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Building a Contract
June 1, 2002
14 Min Read
Elaine Leung and Ric Hutchinson
Some community recycling programs may be threatened with extinction, but San Jose, Calif.'s Recycle Plus Program is evolving into one of the most comprehensive recycling programs in the nation.
When it originally was launched in 1993, the source-separated residential collection program nearly tripled the recyclables volume collected at the curbside. Now, thanks to a comprehensive request for proposals (RFP) process, the city's system is said to be one of the nation's largest privatized collection contracts, valued at more than $600 million over the next 11 years.
Early Formation
San Jose's Recycle Plus Program initially was designed to help the city's solid waste management system meet California's mandated landfill diversion goal of 50 percent by 2000. Working with private contractors, the city provided residents with unlimited, manual curbside collection of source-separated recyclables and automated garbage collection in a choice of three cart sizes. The weekly pay-as-you-throw (PAYT) service was provided to 195,000 single-family dwellings (SFDs) and 85,000 multi-family dwellings (MFDs).
The privatized collection contracts were worth more than $45 million annually. However, the contracts were expiring on June 30, 2002, and the city decided to redesign the program.
San Jose created several programs to test operational efficiencies and gauge customer acceptance of other methods, such as using split carts, a two-sort recycling collection system or a fully commingled recycling collection system. In the end, the city switched from manual source-separated recyclables collection to a commingled, automated system.
RFP Development
Once San Jose decided on a system, it took four to six months to compile the RFP package.
It focused on:
Program Description and Goals: Companies had to understand the city's goals, keeping in mind program cost-effectiveness, customer satisfaction and/or the landfill diversion rate. Achieving these goals could create conflicts, but San Jose was looking for companies that could balance operational changes with customer satisfaction.
This section also included expected minimum service requirements.
Program Data: San Jose believed data was its most valuable asset, as it detailed historical program performance and the pilot results. This RFP section was distributed on a CD and was designed to provide companies with the information to gauge potential program performance. The city hoped that including data on average set-out rates, tonnage collected, route sizes, demographics, etc., would lead to more accurate cost proposals.
Proposal and Cost Forms: The city provided a proposal outline and proposal and cost forms so that all submissions would be consistently formatted. Standardizing cost presentation would allow San Jose to better compare companies. Setting up the cost forms also forced the city to determine how to evaluate and break down costs.
City Program Exceptions: The RFP contained program specifications, but officials did not want to prohibit companies from developing innovations. An “Exceptions” section allowed companies to identify specific changes or program enhancements. Companies still were required to submit program costs as outlined in the RFP. But deviations or suggested changes and related costs could be identified in this section.
This section also allowed companies to ask for revisions or exemptions to the draft contract language. Disagreements, concerns or suggested language changes also could be identified here. The city had initial buy-in on most of the contract terms, so this section simplified the negotiating phase.
Establishing the Contract
The contract allowed San Jose to establish the service performance rules and methodology. In designing the contracts, the city considered:
Definitions
Properly defined terms are the heart of the contract, as they help to alleviate questions relating to service requirements, rate changes, etc. Contract terms that described services to be performed, service recipients, materials to be included, processes or locations were clearly defined.
Rate Adjustments
The city included specific rate adjustment methodology, with information about rate decreases and increases, detailing when and how adjustments could occur [See “Using RRI for Rate Adjustments” on page 55].
Quality of Performance and Administrative Charges
Specific service performance standards and administrative charges used to enforce standards were included. There were two administrative charges. The first would be levied if the collector failed to comply with contractual requirements, such as failing to keep office hours or to have properly licensed drivers. The second charge would be levied if the collector failed to correct problems in the required amount of time, such as failing to correct a missed collection within the specified contract time.
San Jose wanted companies to recognize that they would not be charged for mistakes, such as missing a collection, but they would be charged for failing to correct the problem [See “Tools Guarantee Performance” on page 60].
Required Items
Everything that was required of the service provider — from a review of financial data to employee uniforms — was included. The contract was designed as a stand-alone document, so anything not in the contract was not enforceable.
Flexibility
Provisions for program changes and unforeseen circumstances were contractually allowed to adapt to changing circumstances yet retain the city's control over the program. The city recognized that it is extremely likely that federal, state or local regulations would require program changes during the contract's life. Instances where the city intended to implement new programs during the contract life were defined in the document.
