Federal environmental remediation contractual and insurance-based risk allocation schemes: are they getting the job done?

• Author: Momber, Amy L.

1. INTRODUCTION II. BACKGROUND A. Variant Cleanup Site Conditions B. Complexity of Environmental Laws 1. CERCLA Overview 2. RCRA Overview 3. The Environmental Law Conundrum C. Community Interest in Environmental Work D. Potential for Phenomenal Unanticipated Expense E. Motivations for Undertaking Remediation Projects III. CONTRACTUAL METHODS FOR REDUCING/SHIFTING RISKS. A. Contract Type as a Risk-Shifting Mechanism 1. Cost-Reimbursement Contracts 2. Fixed-Price Contracts 3. Contracting Techniques Relative to Contract Type Selection 4. Selecting the Type of Contract for Use in Negotiated Procurements B. Contract Specifications as a Risk-Shifting Mechanism. 1. Design Specifications 2. Performance Specifications 3. Design and Performance Specification Risk Allocation C. Contract Clauses as a Risk-Shifting Mechanism 1. Differing Site Conditions Clause 2. Changes Clause 3. Permits and Responsibilities Clause 4. Indemnification Clause IV. ENVIRONMENTAL INSURANCE AS A RISK-SHIFTING/REDUCTION METHOD A. Types of Environmental Insurance Coverage 1. Cleanup Cost Cap Policies a. Scope b. Exclusions 2. Pollution Liability Policies a. Scope b. Exclusions 3. Finite Risk Policies 4. Contractor's Pollution Liability Policies 5. Errors and Omissions Policies B. Problematic Aspects and Drawbacks 1. Completeness of Coverage 2. Availability of Coverage a. Policy Costs b. Policy Dollar Limits c. Policy Time Limits 3. Payment of Claims C. Cost/Benefit Analysis V. THE LOCKHEED FAILED PIT 9 CLEANUP A. The Site B. The Remediation Plan C. The Request for Proposals (RFP) D. Contract Specifications E. Contract Clauses 1. Guarantee of Performance (GOP) Clause 2. Differing Site Conditions Clause 3. Permits and Responsibilities Clause F. Risk Allocation Overview G. Risk Allocation Ramifications VI. THE PERFORMANCE-BASED CONTRACTING (PBC) INITIATIVE A. Types of Performance-Based Contracts (PBCs) B. Government Agency Involvement C. Potential Benefits of PBC D. Potential Drawbacks of PBC 1. Profit Motive 2. Reduced Government Agency Oversight 3. Contractor Risks E. Recommended PBC Considerations VII. CONCLUSION I. INTRODUCTION

   Federal environmental remediation projects are laden with risks--risks that are often undetectable before remediation work begins. Recognizing they cannot specifically account for such unknown contingencies via contract, the government and remediation contractors employ contractual and insurance-based methods to shift or reduce their respective risks. This article examines and critiques the effectiveness of such risk-shifting measures as they pertain to the government, the remediation contractor, and, most importantly, getting the job done.

   To provide a foundation for understanding federal environmental remediation contracts and risk allocation therein, Chapter II begins with an overview of the circumstances that make federal environmental remediation contracts unique. Those circumstances include the variant conditions of cleanup sites, complexity of relevant environmental and federal procurement laws, heightened community interest in project successes and failures, and contracting parties' potential exposure to staggering unanticipated expenses. Chapter II concludes with an analysis of government and contractor motivations for taking on such risky projects. This background is essential because some, if not all, of these factors frequently impact the way federal environmental remediation contracts are structured.

   Federal environmental remediation contracts are generally structured in a manner that clearly assigns risks to one party or the other. With that in mind, Chapter III provides a detailed look at the contractual methods for reducing or shifting federal environmental remediation risks. The contract type, specifications, and clauses are the primary contractual risk-shifting measures examined in this section. Brief case studies are also provided to offer a glimpse into how courts and boards generally interpret these mechanisms.

