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April 10, 2012 ASHRAE – Illinois Chapter April Meeting Managing Contract Risks on Green Projects
April 10, 2012
ASHRAE – Illinois Chapter
April Meeting
Managing Contract Risks on Green Projects
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
Overview
Managing Contract Risks on Green Projects
April 10, 2012
The Rise of Green Building
April 10, 2012
Rise in Green Building
Approximately $8 billion worth of green construction 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 of
nonresidential market – McGraw-Hill
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
April 10, 2012
Project Delivery Methods
Design-Bid-Build Design-Build Integrated Project Delivery
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 green objectives
Understanding alignment of parties is critical to understanding potential risks.
April 10, 2012
1. Design-Bid-Build (D-B-B)
2. Design-Build (D-B)
3. Construction Manager @ Risk
4. Integrated Project Delivery (IPD)
Project Delivery Methods
April 10, 2012
Design-Bid-Build
• Discourages green value engineering
• Less collaborative
• Delayed contractor involvement
• Expensive post-award changes
Design-Build
• Who is the owner’s ally/advisor?
• Single point responsibility
• Owner typically less-involved
Project Delivery Methods
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
Project Delivery Methods
April 10, 2012
Managing Contract Risks on Green Projects
Mastering Contract Forms
Drafting and Negotiating Contract Terms
Understanding Insurance and Bonding
April 10, 2012
Mastering Contract Forms
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 to organization
Hasty preparation = missing terms and concepts
Understanding forms means opportunity to avoid green pitfalls
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
What’s Out There?
April 10, 2012
AIA – B211-2007 - Commissioning
Covers architect’s services for commissioning• Requires architect to:
▪ Develop a Commissioning Plan, Design Intent Document, and Commissioning Specifications;
▪ Review the contractor’s 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.
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
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?
April 10, 2012
D503-2011 – Sustainable Projects Guide
Not a contract document, exhibit, or addendum that can be incorporated in whole into project contracts.
Provides an overview of some of the key legal and contractual issues that can arise on projects that incorporate sustainable goals.
Includes model contract language that can be added to:• B101-2007 Owner-Architect Agreement
• A101-Owner-Contractor Agreement
• A201-2007 General Conditions
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
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
April 10, 2012
ConsensusDOCS - 310
Remedy Provision:
▪ Moves all tax and financial consequences (i. e. the cost savings) into the category of consequential damages that are subject to waivers of such damages in other construction documents.
Missing Terms:
• Green Guarantee
• Disclaimer of warranties
• Payment of GBF
• Completion Issues
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 if project fails to meet green goals
▪ Waiver
▪ Liquidated damages
▪ Limited obligation to cure
• Art. 6 – Sub. and Final Completion not contingent on certification.
DBIA – Sustainable Project Goals Exhibit
April 10, 2012
Requires retention of independent Commissioning Authority
Missing Terms:• Payment
Fails to Adequately Address:• Other project delivery options
• Obligation for determining regulatory requirements
DBIA – Sustainable Project Goals Exhibit
April 10, 2012
Drafting and Negotiating Green Contracts
April 10, 2012
Conceptual Risks on Green Building Projects
Impossible Promises
Ambiguous/Overlapping Responsibility
Increased Standard of Care
Using traditional contract mechanisms and concepts on a green project
Lack of precedent
Benefits well-known and well-documented
Conceptual Risks
April 10, 2012
Risks on Green Building Projects
Inexperience
• Increased risk of design/construction defects Unrealized Expectations
Learning Curve: Products and Construction Methods
Building Performance Issues
• Regional issues not always considered
Failed Green Certifications
Green construction is regular construction risk with a twist.
April 10, 2012
Lack of Precedent
No appellate case law to date.
Limited LEEDigation: Only a few reported “cases”containing “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
April 10, 2012
What does “Green” mean?
Defining the Green Standard
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!
April 10, 2012
Use Specificity:
Sample Provision:
• Owner's Desired LEED Certification is LEED Certification at the Gold Level under the USGBC’sLEED for New Construction Rating System, version 3.0 - 2009.
• The LEED Responsibility Matrix [Dated/Version], which is attached hereto as Exhibit A identifies the Prerequisites applicable to the Project as well as the Credits the Owner has decided to pursue for the Project.
Defining the Green Standard
April 10, 2012
Green Guarantees
Owner’s Perspective:• A guarantee is ideal (but may not be realistic)
Designer’s Perspective:• Any contract with the word “guarantee” creates
an uninsurable risk and cannot be accepted.
Contractor’s Perspective: • Do not guarantee any level of certification.
• There are too many factors outside the contractor’s control.
• At most, contractors should accept responsibility for the contractor responsible credits.
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 Council’s Leadership in Energy & Environmental Design (LEED Rating System, as specified in Division 1 Section LEED Requirements.”
AIA D503 Recommendation – A201: 3.5.2 • The Contractor shall perform the Sustainable Measures
required to be performed by the Contractor in accordance with the Contract Documents, however, nothing contained in this Section 3.5 shall be construed as a guarantee or warrantyby the Contractor that the Project will achieve the Sustainable Objective.
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 the consequences 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 or
idle time, interest and finance charges, material escalation costs, depreciation, rental costs, additional energy costs, loss of productivity and efficiency
Waiver must be clear and unmistakable
April 10, 2012
Waiver of Consequential Damages
Owner’s Perspective:
• Try not to waive consequential damages – they are typically owner’s biggest risk.
Designer’s Perspective:
• Insist upon a mutual waiver▪ Standard in AIA forms – B101 Owner-Architect
Contractor’s Perspective:
• Contractors should insist upon a mutual waiver on green projects. Shaw Development is a good example of the exposure a contractor may face (i.e. tax credits)
April 10, 2012
Waiver of Consequential Damages
Sample provision Notwithstanding anything contained in Project agreements or this
Rider, the Contractor shall only be responsible for commercially reasonable efforts to achieve the LEED credits shown in the LEED Responsibility Matrix.