The RFP Process
One of the reasons San Jose was so thorough in developing its RFP was that it believed competition would help to create a program with better costs and more innovative services. Ultimately, the RFP solicited proposals for:
Single-family solid waste collection and recyclables collection and processing;
Multi-family solid waste collection and recyclables collection and processing; and
Yard trimming collection and processing and residential street sweeping.
Several strategies helped to maximize the pool of companies submitting proposals. These included:
Dividing the city into three single-family collection districts;
Not allowing a city-wide award for single-family service;
Dividing the city into two multi-family collection districts;
Creating proportionately “smaller” districts to allow smaller, local collection companies to compete against national firms; and
Mass RFP advertising to reach the largest audience of potential proposers.
The city primarily disseminated information and status updates through the RFP website (www.rfp.recycleplus.org). A few months prior to releasing the RFP, San Jose advertised the website in national publications and trade journals, and interested parties were asked to join an e-mail list. More than 100 companies registered. If new material was uploaded onto the website, e-mail announcements about the updates were sent to all registered companies.
From the RFP release date, companies were given two and a half months to prepare proposals. During this time, San Jose held a mandatory pre-proposal conference, at which the city presented the program, laid out the key objectives and allowed companies to ask questions. Companies also could ask questions prior to the final proposal due date.
Once proposals were received, they were evaluated by the staff responsible for implementing the programs and administering the service contracts, experienced solid waste leaders from throughout the country, and city executive staff responsible for the service delivery to San Jose residents. Evaluators were divided into three committees:
Staff Evaluation Panel: Professional staff from various city departments;
External Panel: Solid waste leaders from across the West; and
City Executive Committee: Various department heads and representatives from the city manager's office.
Committees conducted separate reviews of the proposals. Costs also were evaluated separately because the RFP provided strict guidelines for the cost component.
San Jose recognized that there would be potential cost savings if a company was awarded multiple service districts. However, to maintain control of the multiple service district awards, companies were not allowed to propose one rate for combined districts. Instead, proposers were asked to submit percentage discounts that would be applied to their costs, should the city award multiple service districts. There were more than 7,400 potential system combinations.
To evaluate all potential scenarios and costs, a program was developed to sort the proposals, giving the maximum rating to the lowest cost system. Subsequent system costs were quantitatively rated based on the proportional relationship to the lowest cost system [See “Getting More for Your Money” on page 58].
Based on the results of the review panels and cost analysis, a final recommendation was presented to the San Jose City Council for approval, and contracts with the new companies were signed on March 27, 2001. The city plans to begin to transition the service on July 1.
As part of the transition, San Jose has been preparing and monitoring the operational rollout, managing the residential rate review for multi-family service and new service options, and is in the midst of a large-scale public education campaign.
The city has yet to see the results of its efforts. Nevertheless, San Jose believes the RFP process helped to create efficiencies and build service improvements into the new program design, as well as helped the city achieve its goal of providing high quality services at the lowest possible cost. Initial estimates show that the city will avoid more than $90 million in costs over the 11-year term of the new contracts.
Elaine Leung is the manager of residential solid waste services with the city of San Jose, Calif. Ric Hutchinson is a vice president and senior management consultant with Brown Vence and Associates, Roseville, Calif.
USING RRI FOR RATE ADJUSTMENTS
Collection contracts should address annual rate adjustments, which can be given at any time during the contract's life. Frequently, they are given annually on the contract's anniversary date.
With this in mind, rate adjustments should be designed to allow for annual increases or decreases. Adjustments should reflect changes in the costs of providing collection services experienced by the collector to be equitable to both the collector and the ratepayer.
Essentially, there are two basic rate adjustment methods. The first approach bases the adjustment on the collector's income, such as in the return on investment (ROI) method, the return on equity (ROE) method and the guaranteed profit (GP) method. The drawbacks to using any of these methods are that they require the city and the collector to conduct an extensive and expensive process to determine the rate adjustment. These methods also can result in rewarding an inefficient collector (one whose inefficient operating methods have resulted in a lower net income) by increasing the rates to his customers, while penalizing an efficient collector (one achieving a higher net income through the use of good management techniques).
The second rate adjustment approach is based on various indices, most commonly the Consumer Price Index (CPI). This appears to be appropriate, but the CPI includes the effect of cost changes in many goods and services that have no direct effect on solid waste collection services. For instance, an increase in the cost of housing and food has no direct influence on the cost of collection operations. As a result, collection rates may increase at a time when collectors' costs are not rising. Or, rates may not increase when collectors' costs are significantly increasing.
