Law | by Len Ruzicka, Partner in the Business Litigation Division of Stinson Morrison Hecker LLP. | 07/27/2012
There is a growing trend to incorporate design and construction practices that improve the environment, enhance the wellbeing of the building occupants and increase energy efficiency. There are a number of terms commonly used to describe this trend including "Green Construction", "High Performance Construction" and "Sustainable Building". All of these terms can be used interchangeably to describe this trend. This trend has been driven in part by a recognized economic advantage to build projects that, if more energy efficient, will cost less to operate. There is also, in some circumstances, an additional economic advantage in the form of federal and state tax incentives. Some jurisdictions have established building codes that set mandatory baselines for energy and environmental performance that all projects in that jurisdiction are required to meet. Because the designer and contractor are required to perform in accordance with all laws, regulations, and ordinances, building green becomes a contractual responsibility of the parties to the construction process. In some cases, owners or developers may voluntarily choose to build green because of perceived marketing advantages or enhancement to the owner and/or developer's reputation in the community.
As this trend continues and grows, owners, designers, and contractors will be confronting new roles, challenges and risks in the construction process. This column will attempt to identify these new roles, challenges and risks and discuss how these issues should be addressed from the owner, designer and constructor's perspective.
A better understanding of what is entailed in "building green" and the certification process to achieve a green standard is necessary in order to understand the new roles, challenges and risks to the construction process. There are a number of organizations promoting green buildings including the Green Building Initiative, GreenGuard Environmental Institute, Sustainability in Higher Education, McDonough Braungart Design Chemistry, LLC, and Green Seal. The most prominent green building organization in the United States is the U.S. Green Building Council ("USGBC") established in 1993. The USGBC consists of members of the construction industry. The organization's goal is to encourage the construction industry to design and build based on a healthy building environment employing ecologically sound principles. The website for USBGC is http://www.usgbc.org. Although all of these organizations have adopted certification programs, the most recognizable and used certification in the United States today is the USBGC's LEED rating system. Because of the popularity of the LEED system, this paper will focus on that system to demonstrate the additional roles, challenges and risks expected of the construction participants in achieving certification for a LEED project.
LEED is an acronym for Leadership in Energy and Environmental Design and the LEED rating system focuses on performance in five key areas: site development, water savings, energy efficiency, materials selection, and indoor environmental quality. The LEED system assigns points based on the achievement of specific goals in each of these areas. The system can be used for both new construction and renovation projects and there are four certification levels: Certification, Silver, Gold and Platinum with Platinum being the highest certification level requiring the most credits in each of the specified areas. In addition to deciding which level of certification you want to achieve for a project, it is necessary to determine which rating system is appropriate for your project. There are different separate rating systems for new construction based on the usage including separate rating systems for general commercial, schools, healthcare, retail and homes. There is also a separate rating system for core and shell construction only and two rating systems for interior fit out, commercial and retail. There is only one rating system for existing buildings which basically rates the changes made to improve the operation and maintenance of the building. The USGBC publishes a manual to assist in the selection of the appropriate rating system.
As the USGBC manual indicates, the LEED system only allows one rating system per project. If there is an overlap between systems, it is necessary to choose a rating system most appropriate for your project. USGBC recommends an approach by square footage, i.e., if there are a number of categories that could be included, choose the one that covers the most gross floor area for the project.
Once a system is chosen for the project, the LEED system project checklist for the system chosen should be reviewed by all of the project participants. Each system allocates points for different aspects of efficiency and design in appropriate categories for that system. For example, the rating system for new construction assigns points to the appropriate selection of the site for the project including consideration for public transportation access, parking availability and other considerations that would minimize the project's impact on the environment. This means that ideally the project participants should already have made a determination of the rating system to be used and reviewed the project checklist to assess what level of certification can be achieved prior to site selection. Also, points are assigned for energy efficient landscaping which could also be influenced by the site selected. Bottom line, all of the participants to the project should be involved in the process of selecting the rating system, certification level and participating in the assignment of responsibility of satisfying the requirements of the various categories of the rating system at the earliest stages of the project.
