Introduction Overview Definitions Chapter 1 The Recycling Process Chapter 2 Supply Issues » Chapter 3 Contract and Risk Decisions Chapter 4 Contract Support Chapter 5 Bid Evaluation Chapter 6 Boiler Plate Items Chapter 7 Relating Collecting and Processing Issues CHAPTER 3 CONTRACT AND RISK DECISIONS The best contract is beneficial to both the supplier of material and the processor or end market. Therefore, it is important to consider issues that allocate risk and maximize fairness to both parties. 3.1 Length of Contract Suppliers and processors and end markets may have very different views on the length of the contract. Suppliers may want shorter contracts to limit risk of market fluctuation, make the procurement process easier (for example, many local governments will have more stringent requirements for multi-year contracts), or to keep their options open as market conditions change. Processors and end markets may want longer contracts in order to amortize their costs over time, obtain bank loans and ensure a steady source of supply. The generator should set the term of the contract with an understanding of market needs. Longer term contracts (3-5 years) may benefit the generator because processors and end markets may be willing to pay a higher price for materials in order to lock in their supplies over a longer term. 3.2 Lead Time to Prepare Bids and Provide the Service Responding to bid requests is an expensive and time consuming endeavor. Even in these days of computers and boilerplate language, processors and end markets must spend time to review bid documents, analyze bids, determine appropriate costs and complete the required paperwork Further, many processors and end users are small and medium sized businesses that are unable to absorb these costs. The process is also a gamble, with no guarantee of receiving the bid at the end of the process. Therefore, it is important to provide sufficient lead time (generally. 30 days or longer) to respond to bid requests. Processors and end markets should also have sufficient time between award date and the start of service to adjust personnel and equipment to provide the best service under the agreement or contract. 3.3 Prices in Contract There are two major prices that may exist in a contract for processing materials. First, there is the cost of processing materials (sorting, removing contaminants, compacting and baling). Will there be a tipping fee (paid at the time of delivery) to cover any of these costs? The second price consideration is the sale of materials. Who gets the revenue from the materials? Does the bid document or contract have a fixed or variable price? Are there minimum or maximum prices for the material? The generator determines whether the price for commodities will be a fixed price or a variable price (tied to a market index). This decision will depend on many factors: the length of the contract the type of commodity (and how much the cost varies) revenue sharing between generator and processor (who gets what percentage of the revenue from material sales) As an example, you could complete a three month contract for aluminum on a fixed price basis, since the prices are not likely to vary widely. You should tie a 5-year contract for mixed paper (whose price fluctuates greatly) to a market index. The key issue is allocating the risk (and rewards) associated with each. In a fixed price contract (assuming that the generator receives the revenue), if prices are higher than the fixed price, it will favor the processor, while prices lower than the fixed price would favor the generator. Another issue in pricing materials is whether there is a floor or ceiling price for materials. Generators (especially local governments and institutions) must budget for material sales (and potential costs if prices become negative). They may want a minimum price in order to stay within their budgets in the event markets are poor. Processors and end markets may be unwilling to bid on such contracts depending on the volatility of the market for the commodity(ies). They may also pay a lower price for materials (or ask for a higher tipping fee) in order to limit their market risk. There is also a danger that if a market price goes significantly below the floor price, the processor or end market may be unwilling to meet contract obligations, which may result in litigation or even bankruptcy of the company (see discussion of financial stability in Chapter 5). Processors and end markets may ask for a ceiling price in exchange for a floor price. If generators are willing to trade security at the lower rates for lower prices if prices go higher, this may be a good trade-off. Generators should carefully review market conditions and projections to determine if they will be losing significant revenue over the long term. Again, the key to a successful contract is to allocate the risk between the generator and processor (or end market). back to top