US DoE clean-up – a foreign-owned contractor’s perspective

One of the striking features of the US DoE clean-up work is of course the sheer scale of the enterprise, the annual budget averaging around $4.5 billion, with spending on the larger sites (eg Hanford and Savannah River) exceeding $1 billion per year with workforces of over 10 000 people. “Management of resources on such a scale, in the context of radioactive contamination, regulatory requirements, stakeholder participation and technology development represents a challenge of major proportions,” said Phillip Bradbury.

He also noted that to become a major player in this market “it is not sufficient to have a good technology or good performance elsewhere – it is also necessary to understand the rules.” And in recent years the rules have been changing dramatically.

NEW CONTRACTING APPROACH

In what some people regard as “the bad old days”, DoE sites were managed by Management and Operations (M&O) contractors, a concept conceived during the Cold War, explained Bradbury, when the emphasis was on production. Under the M&O model, the contractor managed the entire site for DoE. The scope statements were very broad (allowing DoE to change scope without contract negotiations), all work was cost plus fee (allowing DoE to change priorities without penalising contractors), there was strong indemnity against liabilities for contractors (enabling DoE to engage the contractor in potentially hazardous operations), the fee was only loosely tied to performance and contracts were rarely competed for, meaning contractors stayed in place for decades, becoming established partners of DoE.

This worked well when the emphasis was on production in a world of rapidly changing priorities (requiring a contractor who would be nimble and compliant because his legal staff would recognise the extensive level of protection that existed). But with the end of the Cold War, reform was needed.

The main goals that contract reform sought to accomplish, in the context of “government that works better and costs less”, were as follows:

• Ensure that the contractor must perform well to make a profit. Approach: performance-based incentive contracts.

• Make the contractor accountable for factors he can control. Approach: reduce level of indemnity and have contractor co-sign appropriate regulatory permits.

• Incentivise the contractor to find innovative ways to save DoE money. Approach: cost reduction incentive programmes – contractor shares the savings.

• Increase the level of competitiveness. Approach: put site management contracts out to competition on a more frequent basis, encourage competition on the sites, move from “M&O” to “M&I” – management and integration..

• Encourage cost containment. Approach: fixed price contracts.

• The contractor is incentivised to use private capital for identified programmes. Approach: privatisation.

Experience with these approaches has been mixed.

Performance-based incentives

Under the new regime work is conducted through a separate entity (joint venture, affiliate company, etc) established for the purpose. Reimbursement does not include fee (profit). Fee is only earned as a result of meeting performance-based milestones. These reflect DoE priorities and are clear, quantifiable and unambiguous, such as “pour 150 canisters of vitrified high level waste by September 30.”

Contractor accountability

The days of full indemnity are gone, Bradbury noted. “The contractor is now expected to stand up and be counted when things go wrong.”

Following on from this, and bearing in mind the litigiousness of American society, “the contractor absolutely must retain good legal counsel, internal and external, with both specialist and generalist expertise in a wide variety of areas,” advised Bradbury. “Those who would wish to penetrate the American environmental remediation market need to understand it full well, and be sure they have the right army of protectors.”

Incentivising

The best known form of incentivising the contractor to save DoE money is the “Cost Reduction Incentive Program” or CRIP. For example, suppose DoE and contractor agree on cost and schedule to complete a particular work package, say $10 million over 2 years. The contractor subsequently identifies an innovative approach that will save money (new technology, change in working practice, etc), reducing the cost to $ 9 million, still over 2 years. The proposal is approved and achieves the $ 1 million savings projected. The contractor receives a share of the savings and in turn shares that with his employees, eg the contractor receives $350 000 and splits this 50/50 with his employees.

While on the face of it, this seems a good approach, practical experience has been mixed, with the process taking longer than anticipated.

Increased competitiveness

One of the drawbacks to the M&O concept is that DoE was more limited in its choice of contractors to perform work at a given site, as the M&O contractor made most of the contracting decisions. All this has now changed, as Bradbury illustrated with the example of Rocky Flats, whose main Cold War mission was manufacture (casting, forming, machining etc) of bomb components from Pu metal (supplied by Hanford or Savannah River) and Pu recycle.

The site was the subject of FBI raids and criminal investigations in the late 1980s, leading to the unprecedented replacement of the M&O contractor over a single weekend. Plant operations were suspended and the allegations were examined. But by the time the facility had been readied to return to service, the Cold War had ended and Rocky Flats was no longer needed.

With the site employees still demoralised and the new M&O contractor’s contract about to expire, the DoE then decided to open the contract to competition, as the first Performance-Based Integrating Management Contract. This contract was won by a team led by Kaiser-Hill (in which BNFL Inc is a participant) in April 1995.

Kaiser-Hill (K-H) is a company jointly owned by ICF-Kaiser and CH2M Hill, and was formed for the purpose of becoming the Integrator at Rocky Flats. Safe Sites of Colorado is a company jointly owned by Westinghouse and Babcock & Wilcox and is responsible for the plutonium stabilisation. Rocky Mountain Remediation Services (RMRS) is jointly owned by Morrison-Knudsen and BNFL Inc and is responsible for all decommissioning, waste management and environmental remediation at the site; through its subsidiary, Denver West Remediation, RMRS also holds a contract for architect-engineering and construction management services at Rocky Flats. The other two members of the team, Dyncorp and Wackenhut, are responsible respectively for infrastructure and for security services.