II. Protecting the Owner's Interest: Key Provisions.
Owners choose a green building for a number of reasons including a wish to lower the building's operating costs and to take advantage of certain financial incentives offered by state and local governments. If the level of certification anticipated by the owner is not achieved, the damages that flow from that failure to achieve that level of certification could be substantially greater than the damages associated with typical construction projects. These damages would probably be considered consequential damages. Accordingly, owners will not want to agree to a blanket waiver of consequential damages on a green building project.
On the other hand, contractors and design professionals will not likely agree to enter into a contract without some form of consequential damage waiver or limitation of liability for those damages. This dilemma is often encountered by owners, contractors and design professionals in dealing with the damages associated with failure of the project's on time completion. The dilemma is usually resolved through a detailed negotiation of the schedule requirements and provisions in the contract for appropriate time extensions and either liquidated damage provisions or limitation of liability provisions, or a combination thereof. The same type of approach should be considered in dealing with the damages associated with failure to achieve certain certification levels. That is, the owner, the designer and the contractor review and agree on the rating system to be used and the certification level to be achieved and assume specific responsibilities for achieving that certification level based on the ability of the party assigned that responsibility to best control a favorable result. Through this process, all parties can assess the risk assumed. By contract, the designer would only be responsible for a shortfall in achieving those points that can be controlled by design. The contractor would similarly be responsible for any shortfall due to its construction methods such as selection of materials that failed to achieve the targeted points. If the project failed to achieve the certification level required by the contract due to actions or inactions of the owner in the areas of its responsibility, the designer and contractor would have no liability. In addition, the owner should be willing to negotiate a specified dollar amount for a failure to achieve the points assigned to either the designer or contractor in the form of a liquidated damage clause that may specify a dollar amount for each point that is not achieved. Other limitations could be an overall cap on liability either in terms of a specified dollar amount or the limits of the professional liability insurance provided by the designer.
III. Contractor's View.
A. Clarifying the Scope of Work.
An experienced contractor wants his obligations specified in detail so that he can properly price the contract and assess his risk profile. In addition, an experienced contractor does not want to assume a risk that he cannot control. Accordingly, an experienced contractor would expect that any green or sustainability standard is well defined and that he will only be responsible for undertaking those obligations necessary to achieve the design standards that are within his ability to control. An owner that is willing to engage the contractor at the earliest stages of the project, including assisting in site selection, will be able to extract the most favorable terms respecting green building from the contractor.
The owner should inform the contractor as to which organization's rating system he considers appropriate for the project and which rating system of the organization specifically applies to the project and elicit the contractor's opinion on the appropriateness of the rating organization, system and the likelihood of achieving the certification level selected by the owner. When agreed upon, the information should be included in the contract. The contract should also specify who is responsible for achieving the various aspects of the requirements of the rating system once it is identified. For example, there are a number of items that are assigned points that the contractor has no control over such as site selection and design. However, a failure to construct in accordance with plans and specifications that result in the building not achieving the rating designated by the contract should be a risk that the contractor should respond to, as well as the damages resulting from such failure. However¸ these damages, such as loss of tax credits, tax abatements, and greater operational costs, could be substantial and the contractor will want to either obtain a waiver of such damages in the contract or place limitations on such damages.
Although most of the industry standard forms contain a broad waiver of consequential damages that should address these green building related damages, it would be advisable to add specific language to the standard waiver. The AIA suggested language which is contained in AIA Form D503 recommends the following:
"The mutual waiver ....expressly includes those consequential damages resulting from failure of the Project to achieve the Sustainable Objective or one or more Sustainable Measures including unachieved energy savings, unintended operational expenses, lost financial or tax incentives, or unachieved gains in worker productivity."
If the owner is not willing to agree to this broad waiver, the contractor should attempt to negotiate a maximum amount that the contractor could be liable to the Owner for failing to achieve certain sustainability goals or assign a dollar amount for each rating system point shortfall. Other options, as discussed above would be agreeing on a liquidated damage amount (in effect, a buy-down clause) or a limit on damages to insurance provided.
