Green Project Risks

7/29/2019 Green Project Risks

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April 10, 2012

Managing Contract Risks onProjects


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April 10, 2012October 14, 2010

The Rise of Green Buildings

Project Delivery Methods Mastering Form Agreements

Drafting and Negotiating Contract Terms

Understanding Insurance and Bonding

OverviewManaging Contract Risks on Green Projects


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April 10, 2012

The Rise of Green Building


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April 10, 2012

Rise in Green Building

Approximately $8 billion worth of greenconstruction in 2006

Grew to approximately $60 billion in 2010 Estimated $100-140 billion in 2013 Next three years:

$554 billion to the national economy

Green jobs will quadruple to 7.9 million By 2015

Green construction to represent almost half ofnonresidential market McGraw-Hill


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April 10, 2012

Rise in Green Building Regulations

International Code Council International Green Construction Code released last March

ASHRAE Standard 189.1 Released last winter - commercial green building standard Replaces Standard 90.1-2007


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April 10, 2012

Project Delivery Methods

Design-Bid-Build Design-Build Integrated Project Delivery


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April 10, 2012

Why Is Delivery Method Important? Delivery method typically owner-driven

Considerations:

Early involvement of contractor and subcontractors?

Single point responsibility

Responsibility for overseeing satisfaction of greenobjectives

Understanding alignment of parties is critical to

understanding potential risks.


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April 10, 2012

1. Design-Bid-Build (D-B-B)

2. Design-Build (D-B)

3. Construction Manager @ Risk

4. Integrated Project Delivery (IPD)



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April 10, 2012

Design-Bid-Build

Discourages green value engineering

Less collaborative

Delayed contractor involvement

Expensive post-award changes

Design-Build

Who is the owners ally/advisor? Single point responsibility

Owner typically less-involved



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April 10, 2012

CM at-Risk

Requires experienced CM

Disconnect from some trades

Integrated Project Delivery

The ultimate collaborative delivery method

Early involvement of contractor and trades Value engineering encouraged and facilitated

Needs strong owner and trusting participants

Shared incentives for LEED certification



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April 10, 2012

Managing Contract Risks on Green Projects

Mastering Contract Forms

Drafting and Negotiating Contract TermsUnderstanding Insurance and Bonding


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April 10, 2012

Mastering Contract Forms


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April 10, 2012

Importance of Contract Forms Design and construction organizations are moving

quickly to prepare standardized forms

Promote an industry standard

Increase revenue

Forms vary significantly from organization toorganization

Hasty preparation = missing terms and concepts Understanding forms means opportunity to avoid

green pitfalls


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April 10, 2012

AIA

B211-2007 Architects Services: Commissioning

B214-2007 Architects Services: LEED Cert.

D503-2011 - Guide for Sustainable Projects

New Sustainable Projects Documents

ConsensusDOCS

DOC 310 Green Building Addendum DBIA

Sustainable Project Goals Exhibit

Whats Out There?


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April 10, 2012

AIA B211-2007 - Commissioning Covers architects services for commissioning

Requires architect to: Develop a Commissioning Plan, Design Intent

Document, and Commissioning Specifications; Review the contractors submittals related to the

systems to be commissioned;

Observe and document performance tests;

Train operators; and

Prepare a Final Commissioning Report.

Incorporated into Owner-Architect Agmt.

Not a stand alone document.


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April 10, 2012

Not a stand alone document

Covers only LEED Services for architects

Intended for use with B102-2007 Not for contractors

Architect Handles Certification Process:

Conducts Pre-design Workshop

Creates LEED Certification Plan

Organize and Manage certification process

Provide LEED specifications

AIA B214-2007 LEED Certification


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April 10, 2012

AIA B214-2007 Continued Missing Terms:

Disclaimer of guarantees or warranties

Disclaimers of any implied guarantees

Remedy provisions for failed certification

Completion

End of certification process?


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April 10, 2012

D503-2011 Sustainable Projects Guide Not a contract document, exhibit, or addendum

that can be incorporated in whole into projectcontracts.

Provides an overview of some of the key legal andcontractual issues that can arise on projects thatincorporate sustainable goals.

