Fixed-Price contracts can slash cleanup costs: Under this arrangement, companies would 'guarantee' the remediation work. (Industry Analysis).

The Department of Defense could save up to 20 percent of environmental cleanup costs at closed military bases by using fixed-price guaranteed contracts.

This type of arrangement is called "guaranteed remediation with insurance."

The U.S. Army decided to try the fixed-price contracting approach in 1999 at Rio Vista, Calif., and Camp Pedricktown, N.J. The two cleanup projects were worth about $6 million. Officials estimated that fixed-price contracting saved these installations 10 to 20 percent, compared to conventional contracting methods.

Additionally, this method eliminates the long delays that typically plague government environmental remediation projects, because the end date is guaranteed by the contractor.

"The contractors take on the risk of using new approaches," said Gary Keyes, senior vice president of Arcadis, the firm hired to do the work.

"Consequently, the incentive is to be as innovative and expeditious in the execution of the project as possible, because the incentive is not to spend hours, but to complete the project in an efficient manner and move on to new projects."

The promise to guarantee the work helped the company win contracts. "We realized that what we were selling was not so much a remediation service as it was a financial product," said Keyes.

Fixed-price guaranteed remediation enables BRAC (base closure and realignment) projects to avoid the economic hiatus that has been associated with previous closures. When the base was closed, an environmental investigation and remediation were conducted before the property could be transferred. Under the guaranteed- work method, the remediation can be done concurrently with the base transfer, so the environmental cleanup does not become an obstruction to the project's completion.

Changes in the remediation scope are a common occurrence in the often bumpy road to closure. Early transfer of BRAC sites requires a guarantee and a backup insurance to protect the Local Reuse Authority, the developer and the lender. The lender and the developer want to know that even though the Defense Department retains ultimate liability, they aren't going to have to wait for a Pentagon procurement authorization to take care of an unexpected situation that could come up in the middle of a multi-million dollar development project.

Government agencies must have a cancellation-for-convenience clause. Pentagon project managers say the probability of cancellation is not high, but the possibility can't be ruled out. The risk to the contractor, said Keyes, "is that, in every complex project, there are times when things are going well, then things may go badly for a while, then go well again. What happens if a cancellation of the contract happens right when things aren't going well? The contractor doesn't have a chance to make up the loss later on. So that's the risk the contractor is accepting in a cancellation for convenience."

The situation can get tough in active bases. "It's hard to mobilize, say, $30 million all at once when it was expected to be spent over 10 years," said Keyes. "There are ways of doing it. Basically you write the guarantee as a packet of guarantees, such that every Solid Waste Management Unit (SWMU) becomes a guarantee to closure, and they're grouped into packets that are funded each year, and then those packets are guaranteed, even if there's cancellation for convenience."

The "tricky part," he said, is "making sure you meet the standards of severability, that you are not committing the government to paying for something in future years that it has not funded."

Different types of insuring agreements can be written for fixed-price contracts, including pollution legal liability that covers third-party bodily injury or property damage, remediation legal liability for investigation and cleanup expenses, legal defense expenses and remediation costs.

However, the agreement with the contractor is the primary element in a fixed-price arrangement. Insurance only acts as a backup, because it has significant limitations. If there is a change in the remediation scope, that change must be presented to the insurance company, which has the right of approval over those changes.

Keyes said that insurance backup is not always needed. "We've done 34 fixed-price projects, but only a little over a third of those had insurance backup," he said. "There are many types of risk that corporations take on in their line of business, and corporations that are very good at their business are good at managing risk."

Arden Roberts, director of the Base Realignment and Closure Division at the Army Forces Command, said that the decision to use fixed-price contracting for remediation projects is shaped by various considerations.

"If a site meets our parameters, then we [consider] using a fixed price contract," he said. "One of the parameters is how far along is the site characterization." If a Record of Decision is in place, he said, "we would not use a fixed price contract on that location." A Record of Decision specifies the cleanup method to be used, so it restricts a corporation from using any new technologies.

Additionally, "if there is very little site characterization accomplished, if it's in the very early stages of characterization, then we don't want to do that as a fixed price either, because we understand that the actual price of that contract is going to be driven very heavily by the amount of characterization of that site."

The decision is based on risk analysis, said Roberts. "If we know exactly what contaminants are on that site, and the basic amount of contaminant that is there, then the risk for a corporation is much lower [and] therefore, their price is lower. I am not willing to pay a large premium for a guaranteed fixed-price contract if the risk analysis reflects that there is a big risk because we don't know what's there."

Ronald A. Torgerson is director of federal solutions at Arcadis, in Highlands Ranch, Colo.

