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

• Author: Torgerson, Ronald A.
• Position: Industry Analysis - Related article

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...