Reducing Recycling's Risks: Share the Pain, Share the Gain

Richard Keller

Few areas in the solid waste industry are as frustrating and unpredictable as recycling. While some costs are predictable, such as collection, others factors, such as the prices paid for the reyclables, fluctuate.

All this adds up to a scary situation for those involved in the recycling business - from the generator to the processor. One way to lessen the potential risks is to construct a contract that shares the results of this volatile business.

A contract is more than a one-time agreement between a waste generator, such as a city or county, and a processor. It marks the beginning of a relationship between the generator, the recycling industry and the successful bidder.

The generator should contact purchasing officials and a legal counsel before searching for a processor. Purchasing officials can design a procurement document that meets company and government requirements and is easier for processors to understand. Meanwhile, legal counsel can identify and modify elements that might lead to bid protests or lawsuits.

Hold a pre-bid conference prior to accepting bids for processing materials to clarify issues and identify barriers that may prevent responsible contractors from bidding. This prebid conference should be held early so that contractors have time to prepare a quality bid.

The Recycling Process Don't regard recyclables as waste; they must be high quality, with little contamination, and sorted to serve as industrial raw materials.

Remember, there is no gold in garbage. In fact, recycling's net cost may be higher or lower than disposal because collection, processing compacting, baling and marketing isn't always covered by selling the material.

Prices for recyclables fluctuate greatly depending on the economy and on the health of key sectors such as housing, automobiles and retail sales. Recyclables' prices also are cyclical but over the long term, they tend to equal out.

Pricing tables (market indices) can be used to share the risk of fluctuations between the generator and the processor. The indices show the high and low prices (which vary by region) being paid by processors and end markets (based on surveys of market representatives).

These market indices do not guarantee the actual prices that processors will pay, but indicate general pricing trends.

Prices in a bid document can be tied to these indices, and bidders can be asked to quote a price or a percentage above or below the market. For example, an organization generating corrugated could ask for a bid to buy the material either above or below the market index (in dollars per ton).

Suppose Company A bids $2 above the market and Company B bids $1 below the market. If the market index were $30 to $40 per ton for the region, the prices would be determined by averaging the base price index ($30 + $40 = $70 divided by 2) which is $35 per ton.

Since company A pays $2 above the index (or $37 per ton) and company B pays $1 below the index (or $34 per ton), company A is the successful bidder.

Considering the same market index, a formula based on a percentage of the market can be used: The average price is $35 per ton. Company A bids 90 percent of the market index and would pay $31.50 per ton. Company B bids 100 percent of the market index and would pay $35 per ton. Company C bids 115 percent of the market index and would pay $40.25 per ton. Company C would win the bid.

A Pricing Boost Generators will get their best price when they have the maximum amount of material and the best quality.

You can improve material quantity through publicity and advertising to increase participation, cooperative marketing of materials (to increase volume) and using "put-or-pay" contracts.

Put-or-pay contracts have associated risks, however. By providing a guaranteed level of recyclables, the generator may get a better price for the material, but generators must be careful to guarantee only those tons they're certain they can provide, not those they generate only occasionally.

Meeting the processor/end market's quality needs/specifications will result in better prices. If you do not meet the specifications, the material could be downgraded (resulting in a lower price) or the entire load could be rejected.

Depending on the market, the interpretation of these specifications may vary. It is critical, however, to provide consistently high quality materials over the long term to ensure being able to market your materials even in the toughest times.

Contract/Risk Decisions Contracts should be longer term (three to five years) to give processors and end markets time to amortize costs, obtain bank loans and ensure a steady source of supply.

Longer term contracts also may result in higher prices for the generator.

The request for proposals or request for qualifications should allow bidders sufficient lead time (generally, 30 days or longer) to prepare bids and to adjust personnel and equipment to provide the service.

Consider the following issues when drafting a contract: * Is it fair to both parties?

* Does it allocate risks to both parties?

* Has the generator provided both the quantities and the quality of material needed to meet market conditions?

* How do the parties resolve problems at the processing facility?

Costs in a contract may include processing expenses (which may be covered by a tipping fee) and prices (fixed or variable) for the material's sale. The key is to allocate risks to both parties. The contract also can include floor prices and ceiling prices to allocate risk and ensure a fair contract.

In addition to processing costs and marketing cost/revenue, three other major costs are associated with a contract:

* Who will pay for transportation of materials from the generator to the processor and from the processor to the end market (if appropriate).

* Which party will pay for information and education costs designed to ensure high volumes of material with little contamination.

* Some contracts (especially office paper recycling contracts) may require using collection containers and equipment, such as desktop containers, gaylords or balers. The contract must spell out who will pay for this merchandise and who owns it if the contract ends.

Basic Items The bid document should include these standard items:

* Scope of work. Describe the provided services as specifically as possible.

* Contract term. Include the contract's length and extensions (at whose option?)

* Pricing. Make provisions for tipping fees and fixed or variable prices for commodities.

* Downgrading or rejecting loads. Under what conditions will loads be downgraded or rejected?

* Residue. How is residue calculated? How much is allowed and what happens if the generator exceeds the residue rate?

* Invoicing. How are payments made to each party?

* Scales. The prices must be determined based on the scales of either the generator or the processor/end market. Scales must meet applicable state requirements.

* Applicable law/minority participation. The processor or end market must meet applicable local laws and local requirements for minority participation.

* Insurance. The processor must have minimum levels of insurance such as liability, worker's compensation and accident.

* Bonding. The contract may require a performance bond, letter of credit or corporate guarantee.

* Recycling. The processor must recycle all materials except residue.

* Facility. The facility processing material should be kept clean and operated according to industry standards.

* Penalties and termination. The contract must state conditions if one of the parties fails to meet their obligations.

* Dispute resolution. The contract should define whether binding arbitration or litigation will be used to settle disputes.

* Record keeping and reporting. Reports should include materials processed, materials sent to market, prices and other information to meet state and local requirements.

* Use of recycled paper and double siding. The processor or end market should print all documents on recycled, double-sided paper to help create markets and reduce waste.

Collection and Processing Generators should review their existing collection programs to determine if they will reap significantly better prices if they change their collection system.

For example, a local government may be collecting mixed paper, and the price differential between mixed paper and newspaper may be significant, but separating the newspaper at a processing facility may be cost-prohibitive. What would be the cost (both of collection and additional public education) to collect the newspaper separately? What would be the value of the remaining mixed paper after the newspaper is separated?

Another example would be a community with a bag program for containers. What would be the cost of collecting and processing the material loose (eliminating the need for bag breaking)? How would the change affect material processing and quality? What would be the cost of additional public education?

The long-term health of the recycling industry depends on a partnership between generators, processors and end markets. The key to success of these partnerships, however hinge on contracts that benefit them all.