Environmental Remediation Contracting: Summary of a Symposium (1994)

David J. O'Connor

U.S. Environmental Protection Agency

Good morning. I am delighted to be here this morning, and I thank the Federal Construction Council for the opportunity to speak on a subject that is of increasing importance to the nation and of great personal interest to me as well.

It is always a pleasure to address conferences on environmental contracting. The past 12 years of my career have been devoted entirely to that issue, and it is gratifying to see how far the business has come in that time. I recall very clearly the beginning of the Superfund program back in 1981. In fact, it was in this month 12 years ago that the first Superfund monies became available to EPA to begin this ambitious cleanup program.

In many respects, Superfund began the environmental contracting era. Certainly it was the catalyst that thrust environmental restoration into the American mainstream. Superfund got off to a somewhat uncertain start but grew through the 1980s to become a multi-billion dollar environmental restoration program. A number of other federal agencies, most notably the Army Corps of Engineers, as well as states and responsible private parties are key players in the Superfund program and have contracting programs that support the Superfund effort.

As large a program as Superfund has become, environmental remediation budgets in the Departments of Energy and Defense have surpassed the Superfund budget in the past few years and are increasing at a much greater rate. The costs of cleaning up some of the largest energy sites alone will run into the billions of dollars and take as long as 20 or more years. Some estimates of the total cost for dealing with the nation's hazardous waste sites run in excess of half a trillion dollars.

The bulk of the work in environmental restoration has fallen to private industry, as EPA and other agencies have been given contract budgets rather than in-house resources to perform most of the work. Typically, the entire remediation process from preliminary assessments through the various remedial phases to design and construction is almost entirely contracted out. Not surprisingly, the growth in companies in the industry has been explosive.

Clearly, environmental restoration today is big business. It is still, however, a new business beset with enormously complicated technical, social, and legal issues, many of which the government undoubtedly will struggle with for years. These issues not only

complicate political and programmatic decisions but also present real challenges to contracting officials.

Superfund provides an interesting case study in how good procurement planning can be difficult in a new, uncertain, and politically controversial program. Bearing in mind that conceiving, developing, and bringing on-line a multi-billion dollar contracting strategy easily consumes two years, the following events over the life of Superfund caused chaos in procurement planning:

1. Superfund, a five year, $1.6 billion program was one of the final pieces of legislation signed by President Carter. It fell, however, to the Reagan administration to implement the program.

2. The initial two years of the program, under the EPA administration of Gorsuch and Lavelle, were marked by a very slow and conservative approach. The level of activity in Superfund was quite low, causing some program managers to complain, for instance, that emergency response actions could not get approval unless there were “dead bodies on the site.” The contract strategy developed in those early years (the first generation of Superfund contracts) reflected this approach to Superfund, and only a modest amount of contract supports was planned and procured.

3. Midway through the five year program, nearly the entire political leadership of the agency was replaced, in part because of public and congressional outcries over the lack of progress in the Superfund program. EPA's new administration arrived at the agency with the cry of “it's time to get the dirt flying in Superfund,” and immediately began planning for a major ramp-up of the program. Unfortunately, the first generation of Superfund contracts, which had just come on-line, were woefully inadequate. Immediate contract capacity was increased through methods which knowingly sacrificed sound procurement practices for the greater urgency of getting the Superfund program moving. The agency then went about planning and implementing a second generation of contracts designed to address the program as set out by the agency's new administration. This generation of contracts came on-line in the waning months of the five year program.

4. At this point the program came up for reauthorization. Unfortunately, there was more than a year delay in the reauthorization, with no new funding coming into the agency during that period. Thus, there was little work to assign to the new, larger contracts that had just come on-line, because we incurred costs just by having to terminate the contracts due to lack of work to assign under them. On a weekly and sometimes daily basis, we were forced to calculate potential termination costs and spread the little funding we had among the contracts hoping to at least preserve the existence of the contracts for when reauthorization would finally occur.

5. When Superfund was finally reauthorized, it was at the remarkable level of over $9 billion for five more years. The just on-line second generation of contracts was again woefully inadequate to support a major change in the Superfund program. The agency immediately began the process of planning and implementing a massive new “third generation ” contract strategy. This strategy resulted in EPA's well-known Alternative Remedial Contract Strategy (ARCS) contracts which in total provided for over $6 billion in contract capacity over a ten year period (which presumed a future reauthorization). These contracts came on-line in 1988/1989.

