may  be costs for monitoring and other items
which  the municipality  may have  to  continue  to  incur  and those  should be
identified for a proper cost analysis.

     The analysis also includes an assessment  of  the risks  that will be faced
by  the  community if each option  is  selected.   For  example if  the contract
operations  option  guarantees that  fines  and noncompliance  penalties  will be
paid by the private  contractor  the city  faces  very little risk as compared to
that situation where  they are  being held responsible for the fines.  In addi-
tion  if  the Contract  Operations   Agreement  calls for  insurance  and personal
liability coverage to be  provided  by  the outside  contractor  these burdens are
removed from  the  city.  And  as indicated earlier  a cost provision  would be
made for that difference.

     The  feasibility of  each  option  with  respect to  its   acceptability to
local decision-makers,  its  legal  implications, and  its  reception by existing
workers will also come  into  play  in analyzing  the  options.   One  problem  that
local communities might  face  in entering into  a Contract Operations Agreement
would be  legal restrictions  in union  contracts  or in agreements  with  other
municipalities  or  intergovernmental   agreements  with  other  municipalities.
This  issue  should  be examined early  in the  options  analysis  so  contract
operations  could  be  eliminated   or  actions  taken   to  remove  the  legal

     As the utility  manager  examines  the options  for  solving operating  prob-
lems and  if contract  operations   looks  like  a viable  option,  then  the  city
decision-makers should be consulted with  to  identify any objections that they
might have  to  selecting the  contract  operations  option.  By performing'this
preliminary screening  during the  alternatives  analysis,  the  utility manager
can  identify problems  that  may arise  and  attempt to mitigate  these problems
or eliminate the option.

     The final entry would be an analysis of the  effectiveness  of each option
in achieving  the  objectives  identified  earlier  and  in  producing  consistent

     In evaluating the effectiveness of  each of  the options,  it  is important
to consider the specific objectives of the city involved,  the utility manager
and  other entities  such  as  labor  unions and  existing management  staff.   By
understanding the concerns and  objectives of these  groups and through working
with them, the utility manager  will understand any reservations  with  each of
the options and will select  the option which  will  best fit   the  needs of  the
utility and  the objectives  of the other parties  involved.   One   factor  in
effectiveness may  be a  reduction  in  administrative burden,  a  reduction in
operating  problems,  or  a projection  of reduced  operating   costs  due to  the
implementation of  operating efficiency.

Select the Option

     Based on the analysis completed above, the utility manager can  calculate
a cost  effectiveness ratio  or other  indicators  to  determine which  of  the
options will best  suit  his needs  for  the  identified  problem.  The  selected
option should be reviewed  with local  decision makers before additional  steps
are taken  to  implement  the selected  option.   An example  option analysis  is
shown in Exhibit    4.


     Once  the  local  official  has decided  to  obtain contract  operations  sup-
port, he  has  several options  for  identifying qualified  firms, selecting  the
best  one  and  negotiating  the  final  agreement.   Three  important steps  that
preceed the actual selection process are:

     •  clarify scope;

     •  review critical issues; and

     •  develop selection criteria.

These  three  steps  provide the  manager  with a basis  for  making  a  contractor
selection  and for negotiating  the final contract.

     It should be remembered  during the process  that  the  decision to contract
out  services  was made on  the best assumptions and  cost  estimates  that  were
available  during the options  available.   If,  as  the selection and negotiation
proceeds,  the utility finds  that  the  assumptions  or cost  analyses were incor-
rect,  they  should   retain  the  option of  reanalyzing  the alternatives  and
redirecting  their  actions if  the  additional  data prove  that  to be  the best
course of  action.

     The  discussion which follows was developed  primarily  for the comprehen-
sive  services  option but  applies as well as  to  utility managers  deciding how
to  select a  firm  for operations  supervision or for  staffing of  a  facility
without responsibility for compliance.

Clarify Scope  of Work

      Although  there are  a  number of different  procurement  strategies   for
 identifying,  screening  and selecting  a firm for a contract operations assign-
ment,  the first  step that  should occur in the process is the  development of a
 detailed  scope of work  which  can be based on the preliminary  ideas  formulated
 during the analysis of alternatives.   Issues  that  should  be addressed in  the
 scope of  work  include:

      • Location and number  of plants - Identify the size, type  of  treatment,
         and the location  of  the facilities  to be  serviced.