Includes model contract language that can be added

to: B101-2007 Owner-Architect Agreement A101-Owner-Contractor Agreement

A201-2007 General Conditions


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April 10, 2012

AIA New Sustainable Projects Documents Set to be released in April or May 2012

Incorporation of model language into:

A101-2007 SP Owner/Contractor

B101-2007 SP Owner/Architect

A201-2007 SP General Conditions

C401-2007 SP Architect/Consultant

A401-2007 SP Contractor/Subcontractor


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April 10, 2012

Not a stand alone contract

Assumes design-bid-build

Invents new nomenclature:

Green Building Facilitator Default = Architect

Green Measures Physical those incorporated in Plans and Specs as part of

design. Procedural means and methods in performance of work.

ConsensusDOCS - 310


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April 10, 2012

ConsensusDOCS - 310 Remedy Provision:

Moves all tax and financial consequences (i. e. thecost savings) into the category of consequential

damages that are subject to waivers of such damagesin other construction documents.

Missing Terms:

Green Guarantee

Disclaimer of warranties

Payment of GBF

Completion Issues


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April 10, 2012

Not a stand alone contract

Assumes Design-Build Delivery

Addresses:

Green Standard Art. 1

Art. 4 - Remedies section offers menu of options ifproject fails to meet green goals

Waiver

Liquidated damages Limited obligation to cure

Art. 6 Sub. and Final Completion not contingent oncertification.

DBIA Sustainable Project Goals Exhibit


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April 10, 2012

Requires retention of independent CommissioningAuthority

Missing Terms: Payment

Fails to Adequately Address: Other project delivery options

Obligation for determining regulatory requirements

DBIA Sustainable Project Goals Exhibit


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April 10, 2012

Drafting and Negotiating Green Contracts


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April 10, 2012

Conceptual Risks on Green Building Projects

Impossible Promises Ambiguous/Overlapping Responsibility

Increased Standard of Care

Using traditional contract mechanisms andconcepts on a green project

Lack of precedent

Benefits well-known and well-documented

Conceptual Risks


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April 10, 2012

Risks on Green Building Projects Inexperience

Increased risk of design/construction defectsUnrealized Expectations

Learning Curve: Products and ConstructionMethods

Building Performance Issues

Regional issues not always considered

Failed Green Certifications

Green construction is regular construction riskwith a twist.


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April 10, 2012

Lack of Precedent No appellate case law to date.

Limited LEEDigation: Only a few reported casescontaining green issues:

Southern Builders v. Shaw Development(MD) Tax credits

Poor contract drafting

DestinyUSA (NY)

Tax/Bond credits, False promises

ACHRI v. City of Albuquerque(NM) ACHRI sued to prevent ordinance imposing energy eff. stds.

Gidumal v. Site 16/17 Development(NY)

Misrepresentation of LEED goals and energy performance


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April 10, 2012

What does Green mean?

Defining the Green Standard


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April 10, 2012

Defining the Green Standard When you get down to it, whether a work of

architecture is green is usually a shade of gray Christopher Hawthorne, Architectural Record, April 2008

Is it an objective standard?

It should be!


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April 10, 2012

Use Specificity:

Sample Provision:

Owner's Desired LEED Certification is LEEDCertification at the Gold Level under the USGBCsLEED forNew Construction Rating System, version3.0 - 2009.

The LEED Responsibility Matrix [Dated/Version],

which is attached hereto as Exhibit A identifies thePrerequisites applicable to the Project as well as theCredits the Owner has decided topursuefor theProject.

Defining the Green Standard


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April 10, 2012

Green Guarantees Owners Perspective:

A guarantee is ideal (but may not be realistic)

Designers Perspective: Any contract with the word guarantee creates

an uninsurable risk and cannot be accepted.

Contractors Perspective: Do not guarantee any level of certification.

There are too many factors outside the

contractors control. At most, contractors should accept responsibility

for the contractor responsible credits.


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April 10, 2012

Green Guarantees Often guarantees are not express or clear:

Example: Southern Builders, Inc. v. Shaw Development LLC Project Specs: Project is designed to comply with a Silver

Certification Level according to the U.S. Green Building

Councils Leadership in Energy & Environmental Design (LEEDRating System, as specified in Division 1 Section LEEDRequirements.

