ASHRAE Illinois Chapter April Meeting

Managing Contract Risks on Green Projects

April 10, 2012

Overview
Managing Contract Risks on Green Projects The Rise of Green Buildings Project Delivery Methods Mastering Form Agreements Drafting and Negotiating Contract Terms Understanding Insurance and Bonding

October 14, 2010

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:

By 2015

$554 billion to the national economy Green jobs will quadruple to 7.9 million

Green construction to represent almost half of nonresidential market McGraw-Hill

April 10, 2012

Rise in Green Building Regulations

International Code Council ASHRAE Standard 189.1

International Green Construction Code released last March 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

Project Delivery Methods

1. 2. 3. 4. Design-Bid-Build (D-B-B) Design-Build (D-B) Construction Manager @ Risk Integrated Project Delivery (IPD)

April 10, 2012

Project Delivery Methods

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
April 10, 2012

Project Delivery Methods

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
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

Whats Out There?

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
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.

April 10, 2012

AIA B214-2007 LEED Certification

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
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

ConsensusDOCS - 310
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.

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

DBIA Sustainable Project Goals Exhibit

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.

April 10, 2012

DBIA Sustainable Project Goals Exhibit

Requires retention of independent Commissioning Authority Missing Terms:
Payment

Fails to Adequately Address:

Other project delivery options Obligation for determining regulatory requirements

April 10, 2012

Drafting and Negotiating Green Contracts

April 10, 2012

Conceptual Risks on Green Building Projects

Benefits well-known and well-documented Conceptual Risks Impossible Promises Ambiguous/Overlapping Responsibility Increased Standard of Care Using traditional contract mechanisms and concepts on a green project Lack of precedent
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

Defining the Green Standard

What does Green mean?

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

Defining the Green Standard

Use Specificity:

Sample Provision: Owner's Desired LEED Certification is LEED Certification at the Gold Level under the USGBCs LEED 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.
April 10, 2012

Green Guarantees
Owners Perspective:
A guarantee is ideal (but may not be realistic) Any contract with the word guarantee creates an uninsurable risk and cannot be accepted. 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.

Designers Perspective:

Contractors Perspective:

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 (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 warranty by 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

Owners Perspective: Try not to waive consequential damages they are typically 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 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 financial and/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
Owners Perspective: Will try to tie certification to substantial completion. Designers Perspective: LEED Certification is on a different timeline from building completion and occupancy. Contractors Perspective: Contractors 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

Owners Perspective: Make certification part of final completion. Designers Perspective: De-couple LEED Certification from final completion by negotiating additional Post-Completion Phase services. Contractors 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

Final Completion and Payment

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.
April 10, 2012

Liquidated Damages vs. LEED Bonus

Owners Perspective: Add liquidated damages if possible LEED Bonuses may incentivize wrong behavior Designers Perspective: No liquidated damages. Contractors Perspective: Contractors 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 Architects entitled to rely on contractors 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:
EXHIBIT A LEED CERTIFICATION RESPONSIBILITY MATRIX Prerequisite or Credit Design Responsibility Contractor Responsibility Owner Responsibility Documentation Responsibility

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 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 with other project participants Dont sign acknowledgements that you cant or dont 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 subcontractors work.

April 10, 2012

Indemnification Provisions
Owners 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 Owners 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? Dont 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 AP Ogletree, Deakins, Nash, Smoak & Stewart, P.C. (312) 558-1429 logan.hollobaugh@odnss.com Matthew J. Straub Ogletree, Deakins, Nash, Smoak & Stewart, P.C. (312) 558-1424 matthew.straub@odnss.com

April 10, 2012