6. At the time the ARCS contracts were finally all in place, the administration of the agency again changed. The new administrator placed a different emphasis on the program, strengthening the agency's enforcement program to emphasize getting responsible parties to clean up sites rather than using EPA resources. The enforcement emphasis was quite successful and has been deservedly applauded. It had the effect, however, of causing severe under-utilization of the large ARCS contracts. Due to the existence of largely fixed program management costs (administrative costs incurred under the contract regardless of level of site work), the ARCS contracts received a major black eye on the front pages of the major newspapers for program management costs constituting 50 to 200 percent of actual site expenses during the first two years of those contracts. While in some respects this was unfair characterization of the contracts, ignoring such factors as high administrative start-up costs, it was clear that the ARCS contracts would not be used as actually intended when they were designed several years earlier.

7. In the third year of the ARCS contracts, the agency began development of a new generation of contracts to support the program as it has now evolved and to effect changes in the thinking of how best to deal with the country's hazardous waste sites. This new generation of contracts (Superfund Accelerated Cleanup Model-SACM) will reach award in 1994/1995. Superfund, however, is up for reauthorization in the 1993/1994 time period. There is still considerable controversy and disagreement about how this program should operate, and there can be no guarantee that the SACM contracts, no matter how well designed, will be the right contracts for the next reauthorization of Superfund.

Many of the above circumstances, including managing a program with only a five year life, are peculiar to Superfund. However, many other complicating factors will be shared by any contracts for environmental restoration. These include:

• Site unknowns

• Cost uncertainties

• Evolving technology

• Resource constraints

• Public concerns and emotionalism

• Liability and indemnification

• Potential for conflicts of interest

From a contract management perspective, two trends in particular are worrisome as agencies' environmental contracting programs continue to grow: the increasingly heavy reliance on contractors without commensurate federal staff to adequately oversee this work, and the widespread use of cost reimbursement level-of-effort “umbrella” contracts.

These contracts, commonly awarded on the basis of general corporate qualifications, as opposed to specific proposals addressing an actual known site, provide a mechanism for assigning work quickly during the life of a contract, an important attribute. However, they also shift the burden for protecting the government's interests from the formal pre-award process, with its many rigid checks and controls, to the post-award process, where

checks and controls are much less defined and established. Importantly, in times of inadequate federal resources, it is easy to overlook the resource needs of the post-award phase, as it is much more difficult to define and measure the cost to the government of not adequately staffing for post-award contract management. In the pre-award phase the impact is clear: contract awards are delayed or not made.

“Umbrella” contracts are legitimate contracts that have important advantages to the government. In deciding to what extent to make use of them, however, it is important to understand what the government gives up as well as what it gains.

When the government completes a requirement, (i.e., awards a contract for a specific job as opposed to assigning that job under an “umbrella ” contract), the procurement process serves as a strong control tool for the government.

For example, statements of work are written to meet the rigorous requirements of a fair and open procurement process. They are thoroughly reviewed in both program and contracts offices and are generally also reviewed by counsel. They are written to withstand review by boards of appeal and courts should selection decisions be protested. Potential contractors prepare detailed proposals describing how they will address the specified project. They do so in a competitive environment, knowing that their ability to win the contract is heavily dependent on the strength of their technical proposal. The proposals are subjected to a formal structured review by the government. All these factors help insure that the government selects the best contractor for the specific job.

With regard to costs in this example, contractors submit detailed cost proposals for addressing the specific project, again doing so in a competitive environment. Cost proposals are subject to audit, cost realism analyses, and formal negotiation before a contract is awarded.

Let's compare this with jobs assigned under umbrella contracts. The jobs are assigned via vehicles called work assignments, task orders, and other such terms.

Statement of work for work assignments are not subject to any of the rigors of the formal procurement process, because the contract is already in existence. The review process is lax and there is strong (and natural) tendency for statements of work to be less well written. This is probably the single greatest source of friction between technical managers and contracting officers in the management of umbrella contracts. Similarly, when the contractor prepares a work plan describing how he will perform the work, he is also without competitive pressures and the formality of the procurement process (he already has the contract). The contractor's cost estimate is also prepared without competitive pressure (often without good independent government estimates) and without the benefit to the government of audit and formal negotiation.

As a result, the government and the contractor can begin work without a firm understanding and agreement on what is expected and what it will cost. In any case, these umbrella contracts demand a high level of post-award management to compensate for giving up the controls and discipline of the formal procurement process.

These are some of the challenges facing you as you go about the business of contracting for environmental restoration. There are many others, and certainly you will be hearing about many of these at your conference here today. It is encouraging that so many of you are sharing your experiences with what has worked and what hasn't. It has been a pleasure speaking here this morning, and I will be happy to answer a few questions.