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Building Green Without Losing Green: Managing Risks In Sustainable Design And Construction Contracts

The green building movement has profound implications for owners, design professionals and contractors. Although much has been written about the growing momentum of green development and the increasing application of green rating standards, surprisingly little has been published addressing the identification and management of risks associated with green design and construction. This article analyzes green risks from the differing perspectives of the owner and the architect/contractor.

It is difficult to read a newspaper or a magazine these days without noting a reference to “green construction” or “sustainable design.” The Owner1 of New York City's iconic Empire State Building recently announced a $20 million green investment to retrot that landmark so that it will operate in a more environmentally responsible manner.2 Announcements of new corporate headquarter buildings are routinely accompanied by references to the green standards by which the buildings will be designed and constructed.3 Federal, state and local legislative bodies and agencies have enacted numerous laws and regulations mandating or incentivizing green development.4

In the commercial development sector, the increasing use of the green building model may be attributed to four driving forces:

  • Government mandates;
  • Tenant demand;
  • Return on investment; and
  • Risk management.5

There is a growing list of federal, state and local governments requiring that new construction comply with LEED criteria. At the federal level, for example, the Department of Agriculture requires all new buildings or major renovation projects to earn a minimum of LEED silver certification6 while the Environmental Protection Agency requires all new buildings over 20,000 square feet to achieve LEED gold certification.7 At the state level, by way of examples, the State of Arizona requires all state-funded buildings to achieve LEED silver certification8 and the State of California has a similar requirement for all new state buildings to achieve a minimum LEED certification of silver.9 At the local level, the City of New York requires all city projects over $2,000,000 to earn at minimum a LEED silver certification10 and the City of Los Angeles now requires all private development of 50,000 square feet or greater to achieve a minimum level of LEED certified status.11 The USGBC Web site contains a frequently updated list of federal, state, and local government mandates and incentives for green development.12

Escalating energy prices, disruptive power outages, green marketing efforts, and pervasive coverage of the effects of global warming have all served to raise public awareness and stimulate tenant demand. Corporations both large and small are seeking to align themselves with green products and initiatives including green buildings. Established green organizations such as The United States Green Building Council (“USGBC”) expressly emphasize the improved quality of indoor environments and “enhanced occupant comfort and health” in green buildings which serves to further stimulate the tenant demand side.13

One of the core principles of green development is energy efficiency. The lower operation and maintenance cost ostensibly offered by green buildings is attractive to both owners and tenants. Owners appreciate how lower operation and maintenance costs improve budgets and asset values. Tenants responsible for paying utilities like the lower lease payments associated with reduced utility costs.

The fourth driver of the green wave in commercial development relates to forward-thinking developers seeking to avoid building marginalization. Although there is currently a relatively low penetration of green building inventory, those numbers are changing. As the market share of green buildings increases and green buildings become more and more the norm instead of the exception, Owners of non-green buildings are likely to find themselves at a competitive disadvantage. In the future, non-green buildings are likely to see lease non-renewal rates increase as tenants move to green buildings. Additionally, the frequently higher operation and maintenance costs of the non-green buildings will serve to make such buildings less attractive to both tenants and prospective purchasers.

The green building movement has profound implications for Owners, design professionals and contractors. Although much has been written about the growing momentum of green development and the increasing application of green rating standards, surprisingly little has been published addressing the identification and management of risks associated with green design and construction. The risk subjects (e.g., standard of care, damages, scope of services, etc.) represent traditional areas of contractual risk. These traditional risks, however, merit fresh review and rethinking in light of the new practices introduced by green building. In the context of identifying significant risks applicable to green design and construction contracts, this article analyzes green risks from the differing perspectives of the Owner and the Architect/Contractor. Although there are several recognized green building rating agencies, this article assumes the application of the USGBC's Leadership in Energy and Environmental Design (“LEED”) rating system.

The Emergence of LEED

Fulfilling the promise of its ambitious acronym, LEED has become the preeminent environmental rating system applicable to commercial buildings. The USGBC's LEED standard was first introduced in pilot form in 1998. In 2000, LEED version 2.0, applicable to new commercial buildings, was released as the first official LEED standard. In the course of a few years, LEED became established as the most well-recognized and cited green building rating tool. LEED's preeminence may be attributed to the following factors: (i) LEED provides a clear definition of green that references existing third party standards and codes; (ii) LEED provides a point system that appeals to the inner competitor in all of us and bestows Olympic-medal-like recognition on “high scorers,” including silver, gold, and the highest level, platinum; and (iii) the USGBC published LEED only after receiving preliminary acceptance from a number of prominent federal government agencies. 14

