I met for coffee recently with a senior lender at one of the Big Five banks. He confessed his dilemma about further lending to a solid client with whom he had been doing business for years. The client wanted to buy a “contaminated” property for redevelopment. Being more than familiar with cleaning up contaminated sites, I wasn’t shocked at the prospect and waited to hear the lender’s concerns.
The problem was the purchaser had been provided a cleanup estimate but he couldn’t be sure it was right; unfortunately, neither was the consultant. The lender volunteered to double the cleanup estimate to provide a purchase price discount, but such a large number would collapse the deal. Sound familiar?
Why are environmental remediation projects so notorious for their high budget overruns?
We can sum up the answer in one word – uncertainty. And with uncertainty comes risk.
Why?
At the top of the list is a business reason.
Providing estimates is now so conventional that no one considers it reasonable to even consider providing a fixed-price quote. And if clients are accustomed to paying whatever it takes, there is no onus on a cost provider to worry about getting things exactly right. Combine that with the winning advantage of low-cost proposals and it is no wonder remediation cost estimates are so unreliable.
But there’s more to it than this. The complexity and volume of environmental regulations continue to grow almost exponentially. Also, they’re written in a manner akin to legalese, often making them difficult to navigate and subject to interpretation.
Finally, investigating a contaminated site underground can be compared with walking blindfolded into a room with only a few minutes (think limited budget) to provide a cost for restoration.
Similarly, drilling is an imperfect way to discover hidden underground features and contamination, including objects as large as underground fuel storage tanks. If you’re inherently cautious, like most technically trained people, you can hardly blame them for wanting to provide ballpark cost estimates rather than quotes.
One of our clients is a perfect, although unfortunate, example of this quandary. He bought a property after representation by a national engineering consultancy that the remaining cost of remediating the former service station was in the low five figures (e.g., $25,000). All the required investigations had been completed, signed and stamped by the consultancy; so what could go wrong? As it turns out, plenty.
The complicated mumbo-jumbo of the investigative reports discouraged scrutiny, even though our client was an engineer himself. After the deal closed and work began, additional contamination was discovered. It turns out the consultancy’s cost representation did not take into account development plans, which included excavation for underground parking; instead, the consultancy had assumed slab-on-grade construction. A big mistake that favoured the vendor, for which the consultancy worked at the time of sale. The remediation cost for slab-on-grade future land use was significantly less expensive, and so was the cost discount from the purchase price.
Are quotes and remediation incompatible? I think not. The risk needs to belong to the consultant, which should know what it’s doing, not the client.
Some things need to change.
For starters, the real estate market has to start demanding fixed-price, all-inclusive quotes for everything involved in remediation.
No room can be left for suppliers to leave out cost items to lower their quotes in an effort to appear more competitive. The quote needs to be for the end product, which in British Columbia is a Certificate of Compliance.
This change will only happen when the focus of environmental consultants shifts from inward to outward, making the client the most important person in the room. This change alone will solve many of the cost overrun problems we see in the race to win jobs when providing environmental remediation estimates.
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