                                                  Exhibit    4

                                            EXAMPLE OPTIONS ANALYSIS

     If a  wastewater  plant has an  operations problem  and has received  a number  of compliance  citations,  the
evaluator  will  identify that  problem  and develop  alternative  solutions.  These  will be  compared  to  existing
conditions to provide a baseline for the analysis.   Assume that  some alternatives that appear reasonable are:

     •  improved training of existing staff by in-house personnel;

     •  training of existing staff by outside contractors;

     •  operation supervision of the facility;

     •  comprehensive service contract for the facility.

     The evaluator  would  prepare  an analysis  of  each alternative's  cost,  risk, feasibility,  effectiveness  and
special issues to consider and present them to the  local officials  as follows:

. ,
In— house
_ - 	
of Existing









. ,

, . , 	 1

1 -•-

    •  Length of contract  -  Identify the  duration of  the  contract and  the
       expected starting date.

    •  Scope of operations responsibility  - Since  the  contractor will  only
       sign a  performance  guarantee for the effluent  quality,  yet the  city
       defines  the  design loadings  for the  plant, these  loadings must  be
       spelled out in the agreement with the contractor.  Also  this specific
       processes  that   the  contractor  will be  responsible  for  should  be
       listed and the period for  returning the plant effluent  to  an  accept-
       able level after a violation of  design loadings,  should  be defined.
       In general, all  items the  contractor should be aware of with  respect
       to the  operation of the plant  should  be  clarified  (should be  noted
       that a  number  of the more  detailed items will  be  worked out in  the
       contract negotiating session).

    •  Scope  of  maintenance  responsibilities/warranties  and  guarantees  -
       Define  the  specific equipment structures and  vehicles   for  which  the
       contractor will  be responsible.   List  all  maintenance  schedules  and
       highlight  the  party that will be responsible for the maintenance of
       all  warranties   and guarantees  for  existing equipment.    Explain  the
       intended procedure  for monitoring the maintenance performance of the

    •  Fines and  fees - Define  the terms under which  the  contractor  will be
       responsible  for  fines  and  fees  (up  to  a  specified   limit)  levied
       against  the  city for noncompliance  with  its national pollutant  dis-
       charge  elimination system permit  (NPDES).

    •  Reports  to regulatory agencies - Identify the procedures that will be
       followed  for providing  all  reports to  regulatory  agencies  and   spe-
       cifically, the involvement of the contractor in this effort.

    •  Septic  tank  sludge  - Define  the  amount  of septic sludge  that the  con-
       tractor will have  to accept  at the  facility.

    •  Laboratory  analysis - Describe  the specific  laboratory analyses  for
       which   the  contractor  will  be   responsible  and   the   mechanism   for
       including  that analysis  in  regulatory reports.

     •  Sludge  and grit  handling disposal - Detail  the contractor's responsi-
       bility  for  disposing  of  the estimated volumes of sludge and grit.   If
       the  contractor  has to  provide  a disposal  site, that should  also  be
       presented  in the scope of  work.

     •  Industrial waste sampling  - Define  the responsibility of  the  contrac-
        tor  with respect to industrial waste sampling.  Include the frequency
       and  type of  analysis  that  will be performed on the  sample.

The development of this  scope of work will  provide  the  local utility  manager,
administrative, and elected officials who might have to approve the work  with
a  clear  understanding  of  the  types of  services  that  are  being  requested.


Since a contract operations  agreement  will  cover a number of  issues  not nor-
mally covered  in  other technical  assistance  agreements,  the  local  decision-
makers can  use  the development of  the scope of work  as  a means  to  identify
and resolve critical issues which may impede the contracting process.

     The utility manager  has the option of providing  a great deal of  detail
in  the scope  of work or  providing a general scope  of work and  expanding  on
the  terms  of detail,  after  he has  had preliminary  discussions  or  received
additional information from interested firms.

     Local utility managers  contacted  as a  part of this  study  indicated that
they would  like to  retain local  flexibility  in  the  contracting process  to
obtain a  contract  that is most suited  to  their  needs  and which  will be  a
workable agreement.