AIA D503 Recommendation A201: 3.5.2 The Contractor shall perform the Sustainable Measures

required to be performed by the Contractor in accordancewith the Contract Documents, however, nothing contained inthis Section 3.5 shall be construed as a guarantee or warrantyby the Contractor that the Project will achieve the SustainableObjective.


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April 10, 2012

Waiver of Consequential Damages Losses or injuries that do not flow directly and immediately

from the act of the party, but only from some of theconsequences or results of such act.

Must be reasonably foreseeable at the time the contract was

made. Typical examples:

lost rents, loss of tax credits, damage to reputation, down oridle time, interest and finance charges, material escalationcosts, depreciation, rental costs, additional energy costs, loss of

productivity and efficiency Waiver must be clear and unmistakable


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April 10, 2012

Waiver of Consequential Damages

Owners Perspective:

Try not to waive consequential damages they aretypically owners biggest risk.

Designers Perspective:

Insist upon a mutual waiver Standard in AIA forms B101 Owner-Architect

Contractors Perspective:

Contractors should insist upon a mutual waiver ongreen projects. Shaw Developmentis a good example ofthe exposure a contractor may face (i.e. tax credits)


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April 10, 2012

Waiver of Consequential DamagesSample provision Notwithstanding anything contained in Project agreements or this

Rider, the Contractor shall only be responsible for commerciallyreasonable efforts to achieve the LEED credits shown in the LEED

Responsibility Matrix.

Contractor is not liable or responsible for the failure of the Project toachieve the Desired LEED Certification or any intended financialand/or environmental benefits.

Notwithstanding any other provision in Project agreements or thisRider, in the event that the Project fails to achieve the Desired LEEDCertification, the Contractor will not be liable for any special,indirect or consequential damages arising in any manner from suchfailure.


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April 10, 2012

Substantial Completion Owners Perspective:

Will try to tie certification to substantial completion.


LEED Certification is on a different timeline frombuilding completion and occupancy.

Contractors Perspective:

Contractors should not allow substantial completion tobe tied to certification. Certification could take monthsand include appeals. This may occur while the owner isoccupying the building and receiving the benefit of itsuse.


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April 10, 2012

Substantial Completion Sample provision:

Substantial Completion: This provision specifically overrides any and all

provisions dealing with Substantial Completion inother Contract Documents. Substantial Completion isthe stage in the progress of the Project when theProject or designated portion thereof is sufficientlycomplete so that the Owner can occupy or utilize the

Project for its intended use. Substantial Completiondoes not depend upon achieving the Desired LEEDCertification.


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April 10, 2012

Final Completion and Payment

Owners Perspective: Make certification part of final completion.


De-couple LEED Certification from final completion bynegotiating additional Post-Completion Phase services. Contractors Perspective:

Same as substantial completion do not tie finalcompletion to certification. The certification processcan take months.

All certification requirements should be handledthrough the punch-list and warranty obligations.

Lien rights


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April 10, 2012

Sample provisions: Final Completion:

Final Completion occurs when the Project reaches

final completion under the Contract Documents,however, Final Completion does not depend uponachieving the Desired LEED Certification.

The Owner may retain 2.5% of the entire Project costuntil the Green Building Certification Institute

determines Certification, if any. Only agree to part two if the owner insists upon

some protection.

Final Completion and Payment


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April 10, 2012

Liquidated Damages vs. LEED Bonus

Owners Perspective:

Add liquidated damages if possible

LEED Bonuses may incentivize wrong behavior


No liquidated damages. Contractors Perspective:

Contractors should discuss a LEED bonus with the owneralternative to LDs or green guarantees.

If the parties agree to share the benefits and risks of LEEDcertification, more likely to result in a successful project.

The LEED bonus concept will encourage a collaborativeatmosphere.


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April 10, 2012

Standard of Care

Changes with the profession as practices and competencieschange.

Best practices ofyesterday are the minimum standards of

today As green products and processes surge, A/Es saddled with

working knowledge of these

New AIA ethics standard: promote sustainable design anddevelopment principles in their professional activities.

Single ply TPO roof (10 years) vs. BUR (30 years)


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April 10, 2012

Standard of Care

Derived from statute:

P.E. must use reasonable professional skill, judgment anddiligence normally rendered by professional engineers in thepractice of professional engineering

implied in every contract

Attempts to minimize standard of care:

Expect sophisticated parties to reject Enforceable?

