Building a better contract

Garbage. Picking it up, sorting it out, recycling it, transferring it and finding disposal for it: Every city and county across America has to deal with it. Along with police, fire and snow removal, garbage collection is one of the more critical public services.

While many communities use their own employees to perform solid waste services, more and more are deciding to contract with private companies to handle the jobs. When local governments decide to privatize solid waste functions, they need to know specifically what services they want and what they are willing (or able) to pay.

Making sure the contract covers all aspects of the service and meets the community’s needs causes many sleepless nights for managers, but it does not have to. Good planning and research before the contract is signed can ensure that the resulting agreement will provide the needed service and benefit all interested parties.

To prepare

Local governments can save time and frustration by gathering information about all elements that can affect the service contract in the beginning of the outsourcing process. Then, they can prepare proposal requests and contracts that clearly state the services they will need.

1. Use data to drive decisions

   The best proposal requests are those based on a solid understanding of the operation that will be contracted and data about the operation. In procuring new services, local governments may want to gather data from outside sources: sister cities, consultants or members of a local solid waste association. But, if a local government has been providing the solid waste service or is renewing a contract, managers should review existing logs, reports and scale house data to evaluate the existing circumstances and look for possible changes to include in the new contract.

   In 2002, Monterey County, Calif., restructured its garbage collection contract to control costs and encourage residents to reduce waste and recycle. County leaders thought that if they could get residents to limit the space they had to dispose of garbage, residents would be more motivated to recycle. After reviewing data from the existing program, county leaders found that many residents were choosing to use the 90-gallon trash carts, but they preferred that residents use the smaller 30-gallon containers. They concluded that residents needed an incentive to modify their behavior.

   County leaders analyzed cart distribution information, subscription data and collection cost data, and they found that the payment structure to the hauler may have been at the root of the problem. Although they were paying the hauler more to pick up the 90-gallon carts, the hauler’s base fee for collecting the carts was only slightly higher than for the 30-gallon service. Armed with that information, under its new contract, Monterey County significantly increased the cost of 90-gallon cart collection service to residents (creating the incentive for them to request 30-gallon carts), while paying the hauler at a rate that was closer to the base fee. When residents chose the 90-gallon option, the county gained revenue by charging residents significantly more than it paid the hauler for the service and used the extra money to fund the county’s recycling program.

2. Know the costs

   When local governments decide to involve private companies in providing solid waste services, they often do not consider the costs for developing the proposal documents, evaluating the bids, negotiating the contract, overseeing the contract and administering it once it is in place. Once local governments estimate contract administration costs, that amount can be included as an expense to be covered under the agreement.

   Elk Grove, Calif., for example, estimated that it cost $250,000 to secure its residential collection and disposal agreements. It recovered those costs by structuring an annual $35,000 payment from the contractor over the seven-year life of the contract.

3. Know what services are needed

   When transitioning from public to private solid waste services, it may be easy to forget that the staff that currently collects trash also picks up leaves in the fall, plows snow in the winter or cleans up after illegal dumping. By taking inventory of all the current solid waste services provided and including that list of expected services in proposal documents, local governments can ensure that residents continue to receive the services they expect from the contractor. More importantly, it will ensure that the community is not stuck providing those services when the contractor does not.

Building the contract

Some of the biggest headaches for city and county representatives have come as a result of proposal documents that leave too much to interpretation and result in drawn-out negotiations with contractors. Cities and counties have the greatest leverage to obtain desirable contract terms at the bidding/proposal stage — a time when potential contractors are more likely to agree with the terms because of the competitive environment. Therefore, the proposal documents should state clearly and concisely the services that are desired.

1. State performance standards and damages

   Proposal documents should delineate performance standards and damages payable by the contractor for non-performance. The damages do not need to be very high, but imposing them will communicate to the contractor that failure to satisfy the terms of the contract will result in penalties (see “Examples of liquidated damages” sidebar above).

2. Termination for convenience

   Solid waste systems need flexibility to remain efficient and effective. While long-term service contracts may be financially desirable, they may leave the community locked into an undesirable partnership. To keep the option to make changes during the life of the contract, cities and counties can include a clause for “termination for convenience” in the proposal documents.