Review Critical Issues

     There are  a number of issues  which the  utility  manager should  be  aware
of as he proceeds  through  the contractor selection process.  These issues  are
discussed here  to  alert   the  utility  manager  to considerations  which,   if
ignored in  the  contracting process,  may cause  problems  during the period  of
the performance of  the contract.  The issues include:

     •  Influent variation - Since  the contractor  will, in  the  comprehensive
        service agreement,  guarantee  the  compliance  with  effluent  require-
       ments,  an  agreement  must be  reached  on  the  variation  that  will  be
        allowed in  the influent to  the plant.   If the influent exceeds  these
        allowable  limits,  the contractor will not be held responsible for  the
        quality, of  the effluent.

     • Existing personnel  labor  agreements  and  pension fund  conversion  -
        Since the  labor agreements  are  a major  consideration in any  of  these
       agreements,  the city's  agreement  with  all  existing  personnel  should
       be clearly  explained to  the contractor  including a  plan  for conver-
        sion of pension plans if  necessary.

     • "Hold harmless" agreement  - The utility manager will  want  the con-
        tractor to  sign a  "hold harmless" agreement which means that  the con-
       tractor will  hold  the utility manager and any board members,  officers
       or agents harmless from claims for  property damage or personal  injury
       which  arise due to the  negligent operations of the contractor.   It  is
       also important to  note that  the contractor normally will  not sign  a
       "hold  harmless" agreement  for  releases of treatment  plant  effluent
       into the air,  land,  or  body  of  water  and  any  subsequent   property
       damage  or  bodily injury that may result from that release.   Included
       in this  issue is  a  determination  of  the utility  manager  and his
       organization's  role in the  defense  of  contractors if  a release into
       the  body of water  occurs.

     •  Compensation  - The  annual  compensation  to  the  contractor  and  the
       terms  for inflation adjustment should  be clarified.  Also,  any com-
       pensation for  additional  services  which might  be over and above those
       defined in the  initial agreement should be defined.

     •  Insurance requirements -  The specific  types   of  insurance  that  the
       city will want the contractor to  carry  should  be  identified early in
       the  process.   This would include  compensation  insurance,  public lia-
       bility  and property damage  insurance  and  other  types  of  protection
       that the  city  would request.

     •  Right  of inspection  -   Since  the  city  will  have  to  occasionally
       inspect  the  facilities to determine  if  the contractor  is  performing
       up to his agreement, then the city must maintain the right  of  inspec-
       tion on the  facility.

     •  Experience requirements  - The city should outline the specific  exper-
       ience  requirements  expected of  the firms  prior  to bidding  on the

     •  Type  of  contract - The utility  can enter into a  cost  plus fixed fee
       or  lump sum  contract with the contractor.   Since  it is difficult for
       the  contractor to predict  changes in  inflation and energy costs,  it
       may  be necessary to provide a  provision  to give  this  flexibility  to
       the  contractor.  This option should be  examined  quite    carefully  so
       that  the  total annual costs for  the  contract  remains  a  predictable
       value  within certain ranges.

     Additional,  issues  that  might  arise  that  the utility  manager should  be
aware of  are:

     • Right  of  ownership;

     • Performance  bonds;  and

     •  Use of municipal vehicles.

     The  relevant detail to which each of  these  issues must be  addressed  will
depend on the magnitude  of  the  effort being contracted  out and  the  previous
working relationship that the  city may  have with the selected contractor.

Selection Criteria

     Before beginning the  selection  process   selection  criteria  should  be
established.  Since the  utility  manager may receive a number of  similar  cost
and  technical  proposals for  the work,  a set  of  screening criteria  for  the
selection process should be established.   A number of elements  that  could  be
included in that process are as follows:

     •  Responsiveness  to  needs - Make  sure that  the  contractor understands
        the  particular  needs of  the  city and  has  responded in  his proposal
        directly to the items identified  in  the scope of work.

     •  Ability to perform  - The  utility manager  may want to check  a list of
        references for each  of  the  firms and review the technical and manage-
        ment  expertise as   it  has  been  demonstrated   in  previous  contract
        operation situations.   A  review  should be  made of  operating experi-
        enced  in similar  plants of similar  size  and  the contractor's ability
        to meet effluent requirements.

