Pricing Hazardous‐Waste Risk

Abstract

A procedure is presented to analyze and price the risk from engineering or construction contracts involving hazardous‐waste projects. The procedure is based upon using a newly developed computation to assign a defined dollar amount to part of the revenue of a project that specifically creates the future risk. The hazardous‐waste risk is defined to include litigation costs, liability judgments, and settlements. The computation is premised upon funding a future probability portion of liability, along with its cost of administration, and is developed on engineering economics theory. The computation is adapted to standard contract pricing techniques. Time period of liability occurrence, liability amount, and probability of liability occurrence within the time period must be selected as computation parameters. These parameters are discussed and numerical ranges are suggested. Sources of liability, insurance, and a tax implication are also discussed. Two examples are selected—an engineering contract and a construction contract—to illustrate the mathematics. Suggestions for further research are presented.