Environmental Liability Cost Analysis
Environmental remediation costs are notoriously subject to uncertainty and escalation – costs even doubling and tripling over time. In any business, getting environmental remediation costs right for your budgets, pro formas, and liability reporting is essential. If you are tired of financial surprises related to environmental remediation costs, Pacific Consulting can help with your project’s rigorous environmental liability cost analysis.
Uncertainties in Estimating Environmental Remediation Costs
Multiple factors influence site cleanup costs, including regulatory changes, increased contamination from early assumptions, execution problems, delays, and cost inflation. Engaging neighbors and stakeholders are increasingly critical; communities can help or stop a project.
Another risk is unavoidably baked into the way the work is done. Investigations are done with soil borings and wells – giving us sample points within a complex three-dimensional system.
It is not unusual, maybe even usual, to encounter surprises during later sampling at new locations or during the environmental remediation.
The United State Environmental Protection Agency (U.S. EPA) recognized the poor track record of cost estimating at remediation sites. As a result, it developed a site maturity model that helps explain why this is an inherent problem.
The U.S. EPA’s model indicates that early estimates during the investigations are frequently off by 100 percent. However, towards the end of remedial design, the uncertainty decreases, and cost estimate reliability increases to resemble construction cost uncertainties.
This model remains an excellent communication tool for business leaders to understand why lifecycle environmental remediation cost estimates may change radically throughout a project.
Common Approach to an Environmental Liability Cost Analysis
Despite the intrinsic uncertainty, every business needs reliable estimates. Some will turn to their favorite environmental consulting firm and use the proposal cost for budgeting.
Consultants want to avoid client sticker shock by proposing the known scope and not including many contingent costs. Then as the various risks turn into issues, either from results or the agencies, the consulting firm will process change orders.
This approach may fit your business just fine. But this is not a great long-term approach – if you rely mainly on proposals for near-term tasks to create financial plans for your brownfields, it’s like driving at night with only parking lights to light the road. You won’t see very far ahead, and anything unexpected can cause an accident.
Pacific Consulting’s Approach
If you need a better vision to drive your business, turn on the headlights with better forecasts and look further down the road at the range of outcomes for your environmental remediation project.
You can turn on the high beams for extra safety by preparing a forecast of contingent risk and determining how to forecast this into your financial plan for environmental remediation work. As a result, you will have a smoother journey.
Pacific Consulting specializes in environmental liability cost analysis for businesses, including looking at the risks that may increase costs or create issues for your business.
Real Estate Transaction and Development Pro Formas
Real estate deal negotiators for brownfields and brownfield developers need reliable estimates of the time and costs for environmental remediation studies and cleanup actions.
When developing forecasts for brownfield transactions and development, we recommend preparing two estimates, probable expenses and reasonable worst-case costs. Reasonable worst-case costs incorporate risks. You are good to go if the reasonable worst-case does not blow up the project. If the reasonable worst-case may jeopardize your brownfield transaction or development, then you have some decisions to make.
You need to address the risks early enough to know the impact of your plan or reconsider the transaction or development altogether.
Budget and Forecasts
All businesses need reliable budgets and forecasts for their environmental cleanups to manage cash flow and personnel involved in the project. As described above, consultant estimates are often biased for competitiveness and exclude risks. Another bias that often creeps into budgets and forecasts is schedule optimism.
Pacific Consulting owner David Harnish specializes in analyzing the project and program budgets and forecasts to help you plan your cash flow, reduce business surprises as projects move forward, and minimize unnecessary cash tied up. David oversaw a $50 million to $70 million/year environmental remediation program for many years and had executive reporting responsibilities.
Pacific Consulting helps companies estimate environmental reserves. Publicly-owned companies must disclose environmental liabilities to shareholders per Security Exchange Commission (SEC)requirements and Generally Accepted Accounting Principles (GAAP) published by the Financial Accounting Standards Board. The SEC requires each quarterly statement of earnings to have current and correct statements of liabilities. FASB Standard 410 provides a detailed framework for environmental liabilities and asset retirement obligations, occasionally clarified through published notes or other updates. Environmental reserve estimates must be prepared with the company’s financial and accounting staff and included in controls under the Sarbanes-Oxley Act of 2002.
FASB 410-30 states that environmental liability must be disclosed if it is both probable and estimable. Most interpretations of “probable” are that the liability has an 80 percent chance or more of arising. Most interpretations of “estimable” are that a range of costs can be calculated using site information or comparing similar sites. If a range of costs can be estimated, but no single estimate in the range is more likely than another, the minimum of the range may be reserved. But if one estimate within the range is the most probable, that value should be reserved. Companies have different policies about how many years ahead they will include in their calculations, generally from 5 years to 30.
Pacific Consulting owner David Harnish has been responsible for project, program, and department-level internal certifications of environmental reserve reporting.
Mr. Harnish prepared testimony for utility rate cases to fund the remediation program and power plant remediation requirements.
Book a Consultation
Book a consultation today with Mr. Harnish to discuss your project.