The contractor will also want substantial completion to be defined under the contract using the standard requirement that substantial completion is achieved when the project is either occupied or is capable of occupancy for its intended purpose. If the definition of substantial completion includes a requirement that the certification of the specified green building standard is achieved, the contractor could be placed in a position of having to wait weeks or even months while the documentation, submittal and acceptance of the applied for certification is finally approved. This would mean that the contractor would have to wait for its final payment even though the contractor may have no control over the process and the timing of formal certification. In addition, transfer of risk usually occurs at substantial completion and such a requirement would delay that transfer.
B. Limiting Warranty Obligations.
Any warranty on sustainability or building green should be limited to those obligations specifically assumed by the contractor under the construction contract. A sophisticated contractor will avoid agreeing to any broad form warranty such as a warranty that a certain level of certification will be achieved or that if it is achieved the project will achieve certain efficiency levels or cost savings. A contractor should be willing to warrant that it will perform its work in accordance with the plans and specifications and in a workmanlike manner. It would be the contractor's position that if following those plans and specifications does not result in the level of certification desired by the owner, the owner should look to the designer for redress.
C. Flow down provisions to subcontractors and vendors.
To the extent that a contractor has assumed certain green building obligations, the general contractor must make sure that those subcontractors actually performing the work, and the vendors providing the materials and equipment, are experienced and qualified to meet the general contractor's obligations to the owner respecting green building. This would include doing proper due diligence in selection and entering into subcontracts and purchase orders that require those subcontractors and vendors to assume, for their scope of work or delivery, the same obligations to the owner that the general contractor has to the owner. This is best done through the use of a flow down clause which could read as follows:
"The Subcontractor (Vendor) shall assume toward the Contractor all obligations and responsibilities which the Contractor has assumed under the contract with the Owner in the performance of Subcontractor's (Vendor's) scope of work."
IV. The Role of Design Professionals and Green Building Facilitators ("GBF's).
A. Design Professionals Role.
The design professional has the greatest potential for risk in a green project. This is due to the designer's ethical responsibilities under its standard of ethics. These standards of ethics require the designer to be environmentally responsible and advocate sustainable building and site design. Language reflecting these ethical obligations are also provided in the AIA standard forms. These ethical obligations and contractual language have the potential of exposing the designer to liability if the building does not meet the owner's expectations respecting sustainability even if the designer does not agree to any specific certification level but is aware that the owner intends to achieve a certain certification. In order to avoid this potential exposure, the designer should include wording in the contract that the designer is only obligated to educate his client on building green, but the decision to incorporate features in the design, that are environmentally responsible, or that are intended to achieve a certain level of certification, remain with the Owner.
The designer should also make it clear that because a building incorporates a certain green feature in the design or achieves a certain certification level, does not mean that the building will meet a certain performance expectation or that if it meets a certain performance expectation that it will necessarily meet the requirements of a certain certification level. Because the AIA is concerned about these issues for the design professional, the AIA recently released a guide advising designers on these issues and recommending certain modifications to its standard forms to minimize the expectations of the owner and the designer's risk on green projects. Because the design professional is required to design in accordance with all laws, regulations, and ordinances, to the extent there are green building requirements incorporated into a specific law, regulation or ordinance, the design professional must meet it.
The design professional should minimize these risks by negotiating and including in the contract the same provisions recommended for the contractor to minimize its risk. This would include a clear and concise scope of work addressing the rating system that applies and the specific responsibilities of the designer to meet the certification level of the rating system, providing for a limitation to any consequential damages through a liquidated damage provision and an overall limitation of liability. These issues are discussed and suggested amendments to the AIA forms are included in AIA D503.
B. Green Building Facilitators ("GBF") Role.
What is a GBF? A GBF is a person or entity responsible for identifying, coordinating and implementing the elements of performance required on projects incorporating green building elements and/or rating goals. A key function of the GBF is to assemble the various documents and reports supplied by the project participants for submission and processing them as necessary to achieve the certification of the green status selected by the owner. The GBF could be the designer, or the contractor or the construction manager on the project or an independent third party to the process focusing just on the GBF functions.
