Potential for Twists and Turns in Contracts for Sustainable Building

Potential for Twists and Turns in Contracts for Sustainable Building

In 2016, the Sunshine State ranked fourth in the number of LEED certified projects in the U.S. at 204, according to the U.S. Green Building Council. Florida now is home to more than 1,400 LEED-certified projects. LEED, short for Leadership in Energy and Environmental Design, is the world’s most widely used sustainable or green building rating system.

In the U.S., more than 3,300 projects were LEED certified last year, pushing the national list to about 60,000. Plus there are many projects certified under different ratings systems such as Green Globes, the WELL Building Standard and others. Green building is prevalent across all sectors of the construction industry, including commercial, residential and health care.

Contracts for sustainable projects, however, are often not tailored to address the many issues and nuances that can appear with these types of projects. Whether the project is a new construction or renovations or retrofitting, a sustainability-focused contract is the best way to prevent problems later on.

The contract should be as specific as possible about what the project’s green goal is. Simply using terms like green building, sustainable building or high-performing building are not enough because it is unclear what the precise goal is. For example, if a project is aimed at reducing a building’s electricity costs by a certain percentage range, that goal should be identified in the contract. In addition, an owner may require a third-party green rating certification like LEED. Which rating system and which level within that system is sought to be achieved should be identified so everyone knows what is expected. Related to this issue is which party will bear the costs for certification fees, inspections and tests that may be necessary to obtain a green rating. Again, this is best addressed in the contract.

The contract should also reflect who is responsible for achieving the project’s green goals. That might be a design professional like the architect or an engineer. Or it may be general contractor, subcontractors, suppliers, a sustainability coordinator or a combination of construction professionals. Each segment of the construction project should be aware of what responsibilities it is undertaking in the green building process. And the person or entity which is responsible may want to bargain for a better deal for taking on the added risk.

Project Guarantees

All contracting parties should be aware of what guarantees are made or received in terms of sustainable performance or certification. For instance, if a contract requires LEED gold certification but the final product does not achieve that, the contract should be clear about what the repercussions are.

Similarly, the contract can address what happens when a component such as a solar energy system or a heating, ventilation and air-conditioning unit does not achieve the level of performance a contractor or other party represented.

Although quantifiable damages may be derived, there will likely be disagreements as to what they are. For example, if the purpose of building green was to achieve certain tax credits and those credits are not achieved, they may become the measure of damages. Damages may be more difficult to ascertain in other performance metrics. Contracting parties may also want to consider capping those damages or setting forth a method to measure them.

An alternative to a guaranty is a performance bonus or bonuses based on the certification or performance levels achieved. In other words, a contract will describe a base fee for services on the project and then allow for additional compensation depending on level of certification the building gets or based on the level of performance of the building after occupancy.

This is helpful because of the difficulties in guaranteeing those types of variables on certain projects. Green building warranties may also be provided but carry greater obligation or risk to the warranty provider. The parties can also tie final completion benchmarks to the achievement of the sustainable goal, depending on the type of project.

Contracts for sustainable construction projects are unique. Reliance on the standard building contract may not suffice. Goals, methods, specifications and components can vary significantly. But all parties involved in a sustainable building project have added incentive to consider and address the issues that may appear.

If the issues are not properly addressed at the beginning of the project, the chances for dispute and litigation will significantly increase. As the old saying goes, an ounce of prevention is worth a pound of cure.