San Jose chose the Refuse Rate Index (RRI), which is a price indexing method designed to adjust collection rates based on national indices that are directly applicable to the major costs collectors incur. The annual rate adjustment can be positive or negative.
To determine the annual rate adjustment, the collector submits financial information that separates the operations costs into several (in this case six) major categories. Each category's weight is based on its particular value as a percentage of total cost. A specific national index is developed for each of the cost categories (for example, No. 2 Diesel Fuel for all diesel fuel costs), and the change in that index is calculated for the appropriate period. The change in each index then is multiplied by the “weight factor” for the appropriate category. The sum of the results is the adjustment factor (the RRI) for that period. The current collection rate then is multiplied by the new RRI to establish the new collection rate.
— Elaine Leung and Ric Hutchinson
GETTING MORE FOR YOUR MONEY
One of the best ways to lower collection service costs is to give proposers the opportunity to obtain multiple services or service districts for a price. San Jose solicited proposals for three different service types:
Single-family dwelling solid waste and recycling collection services;
Multi-family dwelling solid waste and recycling collection services; and
Yard trimming and residential street sweeping services.
Companies could submit proposals on any or all of these services. Additionally, the city was divided up into multiple service districts, and companies could propose single- or multiple-service districts for each service district, keeping in mind the RFP guidelines.
Initial Cost Proposals — Each proposer initially was required to complete the cost proposal forms for each service type and service district that they were interested in. Proposed costs were to represent the costs for the individual service type and service district, in the event the company was awarded only a single service type and service district.
Service Type Discounts — Companies that submitted proposals on more than one service type then were required to provide a percentage discount that the city would apply to the rates on the cost proposal forms.
Service District Discounts — Companies that proposed providing a specific service in more than one district were required to provide a percentage discount that the city would apply to the rates on the cost proposal form.
Cumulative Discounts — Discounts were designed so that they were cumulative for those proposers who were awarded multiple service types and multiple service districts.
— Elaine Leung and Ric Hutchinson
TOOLS GUARANTEE PERFORMANCE
To encourage high-quality service throughout the service contract terms, San Jose incorporated “carrots and sticks” in its contracts. These financial incentives and disincentives are based on performance. A contractor's failure to meet the contract's minimum requirements and/or the performance standards tie directly to potential term extensions.
Carrots for Diversion
Keeping in mind San Jose's recycling goals, the city set minimum diversion requirements in the single-family and multi-family solid waste and recycling contracts. For example, companies providing single-family service are required to achieve a minimum of 35 percent diversion from their service districts (not including yard waste), as specified in the RFP.
The city also incorporated incentives (an annual bonus) for exceeding the minimum requirement. As part of their cost proposals, companies were asked to submit an annual per household incentive rate for achieving diversion rates of 40 percent, 42 percent, 44 percent and 46-plus percent. Achieving higher diversion rates earns the annual incentive payment.
Sticks for Poor Performance
Failing to meet the minimum diversion rates results in the levy of an administrative charge based on the degree of deviation. For example, a $10,000 administrative charge would be assessed for a diversion shortfall of 0.001 percent to 2 percent, and a $25,000 administrative charge would be assessed for a diversion shortfall of 2 percent or greater.
Administrative charges also will be levied if the contractor fails to meet the set performance standards.
Contractor performance also has been tied directly to potential contract term extensions. San Jose's base contract term is five years. A contractor that meets the city's minimum diversion requirement and does not exceeded $100,000 in administrative charges in any of the calendar years will be offered an automatic three-year extension. Two three-year extensions are available through the structure of the contract, bringing the total potential contract term to 11 years.
A contractor that fails to meet the minimum diversion requirement and exceeds $100,000 in administrative charges in any calendar year loses its right to term extension beyond the base five years. If the contractor fails to meet the minimum diversion requirement but does not exceed $100,000 in administrative charges in any of the years, the city can choose whether or not to offer an extension.
In combination with its incentive and disincentive program, San Jose's staff also works closely with the contractors throughout the program term to address issues and concerns to ensure that residents continue to receive high-quality service and that the city continues to strive for higher diversion rates.
— Elaine Leung and Ric Hutchinson
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