     •  Guarantees - The language  proposed by the contractor in the guarantee
        section should be  reviewed  to determine if there are too many "loop-
        holes"  for  the contractor  to  cite   for  reasons for  non-compliance,
        which he will blame on the city.

     •  Cost - Although always  a  factor  in  the selection process, contractors
        that are  not familiar  with  the  requirements  of the contract  opera-
        tions  and  the  performance bonds  and insurance  requirements, may not
        reflect these  costs fully in  their  bid  proposal and this  should be
        reviewed prior to the selection.

     In addition to  these  criteria,  the utility manager should  develop other
screening criteria such as  previous work in  the plant  or the requirement for
the types of personnel that would  be assigned to the project.

Steps In Selecting a Firm

     After  developing  the  scope  of  work,   the  utility manager  has  several
options  for selecting  a  firm for   contract operations  (either  operations
supervision, full  staffing, or comprehensive  services).   The  options  include:

     •  competitive selection;

     •  solicitation of bids from  a limited group  of firms; and

     •  direct  negotiations with a previously identified firm.

     The steps  to be  followed,  in each case,  and the  issues to  consider  are
presented in the following  sections.   Since  the competitive selection  option
is the most  complex,  it will be discussed to highlight the  steps that  would
be followed in  the  selection process.

     Competitive Selection

     The general steps in a competitive selection  include:

     •  Requirements Definition;

     •  Request for Qualification;

     •  Screen for Prequalification;

     •  Request for Proposal bids;

     •  Evaluation of Proposals;

     •  Contract Negotiations;  and

     •  Project Management.

     To supplement that information,  this section will highlight  extra proce-
dures and issues in each step which are unique to the selection of a contract
operations  firm.   We have  discussed  the  requirements  definition  (scope  of
work) step  above,  the  section  which  follows will begin  with the  request  for
qualifications step.

                         Request for Qualifications

     If a competitive  process  is used, the utility may  want to have  as  many
qualified firms  as  possible submit  their  qualifications.   The Environmental
Protection Agency has several reports  which identify  firms  which  have experi-
ence in this area and the city  can  use that list  as  a  reference.

                         Screen for Prequalification

     The utility manager may have to have an outside  consultant assist him in
the  screening  of  the qualifications  submissions  and  the  recommendations  of a
firm  to  the city  decision-makers.   The unique  factors   which  would  be  con-
sidered in the selection are:

     •  use of experience of operations and maintenance contracting;

     •  experience in operation of  facilities,  similar to the one  in question;

     •  proven financial stability  of the firm;

     •  ability of the firm to  post a performance bond;

     •  list of references from the firm's  current customers;

     •  proven technical management and backup expertise;

     •  labor relations experience  of the firm;  and

     •  general familiarity with the  facility.

                             Request  for Proposals

      The  request  for proposals can  be  sent  to the  "short  list" of qualified
 contractors  and would  include the scope of work,  evaluation criteria, and the
 evaluation process  that  will be followed.   For a contract operations proposal
 the manager  should  pay  special attention  to accurately describing the type of
 cost  proposal  requested,  the specific responsibilities of the contractor, and
 the insurance  and performance  bond requirements for  the contract.

                           Evaluation of Proposals

      When  the  selected  firms  submit detailed  technical  proposals,  the city
 and their legal counsel  should review the  specific parameters of the proposal
 to  ensure that  all of  the activities  requested in  the scope of  work are
 covered.  Specific  issues  in the cost proposal which  are of great importance

      •  identification of specific tasks to be conducted by the  contractor;

      •  provision in the proposal for changes in labor costs;

      •  provision in the proposal for added activities; and

      •  clarification of specific expenditures  that  would be  made for actions
        that would  be taken to maintain  the  equipment,  vehicles  and  struc-
        tures  at the facility.

                             Contract Negotiation

      In the  final  negotiation of the  contract  with  the selected firm,  the
 city  should  make sure  that  the contractor  will not  assign any  of the portion
 of the agreement to the  subcontractors  without  the city's approval.   In addi-
 tion, other  general contracting factors should be reviewed  such as  proof of
 insurance, and terms for renewal of  the agreement.

