Pay-for-performance (PfP) remediation of soil and/or groundwater is not a very well-understood subject in general business, mostly because there are so many variations of the subject. PfP should be regarded as a technical strategy and contracting method to compensate a remediation company. It should be based on matching payment with actual contaminant mass reduction with the goal towards site closure.

The secret ingredient in an effective performance program is the ability to match up the site owner's goals with the capability of the remediation contractor. Typically, this means reaching agreed-upon goals within a specified budget.

The first wide-scale, in-situ performance-based program was developed in 1998 by ERFS, Sea Girt, N.J., for the Pennsylvania Underground Storage Insurance Fund. It involved scores of sites contracted on a not-to-stop basis, with predetermined volumes of soil and groundwater being remediated until complete. Compensation was based on pre-defined milestones of contaminant reduction along the path to achieving remedial goals. Since that time, the remediation company's work has been approximately 80-percent based on performance.

Implementing the approach

During any cleanup, it is important to take steps to prevent further site contamination. Photography supplied by Steven Parke.

PfP has two types of implementation. The first is the desired even playing field, where all involved parties have well-defined risks or exposure, and the remedial plan, with contingences, is functional, flexible and well defined for real-world conditions. The other strategy is skewed more toward assigning risk than the management of risk. If the plan favors the contractor, then payments can exceed real performance. If the plan favors the site owner too much, then the remediation company may be faced with having to reach unrealistic performance levels just to cover project costs.

To avoid possible failure of a skewed plan, certain building blocks are needed in the overall plan.

Foremost, PfP cannot be a guess or a singular event; it has to be a program. Also, key attributes of the provider and the client increase the chance for a mutually pleasing resolution to the contract. In our experience, the most important attributes for the provider are experience, in-house technology, and a sound financial model. Up to 60 percent of our business is from environmental consultants or engineering firms, who in turn, do business with 80 percent of our direct clients for services we do not provide, such as civil engineering, or independent reporting. ERFS runs a performance-based program that grew on the experiences of over 500 sites and a 100-percent contract completion rate. All technologies are in-house continually developed and updated, with 18 contracting models that are managed by an actuarial process.

Alternatives to actuarial modeling are 1) external insurance-based models, and 2) risk-to-reward-based factoring. Comparatively, insurance- and risk-to-reward-based models are fixed in nature. Insurance-based models run on assumptions that an overdesigned approach with high capital cost covers probable contingencies and unknown events, or that project failures cause a punitive process to take over. Risk-to-reward models are based on performance, remuneration and fallback reserves. If something goes wrong, there are usually few options to recovery.

Actuarial-based is the most complex model, because the data and calculations that build a fixed cost-design change over time. Factors for this include current costs to provide services; retainage from prior closed sites; cost-of-money rates (internal and external) related to collection of performance milestone payments; and degradation profiles of technology verses contaminants and geology in volumes of groundwater and soil. Even frequency of like operations or proximity of projects effect costing in an actuarial process, because costing is based on an ever-updating schedule of work in progress managed as one actuarial matrix of true costs, past, present and future.

An actuarial model is very flexible for technology changes within a project, such as adding additional injection points, or changing oxidant types in mid-project. This is all done without additional charge to a client, because the financial model allows many types of field changes.

The problem faced by remediation companies not based in performance-based work is that they can get pigeonholed into an insurance- or risk-to-reward-based model because in their view, each PfP project is a standalone event, and not part of a wide, continuous program where risk is spread among portfolios. On the other hand, the complications of such a program may often be too much for clients and remediation providers. The key to pulling it off is to follow three contracting principles: 1) good design, 2) strong trust and equanimity between partners, and 3) simplicity.

Technical design

Most businesses have to stay in operation during a remedial activity. Care to not interrupt business activities is very important. Photography supplied by Steven Parke.

Delineation of a site needs only to be bracketed, not perfect. Most important is that site characterization defines the horizontal and vertical extent of the contamination, and the approximate levels, along with the geology and hydrogeology. Information beyond this is a luxury that can drive design costs down, but assume a whole volume needs to be treated.