ConsensusDOCS 310 Green Building Addendum ("GBA") is a document which assigns responsibility to a designated GBF charged with the responsibility of achieving the certification designated in the GBA. The role of the GBF is well defined in the GBA and I recommended its usage to you.
V. Risk Allocation.
The contract documents between the various participants in the project should clearly define the level of "green" to be achieved and the specific rating system that will be used. These documents should be fully integrated so that the party responsible for achieving each of the categories in the selected certification are specified. Also, the documentation should make it clear which party is responsible for document collection and submission to the rating agency. AIA D503 and ConsensusDOCS 310 provide specific guidelines to achieve this risk allocation and language to be added to standard forms to define and assign these risks.
In one of the first law suits to be filed involving green building issues, not all of these issues were addressed by the parties prior to executing the construction contract. In Shaw Development v. Southern Builders , the contract specifications required that the project was to be designed to comply with the Silver Certification Level under USGBC's LEED Rating System. The project was a multi-unit condominium project in Maryland and among the owner's claims against the contractor, the owner alleged that the contractor failed to construct a green building in accordance with the rating specified. The largest count for damages related to a loss of tax credits by the owner allegedly as a result of the contractor failing to deliver a project in a timely manner so that the owner could apply for the credits. There were no provisions in the contract specifying the procedures and responsibilities for obtaining the credit or any assignment of risk for failure to obtain the credit. The contract did contain a broad mutual waiver of consequential damages. This litigation was settled presumably because of this lack of detail assigning responsibility for the process and the problems of asserting such a claim by the owner in light of the waiver of consequential damages and highlights the importance of dealing with this issue in the contract.
B. Specific Considerations.
A green building construction contract must address, in addition to all the issues that are normally included in all construction contracts, the following:
1. The level of certification required and the certifying agency;
2. Assignment of responsibility, not only for the design and construction to the certification level, but the person responsible for monitoring the process and gathering the appropriate documentation;
3. If tax benefits are involved, understanding the legislative and administrative process to obtain those benefits;
4. Assigning the financial responsibility/obligation of the parties for failing to achieve the tax benefits anticipated by the owner, i.e., outline a procedure and responsibility for obtaining the credits; and
5. An owner that wants to maximize its chance of recovery in the event of a failure to achieve a green building goal will want to consider entering into a design-build contract. Otherwise, a failure to achieve may result in finger pointing between the designer who claims the design would have met the certification level and the contractor who will claim that the project was built to the designer's plans and specifications but the design was deficient.
C. The Role of Insurance in Building Green.
Some of the risks of building green could be allocated to insurers and some insurers are responding with specific green coverage endorsements. The parties cannot rely on standard policies and hope that the coverage is available when a problem arises. It is important that all participants to the project involve their insurance brokers and communicate to them the green goals of the project. Each of the parties should determine the extent that the various insurance policies respond to the special risks associated with green buildings for those risks assumed by that party. There are three types of coverage that should be reviewed as follows:
1. Builder's Risk covers the project while under construction and covers loss or damage to the work itself. The carrier should be fully apprised and the policy should recognize the additional cost of the work due to the green goals of the project;
2. Professional liability or errors and omissions insurance provides coverage for errors and omissions in the design of the project. Again, recognition of the extra costs and potential for mistakes due to designing green should be recognized in the professional liability policy; and
3. General liability coverage for property or bodily injury to a third party should not be affected by the green goals of the project but it should be recognized nonetheless.
Even with green endorsements, these policies will not include coverage for any guarantees or warranties to achieve a certain level of certification made by the contractor or design professional.
D. Concluding Remarks on Risk Allocation.
Building Green is a subjective term and needs to be given definition in the contracts for design and construction through an objective standard such as LEED certification. Even after the parties agree on an objective standard, standard industry documents need to be modified to clearly identify and allocate the obligations for meeting the objective standard among the participants in the design and construction process including the obligation to assemble, submit and process the documents necessary to achieve the certification selected from the certifying agency.