Bradbury used Rocky Mountain Remediation Services to illustrate characteristics of the new contracting regime. For example Rocky Mountain’s contract is with K-H, not directly with DoE and fee discussions are with K-H, though subject to DoE approvals. RMRS is an independent company with its own board of directors composed of representatives from MK and BNFL. It has its own subcontractors that work on the site under RMRS direction. In contrast with the old M&O contractor approach, RMRS is permitted to market outside Rocky Flats, and is currently supporting several non-Rocky Flats contracts.

Encourage cost containment

Fixed pricing in theory benefits both contractor and DoE. The client benefits because he is less subject to DoE oversight and control, can manage his work more effectively and if he finds ways to be more cost effective, he increases his own profit. DoE needs to spend less on oversight and knows that its costs are contained.

This form of contracting is ideally suited to situations in which scope can be well defined and understood by both client and contractor. However, many remedial situations do not fit within this definition – there is much characterisation to be done, and often the characterisation programme is only marginally ahead of the execution of the work. Nevertheless there have been some notable examples where contractors have been willing to bid fixed price work.

Bradbury cited the example of the Oak Ridge Gaseous Diffusion Plant, shut down in 1985, but not decommissioned because of high anticipated costs.

In October 1996, BNFL Inc and a team of subcontractors, submitted an unsolicited proposal to decommission six buildings for $ 250 million, a saving of $ 650 million over DOE’s budget estimate. BNFL was able to do this because of its experience in decommissioning the Capenhurst gaseous diffusion plant in the UK. Although there are differences of scale between the two plants, the technology and techniques required were very similar. Thus, BNFL had a template of actual costs, and actual methods, equipment and processes that were known to be applicable. After a long period of negotiation the contract was finally signed in August 1997 and work is now underway.

But fixed price contracting can also be fraught with danger, he cautioned, where the contractor has committed to programmes without the prior knowledge of how to deliver: “Fixed price contracting is not for the naive or unwary!”

Using private capital

In a number of instances, DoE has encouraged the contractor to invest his own money in the success of a project. This is called the “privatisation programme.” Early privatisations were comparatively low budget, eg the radio - active laundry at Hanford and the low level waste vitrification facility at Savannah River.

More recently, DoE has extended the concept of privatisation to major programmes, such as the Tank Waste Remediation programme at Hanford and the Advanced Mixed Waste Treatment Facility in Idaho – facilities in the billion dollar range designed, built and operated by the contractor using his own financing. The contractor receives reimbursement through the service provided, eg $X per glass log of high level waste produced.

There are considerable advantages in this approach, but also potential pitfalls. Bradbury mentioned some of the lessons learned from his experience of privatisation. For example: commercialisation is complicated and usually takes longer than expected; risks must be apportioned fairly, with a careful examination of indemnities; procurement documents should explain the objectives of the transaction, enabling contractors to be creative in their offerings; and communications with all stakeholders must be clear, accurate and frequent.

BNFL’s MARKET PENETRATION

Since its formation in 1990, “with two employees, an empty office and no work,” BNFL Inc has won major contracts, at Hanford, Idaho, Oak Ridge, Rocky Flats and Savannah River, capitalising on its experience in the UK. The company now has an order book worth nearly $2 billion, and in 1996 came fourth in the league table of top 15 US environmental firms measured by new contracts (below Bechtel, Foster Wheeler and Morrison Knudsen and above CH2M Hill, Jacobs, Black & Veatch, Brown & Root, ICF Kaiser, Montgomery Watson, Parson, URS Greiner, Radian, International Tech Corp and Earth Tech). This success is particularly significant when viewed in the context of full compliance with FOCI (Foreign Ownership, Control and Influence) requirements.

BNFL regards the DoE environmental management market as a “major factor in its move towards globalisation,” said Bradbury.

Major clean-up projects in which BNFL Inc is involved include:

• Hanford Tank Waste Remediation. Retrieval, treatment, immobilisation and disposal of high level radioactive waste stored in underground tanks since 1944 – a process which will continue for decades. BNFL Inc has a privatisation contract intended to lead to design, building, operation and deactivation of a processing plant.

• Advanced Mixed Waste Treatment Project, Idaho. A private sector treatment facility for transuranic and low-level mixed wastes that will be designed, permitted, financed, built, operated, and owned by BNFL Inc. The treated wastes will be disposed of at the Waste Isolation Pilot Plant (WIPP) in New Mexico.

• Design and supply of plutonium stabilisation and packaging systems for several DoE sites.

• Solid waste management at Savannah River. BNFL Savannah River Corp is part of the team headed by Westinghouse Savannah River that is the M&I contractor for Savannah River.

• Site waste management, remediation and D&D at Rocky Flats, which includes Pit 9, where contaminated waste from bomb making was dumped in the late 1960s.

• D&D of three gaseous diffusion plants at Oak Ridge.