When evaluating a potential brownfield development deal, answering the question, “how much will it cost to address environmental issues?” is among the first task that needs to be accomplished. It is also one of the more difficult questions to answer quickly with the limited information that is typically available. However, cost estimating can be done in phases using the available data to first establish a range of expected costs. That estimate can then be refined as new data become available. As long as uncertainties in the cost estimates are well-communicated, critical decisions often can be made early in the deal-making process without a detailed understanding of all environmental conditions at the property.
Experience shows that typical construction costs of a new development can be expected to vary 40 percent or more from the initial estimate made during the planning stages, with the expected error decreasing as plans become better defined.
The initial range of estimating error for environmental-related costs during a brownfield redevelopment is likely to be much higher, perhaps +/- 80 percent, due to the uncertainties associated with unknown environmental conditions. Acknowledging, communicating and understanding those uncertainties are the keys to environmental cost estimating for successful brownfield redevelopment projects.
Early on in the evaluation of a potential deal, there is considerable interest in minimizing the cost of evaluating environmental conditions. Nobody wants to spend $50,000 for a site investigation on a property they don’t ultimately purchase. Therefore, the initial estimate may be the most important estimate, but it may be based on minimal data and requested before even preliminary redevelopment plans are available. As a result, these estimates depend more on experience with similar sites and an understanding of the possibilities than on unit costs and detailed calculations.
Initial estimates are developed by gathering available information, evaluating the data relative to potential environmental impacts, and then assessing the impact of these potential influences on the overall scope and cost of the project. Developers typically seek to bracket the order of magnitude of the environmental liabilities – known and unknown. The known issues may be a source for quantitative cost estimates, but the experience of the developer and the environmental professional are the source of speculation on unknown, but potential, environmental costs. Some sites have a higher probability of environmental impacts that will determine the environmental cost for the project, for example, gas stations, and former industrial properties. However, even mundane properties can have hidden issues that will drive the go/no-go decision. In the Northeast, the risk of encountering unforeseen conditions is fairly high due to the long industrial history of the region and the multiple changes in property use throughout the past century.
The cost estimate usually starts with the anticipated scope of the project, the relative likelihood of environmental impacts that are financially significant, and the conceptual redevelopment design. In Massachusetts and in most other New England states, contamination can be left in place if it will not adversely affect the future users of the property. Simply put, the proposed use defines the environmental criteria that apply and the environmental criteria define the anticipated costs. As a result, changes in use of a contaminated property and changes in the redevelopment design can have a big effect on the clean-up cost. This means that the developer and the consultant need to work closely together to estimate the environmental costs and find design options that reduce the costs and potentially reduce the uncertainty associated with the estimate. An example is a change in the foundation design that significantly reduces the volume of excavated soil requiring expensive off-site disposal.
The acceptable range of the go/no-go cost estimate can be pre-defined by the developer in consultation with the environmental professional while looking at how the financing will ultimately be structured to make the project happen. If the developer is self-financing the redevelopment, the reward may be greater, but certainly the inherent risk of unknowns could be crippling. For example, if the potential environmental liabilities could exceed the return on the investment, additional data collection efforts should certainly be considered.
Value and Cost
Because environmental consultants are usually scientists or engineers, they will nearly always say, “we need more data.” After reviewing the data, they will probably say it again. The goals of the environmental consultant are typically to understand the nature and extent of the contaminants, and then determine how to clean them up. The goals for the developer are threefold: first, decide whether or not to buy the property; second, reduce the price to account for the environmental liabilities; and, third, control the cost of the clean-up while getting the project completed quickly. The goals of the current property owner are likely to be different also – to get the best price and to avoid new or additional regulatory compliance obligations. The art is in collecting an adequate amount of data, and at an appropriate time, commensurate with the goals of the developer and the current owner.
There are instances when the current owner might want to avoid the collection of new data that could lead to a regulatory reporting obligation and associated deadlines. This is one of the potential undesirable costs of additional data. If the deal falls through, the current owner is stuck with a regulatory compliance schedule, additional investigation costs, no buyer, and more difficulty in attracting the next potential buyer. Therefore, it is important to recognize the goals of both the buyer and seller, and potentially delay the collection of additional data until the deal is more likely and until the costs and responsibilities for managing the environmental liabilities can be allocated in the agreement.
Based on initial data collection and evaluation efforts, the environmental professional in conjunction with the developer will determine what additional data collection efforts are required, and when, to fill the data gaps and refine the environmental-related cost estimate. Certainly the historic uses of a property will affect the scope of the investigation, as will the proposed future use of the property. For example, if a property was used for electronics manufacturing activities and will be converted to residential use but no assessment has been conducted for chlorinated solvents, additional investigations will be necessary. The environmental professional can also apprise the developer of regulatory trends that may affect the return on investment in the future, such as proposed revisions to standards that will make remediation more or less costly.
Of equal importance in the cost estimating process is the time allotted for the data collection. Both buyer and seller are hoping to get the deal done as expeditiously as possible. These time constraints could drastically limit information gathering efforts, and are therefore more likely to result in a wider range in the environmental cost estimate. The deal can be structured to account for this wider range of potential costs using insurance, escrow funds, or allocation agreements. However, without these tools, the financial risks may be absorbed by one of the parties in the deal and reflected by an unbalanced purchase price.
During the information gathering process, it is important to continue to update and refine the cost estimate. Of equal importance is the realization that the project itself may be evolving. If permitting pressures are driving the development in one direction, the environmental cost matrix may shift as well. One example of this is when the building’s height is constrained and the project shifts to move some of the space downward, requiring deeper foundations and possibly other costs not originally envisioned in the environmental investigation. It is the role and responsibility of the environmental professional to stay in touch with the project team to assess the likelihood of additional information impacting the costs that will affect the success of the project. Part of the discussion among the design team should focus on whether design changes could limit the potential environmental costs and reduce overall construction costs.
Starting Point
The construction cost estimate is the final estimate made before breaking ground on the project and is based on real data and an actual design. Although the project may change many times, this is the starting point from which the developer can allocate budget to various portions of the project that are affected by environmental costs. Ideally, the developer would like to have this estimate, and may be expecting it, at the go/no-go decision stage. However, the site data necessary to calculate this estimate is seldom available early in the process and it is likely to take time and money to collect it. A skilled and experienced consultant’s final construction cost estimate should be within the range of potential costs that was identified during the initial phase of the deal.
Typical environmental-related construction costs include remediation and disposal of various materials, regulatory compliance, and premium contractor costs associated with soil and groundwater management and health and safety. Construction cost estimates are based on the detailed design plans and specifications. There are direct costs, such as contaminated soil excavation and disposal, but also potentially less obvious associated costs for activities such as contaminated dust suppression and odor control. While there are many readily-available documents that can be reviewed to determine costs, the experienced environmental professional will know the current rates and trends in the market, as well as changes in environmental regulations that are likely to affect costs.
Understanding the goal of the estimate is crucial – as is early involvement by a skilled environmental consultant. An important quality in an environmental consultant is the ability to communicate the limitations of the environmental cost estimate at each stage in the process. If the limitations are understood, the developer can avoid unnecessary investigation costs for deals with unmanageable risks and allocate that money to collect valuable data during the appropriate phases of a successful project.
The value of experience cannot by understated. The purpose of the environmental due diligence, evaluation, additional investigation, and ultimately construction observation, is to document conditions that may affect the bottom line – money. It is unrealistic to assume that experience and a well-planned and executed environmental program will avoid all unexpected environmental issues. What the experience of the environmental professional brings to the table is an understanding of issues that will affect the cost of the project, so that the developer can in turn make informed decisions throughout the process.