In our recent experience, bench tests and pilots studies are holdovers from the '90s. Unless an unusual compound, rare mix of contaminants or difficult geology is involved, a bench test tells little about real-life site applications. Bench tests are useful to study stoichiometric ratios or chemistry, or testing can determine if there is a natural microbial population to stimulate. But there is no real-world translation to the field.

Also, pilot study results are generally not transferable in our experience, regardless of outcome. Even areas on the same site could have non-interchangeable characteristics. Live fieldwork strategies provide real-time bench and pilot test data in the early stages of a project and are essential to a complete PfP work plan. Technology substitutions must be preplanned and cost relatively the same. Contingency planning in performance contracts requires that backup plans do not exceed the basic costs of the primary plan.

Trust and simplicity

Not all cleanup sites are situated in easy-to-access areas. It is important to use care and preserve existing landscaping as much as possible. Photography supplied by Steven Parke.

The first rule in any performance program is that all stakeholders have to win. No part of the contracting plan can reward failure, or upon success, greatly reward another stakeholder at the expense of the others. Communications must be even and open among all parties.

Further emphasizing the need for trust between business partners, the contract needs to be a living document. The technical plan needs to be based on very sound what/if/then planning. Field changes to a project need to be planned to at least four to five contingency levels, in order to accommodate possible scenarios.

One way to keep all parties on the same page is to keep the contract as simple as possible, using only the most concrete terms and conditions. Things like bonus payments for early completion generally do not work, because they cause a possibility of field decisions being compromised. Milestones for payment should be black-and-white in structure, easy to understand, and easy (and of reasonable cost) to verify. A good rule is that if the payment schedule requires any subjects that need to be audited or interpreted, it probably is not going to work.

Remediation contractors need to understand the paying client: 1) is not usually cleaning a site by free will, 2) this is not their core business, and 3) the money spent on environmental is viewed as a loss to the bottom line. True PfP work requires an understanding of some very advanced economics to provide a business solution to a problem. To understand the financial benefit of such a program for a client, which sometimes is their only benefit, it is important to understand and be able to explain some rather complicated financial and accounting concepts.

The science is not limited to technology. It also involves all of the design features of the financial products that minimize client risk. For example, any financial contracting model should not only set milestone, payment and work completion schedules, but also set financial modeling precepts so that the client's business accounting needs for financial statements, taxes, or other reports can be produced. Common reoccurring accounting subjects include the obvious: return on investment, and less obvious focus percentage, i.e. the percentage of actual remediation costs within total costs. End-of-lifecycle is a percentage of project progress that becomes the main inverse to the all-important contingent liability calculation, especially for public companies. Financial modeling is an enormous and specialized subject on its own. Without an in-depth financial model, there is no true way to manage the variable uses of technologies within a PfP project. PE

Sidebar: Case Studies

What does a successful project look like? Examples of PfP in action may provide some insight:

1. In one case, a Department of Defense site in California was on an original PfP contract that was adapted to new field discoveries without interruption. Field changes involved injection methods, oxidant changes and hand off to biological MNA.

2. Thirty-one gas stations in New Jersey, privately owned portfolio, were being treated concurrently on a five-year schedule. All expenditures matched operations on a complex completion matrix.

3. In Maryland, an oil terminal with 100 years of free product accumulation was remediated in 90 days of active treatment. Payment was earned and deferred, to be paid on a schedule not matching the field services.

4. Another oil terminal, this one in Florida, was retired in time to become a parking lot for the Super Bowl. Because of contract terms, a discovered abandoned pipeline did not interfere with closure of the site.

5. The owner of three dry cleaners in major shopping centers around Dallas faced a mid-game technology substitution in the field, at no additional cost to the client. The sites were completed as planned and on-schedule.

6. A VOC site within an Illinois shopping center was completed early. Invoicing stayed on the original timing schedule as planned for the possible circumstance.