Possibly against contracting party; not third parties


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April 10, 2012

Material Substitutions Do not allow material substitutions without written

change from all necessary parties (Owner/Architect).

Risk of inadvertently losing LEED credits.

Designers and Contractors - be cautious in proposingmaterial changes.

Make sure you know how it will affect credits.

Proposed language in AIA - D503:

Burden on contractor to determine affect Architects entitled to rely on contractors statements

Contractors should get specific approval from Owner andDesignerBEFORE substituting materials.


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April 10, 2012

LEED Certification Responsibility Matrix Should be prepared by Owner or Designer at beginning of

project.

Tied to green standard definition.

Matrix outlines LEED Credit responsibilities and assignsdocumentation and credit responsibility.

If you are a contractor or consultant, ask whether a matrixhas been prepared and get a copy.

Contractors can use it as a tool with subcontractors,even if the owner or designer has not prepared one.


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April 10, 2012

Sample Matrix


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Sample Matrix #2

Could be as simple as:

Documentation

Responsibility

Owner ResponsibilityContractor

Responsibility

Design ResponsibilityPrerequisite or Credit

EXHIBIT A

LEED CERTIFICATION RESPONSIBILITY MATRIX


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April 10, 2012

Flow Down Provisions


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April 10, 2012


Provide that a subcontractor/subconsultant is bound to thecontractor/DPOR in the same fashion as thecontractor/DPOR is bound to the owner in the primecontract.

Help to ensure that the subcontractor's obligations to thecontractor mirror the contractor's obligations to the owner.

Flow Down Mistake: Subcontractor brings high VOC paint on site; Unable to obtain EQ Credit 4.2 which costs the project Silver

Certification; Owner needed at least LEED Silver for tax credits and sues; If Sub was not bound to same standards, contractor may end up

holding the bag


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April 10, 2012


If you are upstream party, looking to include flow-down: make available in writing any documents you are flowing down

identify what contract obligations are flowing down

include acknowledgment statement

better to include a separate flow down for green obligations

defeats arguments that green risks didnt flow down

If you are downstream party: narrow any flow down to scope of work

make written request for documents to which you are bound

understand the risks that your contracting party is taking on withother project participants

Dont sign acknowledgements that you cant or dont know


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April 10, 2012

Flow Down Provision

Sample:

The subcontractor acknowledges that the work under thissubcontract is for a project seeking LEED certification. The

subcontractor hereby assumes toward the contractorall thesame obligations, rights, duties and redress that thecontractor assumes toward the ownerandarchitect/engineer under the prime contract, LEED projectrequirements, and/or LEED responsibility matrix as they

relate to the subcontractors work.


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April 10, 2012

Indemnification Provisions Owners unrealized expectations = claims and lawsuits

Attempt to pass liability to the party most responsiblefor the loss

Indemnify: To protect against damage, loss, or injury

Best used in conjunction with a flow down provision

Be aware of embedded indemnification provisions


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April 10, 2012

Indemnification Provisions

Green/Sustainable Project. Subcontractor shall defend andindemnify Contractor against all costs, expenses, damagesand liability, including without limitation, legal fees andexpenses resulting from any failure of the Project to achieve

the Owners desired green or sustainable buildingcertification or goals, but only to the extent that such failureto achieve certification or goals results from any fault orneglect or act of the Subcontractor in the performance ofthe Work, or the fault or neglect or act of any entity for

whose work the Subcontractor is responsible.


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April 10, 2012

Understanding Insurance and Bonding


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April 10, 2012

Insurance and Bonding Review and understand insurance policies and bonds.

Are you covered for failure to obtain certification?

Dont count on it.

Read your policy. Call your broker.

Bond companies are taking position that greencertifications are not covered by bonds.

Insurance companies are taking position of wait andsee according to the 2010 Marsh Report

Coverage for green product failures?


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April 10, 2012

Questions?


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A il 10 2012

Thank YouLogan A. Hollobaugh, LEED AP

Ogletree, Deakins, Nash,Smoak & Stewart, P.C.

(312) [email protected]

Matthew J. StraubOgletree, Deakins, Nash,

Smoak & Stewart, P.C.(312) 558-1424

[email protected]