Contractor is not liable or responsible for the failure of the Project to achieve the Desired LEED Certification or any intended financialand/or environmental benefits.
Notwithstanding any other provision in Project agreements or this Rider, in the event that the Project fails to achieve the Desired LEED Certification, the Contractor will not be liable for any special, indirect or consequential damages arising in any manner from such failure.
April 10, 2012
Substantial Completion
Owner’s Perspective:
• Will try to tie certification to substantial completion.
Designer’s Perspective:
• LEED Certification is on a different timeline from building completion and occupancy.
Contractor’s Perspective:
• Contractor’s should not allow substantial completion to be tied to certification. Certification could take months and include appeals. This may occur while the owner is occupying the building and receiving the benefit of its use.
April 10, 2012
Substantial Completion
Sample provision:• Substantial Completion:
▪ This provision specifically overrides any and all provisions dealing with Substantial Completion in other Contract Documents. Substantial Completion is the stage in the progress of the Project when the Project or designated portion thereof is sufficiently complete so that the Owner can occupy or utilize the Project for its intended use. Substantial Completion does not depend upon achieving the Desired LEED Certification.
April 10, 2012
Final Completion and Payment
Owner’s Perspective:• Make certification part of final completion.
Designer’s Perspective:• De-couple LEED Certification from final completion by
negotiating additional Post-Completion Phase services. Contractor’s Perspective:
• Same as substantial completion – do not tie final completion to certification. The certification process can take months.
• All certification requirements should be handled through the punch-list and warranty obligations.
• Lien rights
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 upon achieving the Desired LEED Certification.
▪ The Owner may retain 2.5% of the entire Project cost until 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
April 10, 2012
Liquidated Damages vs. LEED Bonus
Owner’s Perspective:
• Add liquidated damages if possible
• LEED Bonuses may incentivize wrong behavior
Designer’s Perspective:
• No liquidated damages.
Contractor’s Perspective:
• Contractor’s should discuss a LEED bonus with the owner alternative to LDs or green guarantees.
• If the parties agree to share the benefits and risks of LEED certification, more likely to result in a successful project.
• The LEED bonus concept will encourage a collaborative atmosphere.
April 10, 2012
Standard of Care
Changes with the profession as practices and competencies change.
Best practices of yesterday 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 and development principles in their professional activities.• Single ply TPO roof (10 years) vs. BUR (30 years)
April 10, 2012
Standard of Care
Derived from statute:
• P.E. must use “reasonable professional skill, judgment and diligence normally rendered by professional engineers in the practice 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
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 proposing material changes.
▪ Make sure you know how it will affect credits.
▪ Proposed language in AIA - D503: – Burden on contractor to determine affect
– Architect’s entitled to rely on contractor’s statements
Contractors should get specific approval from Owner and Designer BEFORE substituting materials.
April 10, 2012
Material Substitutions
Beware of brand name or its equivalent specifications
Consider using standard form to evaluate material substitutions:
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 assigns documentation and credit responsibility.
If you are a contractor or consultant, ask whether a matrix has 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.
April 10, 2012
Sample Matrix
April 10, 2012
Sample Matrix #2
Could be as simple as:
Documentation Responsibility
Owner Responsibility Contractor Responsibility
Design ResponsibilityPrerequisite or Credit
EXHIBIT ALEED CERTIFICATION RESPONSIBILITY MATRIX
April 10, 2012
Flow Down Provisions
April 10, 2012
Flow Down Provisions
Provide that a subcontractor/subconsultant is bound to the contractor/DPOR in the same fashion as the contractor/DPOR is bound to the owner in the prime contract.
Help to ensure that the subcontractor's obligations to the contractor 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
April 10, 2012
Flow Down Provisions
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 didn’t 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 with other project participants
• Don’t sign acknowledgements that you can’t or don’t know
April 10, 2012
Flow Down Provision
Sample:
The subcontractor acknowledges that the work under this subcontract is for a project seeking LEED certification. The subcontractor hereby assumes toward the contractor all the same obligations, rights, duties and redress that the contractor assumes toward the owner and architect/engineer under the prime contract, LEED project requirements, and/or LEED responsibility matrix as they relate to the subcontractor’s work.
April 10, 2012
Indemnification Provisions
Owner’s unrealized expectations = claims and lawsuits
• Attempt to pass liability to the party most responsible for 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
April 10, 2012
Indemnification Provisions
Green/Sustainable Project. Subcontractor shall defend and indemnify Contractor against all costs, expenses, damages and liability, including without limitation, legal fees and expenses resulting from any failure of the Project to achieve the Owner’s desired green or sustainable building certification or goals, but only to the extent that such failure to achieve certification or goals results from any fault or neglect or act of the Subcontractor in the performance of the Work, or the fault or neglect or act of any entity for
whose work the Subcontractor is responsible.
April 10, 2012
Understanding Insurance and Bonding
April 10, 2012
Insurance and Bonding
Review and understand insurance policies and bonds.
Are you covered for failure to obtain certification?
• Don’t count on it.▪ Read your policy.
▪ Call your broker.
• Bond companies are taking position that green certifications are not covered by bonds.
• Insurance companies are taking position of “wait and see” according to the 2010 Marsh Report
Coverage for green product failures?
April 10, 2012
Questions?
April 10, 2012
Thank You
Logan A. Hollobaugh, LEED APOgletree, Deakins, Nash,
Smoak & Stewart, P.C.(312) 558-1429
Matthew J. StraubOgletree, Deakins, Nash,
Smoak & Stewart, P.C.(312) 558-1424
