The balancing act

Features - Municipal Contracting

MRF operators and municipalities must strike a balance between risks and rewards in recycling contracts.

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July 30, 2019

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Following China’s National Sword, a policy that began in January 2018 and effectively banned the country from importing certain recyclables, material recovery facilities (MRFs) in North America have struggled to market some of the recyclables they recover and have seen prices decrease for a number of secondary commodities.

Because of this and other market factors that are beyond their control, during contract negotiations, MRF operators and municipalities must engage in a balancing act when it comes to distributing the risks and rewards associated with fluctuating commodity markets.

“Back in 1995, when I was at BFI (Browning Ferris Industries), we felt that there might be a contractual pricing method that might sustain recycling for the long term,” said Michael Timpane, vice president of process optimization and recovery at Resource Recycling Systems (RRS), Ann Arbor, Michigan. “What was rolled out nationwide to 100 MRFs … [did not cause] a lot of disputes in contracts. That’s because we took the risk out of people’s cost structure. People got paid to their cost level at least before they started risking on commodity revenue.”

Timpane spoke during a webinar April 5, hosted by the Northeast Recycling Council (NERC), Brattleboro, Vermont. He introduced the cafeteria approach, where a MRF operator puts a price on every commodity that the MRF can recover. “Then, as municipalities, you decide what you want in your stream and whether or not it is good public policy to take more.”

Lori Scozzafava, recycling division chief for Maryland Environmental Service (MES), Millersville, Maryland, said she believed sustainable community recycling programs are achieved by asking communities to cover the base cost of processing recyclables rather than relying solely on the revenue from the sale of recyclables.

“One of the things I’ve come to realize is that shifting the risk is very important, especially in this day and age,” Scozzafava said. “I think that initially when recycling started, it made sense to include the risk on the business side of things. But shifting the risk to the community is a better way for the government to create sustainable programs.”

Addressing market conditions

Since its implementation, China’s National Sword has worsened market conditions, but Timpane said markets have been trending downward for a number of years.

“We’ve had a down market since 2010. Besides one really brief flip up in 2012 and another one right before the [Chinese] ban, it has been a generally down market for seven or eight years,” Timpane said, referring to the array of commodities coming out of MRFs. “There are almost no new material recovery facilities being built in the United States—maybe one or two per year—even though there are tons more collection programs. There is not enough investment in the system.”

Commenting on how U.S. counties have been affected by the poor market conditions, Scozzafava said they “had to shoulder the revenue reduction when the markets dropped. Just as we’ve seen all over the country, there has been significant reductions for these counties in terms of their revenue. The good news is that they have secured the capabilities of having their recyclables processed regardless of what the markets are because they’ve budgeted the expense.”

Stimulating competition

Stimulating competition between bids is a way to address poor market conditions. When there is competition, MRF operators can use the cafeteria approach when presenting their bids, and municipalities can choose which bid best fits their needs.

During the procurement process, Shahrzad Habibi, research and policy director at In the Public Interest (ITPI), Oakland, California, said cities should use approaches like best-value contracting, where contractors’ bids are given points and evaluated based on how well they comply with specified criteria.

“In addition to awarding points based on price, you can also prioritize other important factors, such as demonstrating good performance, safety records, meeting set wage and benefit standards, meeting specified health and safety standards and more. Such stipulations allow cities to evaluate bids based on factors other than the lowest price and thereby select a high-road contractor that will provide quality service,” Habibi said.

Regarding competition through the lens of the cafeteria approach, Timpane said, “Right now, we just have a glob of stuff, and someone gives us the processing fee proposal, and we put it into place and tend to believe what they are saying.” By costing every commodity out, he said, “you will find with good competition that you might get a lot of different choices in front of you, then you can decide what is best through that cafeteria approach.”

Complaints and termination

Various responsibilities need to be considered when drafting a contract between a hauler or MRF operator and a municipality, such as which party is responsible for handling customer complaints and what happens when expectations set forth in the contract are not met.

Habibi said the responsibility usually falls on the contracted party to handle customer complaints. She explained that contracts should detail how complaints will be processed, tracked and resolved, with a short timeline provided for complaint resolution. “A clear and documented complaint process also gives the city data about potential contractor deficiencies, providing them with another way to monitor contract compliance,” she added.

The right to terminate a contract becomes relevant when a contractor is not meeting the expectations laid out in the contract and the city is seeking a way to remedy the situation. “When a contractor defaults on its responsibilities detailed in a contract, it is important that the city has remedies available, including the right to terminate a contract,” Habibi says. “This termination notice period should be short, so the city can transition to another contractor or in-house staff if a problem arises that cannot be remedied.”

Contracts also should specify that the contractor is liable for damages that occur prior to the contract’s termination and explain how the municipality will recoup those damages.

Force majeure events are circumstances where contractors are unable to perform their specified duties, but the lapse is excused. Examples include natural disasters, such as hurricanes, floods, earthquakes and weather disturbances.

"What I would state, at least initially, is to go into any contract with trying to get a win-win for both sides.” – Lori Scozzafava, Maryland Environmental Service

“These events should be uncontrollable and unavoidable circumstances,” Habibi said. “They should not include preventable circumstances, such as labor strikes, lockouts or vendor failure.

“A reasonable timeline and process should be specified for resuming services after a force majeure event, and the contract should detail fines for not resuming service within that time frame,” she said.

A contract should detail what constitutes as force majeure events for the contractor and the city.

Including disciplinary language

If the responsibilities laid out in the contract are not sufficiently met, fines and liquidated damages can provide vehicles for the municipality to discipline the contractor without defaulting on the contract.

Fines and liquidated damages, Habibi said, are facets of good management. “Fines and liquidated damages should be high enough to provide a strong disincentive for acts of noncompliance. Furthermore, to provide the contractor an incentive to quickly address more serious contract violations, fines and liquidated damages can accrue until the issue is resolved.”

Habibi was not the only speaker to voice her thoughts on using fines and liquidated damages as motivators within contracts. Based on her experience, Scozzafava said fines can be effective in certain situations.

“I had an example of a county who had a contract for the processing of its materials, but they had no fine capabilities,” she explained. “The only mechanism that they had to address a huge decline in the productivity and maintenance of the facility was to threaten to default.

“The county found itself in a very difficult situation because they did not want to go into default,” Scozzafava continued. “They didn’t want to take over the facility; they wanted the contractor to stay in business. What they really wanted was for those maintenance and production items to be addressed.”

Scozzafava added, “Having fines in the contract would have helped [the county] significantly.”

Leaving room for flexibility

Scozzafava closed her presentation by giving general contracting advice to the attendees. She explained that flexibility is key when it comes to contracts. “Definitely include that you’ll allow for changes through work orders, so you can change the materials, frequencies or even working hours. Sometimes contracts get so tight they eliminate flexibility, which you need to be very careful of.

“I would also caution to put the details of your contract in an addendum to your contract so that they can be changed on an annual basis along with your budgeting process,” she continued. “What I would state, at least initially, is to go into any contract with trying to get a win-win for both sides.”

The author is an intern with the Recycling Today Media Group. She is based in Cleveland.