   Oxnard, Calif., included termination for convenience in a service contract for operating its recycling facility. After some research last year, city officials found that their service contract price was the highest in the region. Although negotiations with the contractor are not complete, the termination for convenience clause allowed the city to revisit the contract terms and pricing seven years into a 15-year contract. Oxnard had obtained the provision through protracted negotiations, but others can avoid that if they include the provision in their proposal documents.

   Robert Epler, deputy public works director for Oxnard, believes that the termination for convenience clause is a good approach for communities that contract for solid waste services. However, he points out that the conditions should be accompanied with compensation for the contractor to “strengthen the enforceability of the contract.”

   In Oxnard, its 15-year, $700,000 contract included a buyout schedule. As part of that, for each year that goes by, the contractor receives $50,000. If the city decided to terminate for convenience, it would pay a lump sum to the contractor for the remaining amount to compensate for the early termination.

3. Control the purse strings

   Local governments can arrange to collect all customer fees for solid waste services. By doing so, they can ensure they have cash on hand to resume garbage collection or disposal if a contractor were to abruptly stop service. By organizing fee collection that way, local governments will have to set up billing outside of the service contract. However, by handling the billing or running the scale house, the local government gains control of the cash management of its solid waste services. Hiring a third party — even the hauler — to send out bills can work as long as the local government remains in control of the incoming funds.

   Calvert County, Md., has an arrangement with a solid waste contractor that gives the county control of service fees. The county owns its transfer station, but it contracts out the facility’s operation. County employees run the scale house and receive the tipping fees that are generated, so the county has some control over the funds coming in as well as the waste entering the facility. “When we hired Waste Management to operate our transfer station, we felt it was really important to stay in control of the scale house,” says Dan Williams, bureau chief of utilities for Calvert County. “It was the best decision we ever made.”

4. Create incentives and disincentives for the contractor

   Contractors respond to a proposal because they feel they can perform the tasks requested and make a profit. The local governments’ goals are likely to be much broader than that. To keep the contractor in sync with the local government’s objectives, the proposal documents should create incentives and disincentives for meeting or failing to meet contract goals. For example, a city may want to avoid expanding its landfill space. To achieve that goal, it may include incentives for a landfill contractor to exceed the minimum compaction standard at a rate approximating a portion of the cost to develop another site. That way, the city increases the odds that it and its contractor will be working toward the same goal.

   In 1991, Ocean County, N.J., built a materials recycling facility and contracted with a private company to operate it. The original contract specified that the county and the company would share the net revenues from the sale of the recyclable materials. The county received 95 percent, and the contractor received 5 percent. However, there was little incentive for the contractor to seek higher-paying markets for the materials or to bring in more materials.

   A few years later, the county restructured the contract so that as more materials were processed through the facility and revenues from the sale of materials increased, the contractor would receive a higher percentage of the net revenues. Before the incentive restructuring, the county made $119,373, and the contractor made $98,734. By 1994, the net revenue split was 35 percent for the county and 65 percent for the contractor with net revenues of $879,000 and $850,000 respectively. The county and the contractor now are averaging about $1 million annually. “It’s possible to make money for your community if you are able to get the right incentives in place for your contractor,” says John Haas, recycling coordinator for the county.

Good planning makes good contracts

Some communities conclude that solid waste services can be done more efficiently and effectively by the private sector. That does not, however, absolve local governments from the responsibility of protecting public health and the environment in the most economical manner. Therefore, when contracting for services, local governments have an obligation to craft the best possible agreement — whether hiring private contractors to operate the landfill, run the transfer station, collect garbage or operate the recycling facility. Before local governments start to develop their bid specifications or requests for proposal, they should look at the data they have, know what their costs are so they can be covered under the contract and know what specific services they need.

When developing bid documents, it also is important to identify and clearly state the performance standards required and damages that will be imposed. Consider including termination for convenience and incentives for the contractor and establishing a means by which the city or county would maintain control of the funds. Paying attention to those key areas only can result in a better contract.

Lori Scozzafava is director of technical programs for Silver Spring, Md.-based Solid Waste Association of North America.

Examples of liquidated damages that could be included in final collection contract