Probabilistic Cost Modeling and Liability Settlement

Project Approach

As a result of its acquisition of certain assets and liabilities of a former company, a Fortune 100 company was named as a responsible party in a State of California Remedial Action Order that required the respondents to perform operation and maintenance activities and other projects at a 190-acre Class I hazardous waste landfill and a 170-acre Class III municipal waste landfill.  The company notified the State of its interest in reaching a cash-out settlement of its alleged liability, but the State responded that it would be difficult to reach a cash-out settlement without having a realistic estimate of how much it would cost to complete the site investigation and landfill closure activities. 

In response, the company hired a group of four experts to compile available information, use engineering judgment, and perform probabilistic cost estimating to arrive at a defensible settlement amount through the quantification of future uncertainties and risks.  The team of experts was led by a Senior Principal of DECARB, who was singularly responsible for the development and application of the probabilistic cost risk model that was the centerpiece of the settlement negotiations.  He also prepared the final report, led presentations to the State, defended the work against the State’s consultants, and made presentations to the company’s insurers to update them on the status and plans for the settlement.

The cost model incorporated decision tree principles to evaluate uncertainties in State-controlled decisions on the nature and extent of future remedial activities, as well as Monte-Carlo simulations to quantify the effects of uncertainties in quantities and unit costs.  A critical uncertainty addressed in the model was the nature and extent of groundwater impacts due to a potential threat to nearby public drinking water supplies.   A unique feature of the model was the need to incorporate the effects of several low-probability, high-cost binary risks such as a future earthquake given that a fault ran through the site, a destructive fire similar to what was being experienced across other Southern California hillsides, and a catastrophic landfill gas release if there was a system failure.

The result of the study was the acceptance of a risk-based settlement amount by the State that was highly favorable to the company.  The difference between the State’s initial settlement offer and the final settlement amount was a nine-figure value.