     Once the  final contracts are signed,  and  the  starting  date established,
 the city  then must  plan on  reviewing  the performance of  the  contractor  to
 ensure that  he complies  with his agreements.   It  is important  that  the City
 understand that  the supervision  and review will  be  required  when  they  are
making their decision to hire  an  outside contractor,  since  the  costs  for this
 activity must be factored into the decision.

     Limited Solicitation

     In a  limited   solicitation  situation,  the city  follows  the basic  steps
 outlined  for  the competitive  solicitation, except  the  city  only sends  the
Request for Qualifications to  a limited number of  firms that  they feel  quali-
 fied to perform the activities.   This pre-screening  of  qualified firms  by the
 city  can  save  a great deal  of time  in  the  review of  qualifications'  state-
ments from firms which may  not have  the capability  to perform  the work.   In

addition,  this procedure may allow the city  to  move more quickly  through  the
selection process.

     Direct Negotiation

     Several  communities  contacted  during  the  research for  this  guidebook
indicated  that  they preferred to  enter  into direct  negotiations with  firms
they  felt  were  qualified  to  perform the  contract  operations'  role.   This
situation gives the utility manager a great deal of  flexibility  in developing
the scope  of  work  and  the  terms  of  the  arrangements since he  can have  the
benefit of input from  an experienced contractor.   This allows the  utility to
move quite quickly  to the contracting process and could  allow  an initial con-
tract of limited scope to be initiated almost immediately.


     An important role  for the utility manager  and his  staff  in the contract
operations situation  is a  formal  arrangement  for  monitoring  the  progress of
the contractor.  Either through random checks or routinely  scheduled reviews,
the utility manager must be sure that the contractor is performing as stated.

     The  data gathered  and  reviewed combined  with  the record  of cost  and
operating  and maintenance  problems  which  have arisen  during  the  first year
can  form  the basis  for renegotiating the  contract or  for the  selection of
another  firm.  As  mentioned  earlier,  it  is   important  for  the utility  to
realize that  there  will  be  some  costs for the  monitoring and  contract admin-
istration  functions, even in the comprehensive contract operations option.

     In summary, the contract operations alternative may provide a cost-effec-
tive  solution  for  some  utilities  and  should  be  included  in  the  options
reviewed  to  solve  the problems  identified in  the  Comprehensive Diagnostic


1.  Contracting  Out  -  A City  Successfully  Manages  A  Private  Sector  Water
    Treatment Operation", Government Executive, copyright 1980.

2.  "Contract  Operations of  Publicly-Owned  Treatment  Works:   Pitfalls  and
    Profits for  the  Private Sector",  Urban Systems Research  and Engineering,
    Incorporated,  presented at  the  1980  Water  Pollution Control  Federation
    Conference, October 1, 1980.

3.  "Management by Contract Operations and Maintenance Solutions",  Envirotech
    Corporation, John A. Sedwick, presented at an EPA seminar.

4.  "The Reality  of Plant  Operations  and Maintenance Contracts",  George  E.
    Strudgeon, E. S. Environmental Services,  Inc.,  California Water Pollution
    Control Association Conference, May 1, 1980.

5.  "Wastewater Problem-Solving Using Contract Operation and  Maintenance Ser-
    vices", Ray Maddocks, Administration,  Capistrano  Beach  Sanitary District,
    1980  Southern Regional  California  Water Pollution Control  Assopiation
    training seminar.

6.  "Selecting An  0  & M  Consultant  for  Wastewater Treatment Facilities",  B.
    J. Murphy et al., Water Engineering and Management, March, 1981, p. 85.

7.  "Private  Sector  Provision of Operation and  Maintenance  Services  to Pub-
    licly-Owned Treatment Works", Executive  Summary,  prepared by  Urban Sys-
    tems Research  and  Engineering, for  U.S.  EPA,  July  1980.   (See  also  the
    complete final report published July 1980  under contract no. 68-01-5034.)

8.  Management  of   Small   to   Medium-Sized   Municipal  Wastewater   Treatment
    Plants, U.S.  Environmental  Protection Agency,  Office of Water  Program
    Operations, EPA  No. 430/9-79-013, prepared by Gulp,  Westner,  Gulp, Clean-
    water Consultants,  July 1979.  See pp. 123 - 129.

                                             « U. S GOVERNMENT PRINTING OFFICE • 1982 361-082/307