RELATED ARTICLE: Base Closure Process Much Longer Than Planned

When the Defense Department kicked off its first round of military base closures in 1938, officials expected the process would take about six years. That timeline grossly underestimated the complexities associated with base closures, said Arden Roberts director of the Base Realignment and Closure Division, Army Forces Command (FORSCOM).

Thirteen years after the first BRAC round, said Roberts, the Army has yet to complete the closures of all those bases.

"We had a misconception back in 1988, a misconception born in the context of ignorance, because we'd never done this before," Roberts said. "Not that we'd planned improperly, we just really did not know what the ramifications would be to dispose of and dispense with very large numbers of [defense] properties.

"We thought it would be a six-year disposal process. We now know that it is a much longer process."

Forces Command uses a four-phase process for each round of BRAC, he said. The first phase is data collection, where every square inch of property is measured and evaluated. The second phase is the actual closure of the installation. The third phase is environmental cleanup and cultural rehabilitation. The last phase is the disposal of the property.

Each of these phases, said Roberts, were expected to take about 13 months, thus establishing a six-year process. "We have found, since the first BRAC round, that we can get through phase one quite easily in an 18-month period." The closure phase can take from 18 months to 24 months. "Phases three and four are turning out to be about 10 years," he said.

"We did not anticipate the amount of work load that would be associated and also the public interest and the public need to participate in the environmental remediation of our installations," said Roberts. "We didn't anticipate the processes we'd have to go through, and the length of time it would take to actually dispose of the properties and the amount of time and effort and activity that the local communities and the state governments wanted to get into."

The Army is still working on 1983 BRAC installations. FORSCOM has closed all of its installations, he said. The Army has closed 137 sites. "We've closed them, but we haven't completed all four phases of the BRAC process."

Forces Command has closed or realigned 84 sites that were under BRAC 1991, 1993, 1995. "Of the 84, we have 18 that we're still working that aren't disposed of yet," said Roberts. For example, Fort Hunter-Liggett in California, has not closed, but rather downsized. "We have realigned that installation, and we've come up with an excess of about 110 acres and 135,000 square feet of facilities. We have realigned it, but have not disposed of all of the property yet."

FORSCOM has 85 out of the Army's 135 BRAC projects. Other major commands that have BRAC sites include TRADOC (Training and Doctrine Command), Army Materiel Command, Military District Washington D.C., Military Traffic and Management Command, and Medical Command.

Approximately, $5.3 billion has been spent to date on U.S. military base closures. The Army's budget for base closures this year is about $400 million, said Roberts. "Next year, it drops to about $230 million, the year after, to about $140 million. ... But those numbers may change," he said. "That is not money that is set aside way in advance.... We have to vie for our operating money every year, just as all the other Army activities do.

"We'll have to go out and vie with the Department of the Navy and the Department of Air Force for available dollars," said Roberts. The war against the Taliban regime in Afghanistan, for example, will drain dollars from non-wartime expenses, such as environmental cleanup. "As priorities change, as needs change, then even current year budgets can change," Roberts said.

By law, Congress provides funding to the Department of Defense to execute the BRAC process. When the process started in 1988, it was assumed that any monies derived from the sale of BRAC properties would then go to fund the next BRAC round, and then those profits would fund the next BRAC round, and so forth, explained Roberts.

Profits have not materialized, he added. "What has occurred is that we have not sold much of the property. Other programs have come on to the scene since 1933. For example, many of our properties are being transferred to local entities through PBC's, or public benefit conveyances. Public benefit conveyance of the property is free to local governing bodies."

For example, if a piece of property is being turned over to a particular city, that city may want to turn that property into a park or a school or a fire station. "That's construed as a public benefit so the property would be transferred, at no cost under a public benefit conveyance. Many of our pieces of property have gone to local governments under a PBC, so there's no money gained there," said Roberts.

"We also have an EDC, a no-cost economic development conveyance," he said. BRAC properties are transferred to a local reuse authority, which are approved by the state government and the Defense Department so they're somewhat of a pseudo-governmental agency. The property goes to that local community in order to facilitate development of the property to turn it for example, into a business park, or to defray the loss of jobs that occurs when closing the base. "The property, just like a PBC, would be transferred to the local entity at no cost," said Roberts.

At times, Congress has written language in one of the appropriation bills that says that a certain BRAC property would be given to a government entity at no cost or at less than market value. The result is that "we are not selling all of our properties, which means there aren't large infusions of dollars that are being sent back to the government to defray further costs".

Consequently, the Defense Department has to pay for the cost of closing these BRAC sites.