   Faced with limited success in employing such mechanisms, contractors often consider (and the government frequently even requires) purchasing environmental insurance to protect themselves against the risks inherent in federal environmental remediation projects. Therefore, Chapter IV explores the risk-shifting benefits of five types of environmental insurance coverage: Cleanup Cost Cap policies, Pollution Liability policies, Finite Risk policies, Contractor's Pollution Liability policies, and Errors and Omissions policies. To provide a complete picture of environmental insurance as a risk-shifting measure, the chapter also cautions against policy exclusions and highlights difficulties associated with acquiring sufficient coverage to effectively shift or reduce policyholder risks in any given case.

   With an analysis of risk-shifting measures in place, Chapter V explores the contractual and insurance-based risk-shifting measures that were included in the subcontract for the Lockheed failed Pit 9 cleanup and what impact, if any, such risk-shifting measures had on the project. In addition to illustrating these risk-shifting methods in action, this in-depth case study also introduces another type of risk-shifting clause: the Guarantee of Performance clause. In the end, the analysis of this case provides valuable insight into how courts apply and often strictly adhere to contractually agreed upon risk allocation schemes. Its also highlights the dangers involved when inexperienced remediation firms "buy in" to the field and underscores the notion that no one wins, least of all the public and the environment, when remediations fail.

   The subcontract for the Lockheed failed Pit 9 cleanup is representative of the current government Performance-Based Contracting (PBC) initiative. Therefore, Chapter VI examines, in considerable detail, this quickly growing initiative and its risk allocation implications. Such an analysis provides the groundwork to forecast where the federal environmental remediation procurement program is headed next.

   The article concludes in Chapter VII. The conclusion outlines the current status of risk-shifting/risk-sharing between the government and federal remediation contractors. Then, it identifies areas ripe for improvement and offers suggestions for both the government and government contractors regarding how to approach and improve such deficient areas. Ultimately, the conclusion ends with a call for action--a call designed to improve the federal environmental remediation procurement program, as a whole, and its government-contractor risk allocation component, in particular.

2. BACKGROUND

   Government agencies enter into thousands of remediation services contracts with private firms each year to clean up contaminated federal sites. The remediation services procured may include preliminary assessments, (1) site inspections, (2) remedial investigations, (3) feasibility studies, (4) remedial design, (5) and remedial actions (6)--among other things. (7) This article focuses, primarily, on government contracts (or portions of contracts) for remedial actions because the remedial action phase of a cleanup project is, arguably, the phase that puts both the government and the government contractor at the greatest risk for unanticipated costs and cost overruns.

   To fully explore the nature of such contracts and how risks are allocated therein, it is helpful to understand some of the key factors that make environmental remediation contracts unique. Those factors include: variant conditions of cleanup sites, complex laws, increased community interest, potential for phenomenal expense involved in cleanup work, and the dynamics that motivate the government and government contractors to take on these projects. This section will examine each of these factors in turn.

   1. Variant Cleanup Site Conditions

      Government environmental remediation contracts have, by necessity, developed a character separate and distinct from all other government contracts. One such distinguishing characteristic of remediation contracts is their customization. These contracts must be highly customized because no two remediation sites are ever exactly the same. Rather, a wide range of pollutants contaminate federal sites throughout the nation. (8)

      Some of the contaminants, like petroleum, oil, and lubricants--generally associated with past operation and maintenance activities at military installations (9)--are similar to contaminants found on civilian sites. (10) However, others (including unexploded ordnance (UXO), nuclear materials, and chemical explosives) are typically only found on federal property. (11) Unfortunately, such federal contaminants tend to be particularly difficult and costly to remediate. (12) Regardless, each cleanup site--whether it is a contaminated storage area, landfill, lagoon, building, groundwater aquifer, or something else--is different from another, even if the type of site is similar.

      In addition to the variant conditions of cleanup sites, several other aspects of federal environmental cleanup work make it unique. Three particularly influential aspects include the complexity of pertinent environmental laws, the community interest in environmental cleanup work, and the potential for phenomenal unanticipated expense. Some, or all, of these components frequently affect the way federal remediation contracts are structured. Therefore, each warrants further discussion.

   2. Complexity of Environmental Laws

      The Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) (13) and the Resource Conservation and Recovery Act (RCRA) (14) are the two primary environmental laws generally applicable to federal remediation projects. Though one or the other may apply to any given project, many remediation projects are subject to both of these statutes at the same time. Similarly, the requirements of each statute apply, at least theoretically, (15) to both the government and government...