The USGBC confirmed recently that the numbers of both LEED-registered and LEED-certified projects doubled in 2008 — from about 10,000 registered projects at the end of 2007 up to more than 20,000 registered projects by the end of January 2009, while square footage of LEED-certified construction rose 92 percent during that same time period, from 148,000,000 square feet to 284,000,000 square feet.15 As of February 1, 2009, various LEED initiatives, including legislation, executive orders, resolutions, ordinances, policies and incentives are found in:

  • 12 federal agencies or departments;
  • 31 state governments;
  • 186 localities (including 122 cities, 34 counties and 30 towns in 44 different states);
  • 15 public school jurisdictions; and
  • 39 institutions of higher education across the United States.16

The success and popularity of the USGBC and LEED are further reflected in the growth of the USGBC's membership since its relatively recent creation. Over the past five years, the non-profit USGBC has doubled its membership to more than 16,000 members.17 Also noteworthy is the success of the USGBC's annual Greenbuild Conference. The 30,000 attendees in 2008 were more than seven times the number in attendance at the inaugural 2002 conference.18 As of April 2009, the USGBC had recognized over 100,000 LEED-accredited professionals (“LEED-AP”).19 The LEED-AP designation is granted after the applicant has sat for and passed an examination testing the applicant's knowledge of LEED criteria and principles of sustainable design. Finally, a number of large public corporations have begun seeking LEED certification for new buildings breaking ground. The list of such companies includes Office Depot, Wal-Mart, Starbucks, McDonald's, Target, Home Depot, and Whole Foods.20

The year 2009 promises to be a significant year in the evolution of LEED. Beginning in 2009, the USGBC transitioned control over the certification of LEED-registered buildings to the Green Building Certification Institute (“GBCI”), a non-profit affiliate of the USGBC. Actual certification of buildings will be performed by independent, accredited certifiers overseen by the GBCI. In announcing the transition, the USGBC indicated that the outsourcing of certification services should allow the USGBC to better manage the increasing demand for LEED certification of buildings and improve customer service.21 Additionally, effective April 27, 2009, the USGBC rolled out the long-anticipated version 3 for the LEED new construction (“NC”) rating standard. The new version 3, unlike prior LEED NC versions, has a realigned credit structure that includes (i) eight years worth of market and user feedback in the form of precedent-setting Credit Interpretation Rulings, (ii) revised credit ratings that assign credits based on relative impact towards achieving green goals, and (iii) regionally sensitive credits awarded on the basis of satisfying geographically prioritized environmental objectives.22

Identifying and Managing Risks in the Sustainable Design Contract

The Architect23 obviously plays a critical role in the creation of a green building. The majority of LEED credits must be incorporated into the design documents (and, later, the construction contract documents) in order to have a reasonable prospect of achieving a targeted LEED certification level. Depending on particular contract negotiations, as well as Owner and design professional preference, the Architect on a particular project may or may not be the LEED consultant with responsibility, among other things, to identify attainable LEED credits, administer documentation of LEED credits and interface with the GBCI in pursuit of registration and certification goals.24

From a distance, green building projects appear to be built with project delivery systems similar to those of non-green buildings. It is easy for Owners, Architects, and their legal counsel to utilize the standard forms of agreement to document the Owner-Architect contractual relationship for a green building. Following this path of least resistance will, however, inevitably lead to ambiguity, misalignment of expectations, and attendant claims. Accordingly, it is incumbent upon Owners, Architects and their counsel to recognize the special risks associated with green building design and address those risks expressly and unambiguously in the Owner-Architect contract. Looking through a green prism, this article examines traditional areas of contractual risk in light of new green practices and considerations.

Standard of Care

In today's marketplace, Architects and architectural firms are frequently holding themselves out as specialists in “sustainable design.” Individual Architects are marketing themselves as “LEED-accredited professionals” or “LEED-AP.” This professed expertise and “accreditation” open the door to the design professional being held to a higher standard of care on green projects. From an Owner's perspective this may at first blush appear to be a good thing. Owners, however, need to be mindful of the fact that certain professional liability policies exclude coverage for the Architect if a higher standard of care is voluntarily assumed by the Architect in its contract. The professional liability insurance market utilizes a variety of base policy forms in contrast with the Contractor insurance market which employs a standard ISO form for general liability coverage. To avoid the risk of loss of coverage, Owners (and Architects) and their counsel need to insist on reviewing the Architect's professional liability policy prior to executing a design contract which calls for the Architect to assume a heightened standard of care.

In light of the fact that the LEED-AP designation has frequently been issued to persons with no prior experience designing a green building, there exists an enhanced risk of “overselling” the individual's or firm's green expertise and capability. While design professionals are always subject to the risk of “overselling” their design expertise, the presence and use of the LEED-AP accreditation adds a new element and serves to materially increase the risk of a higher standard of care being applied to the design professional. Individual Architects and design firms need to weigh the benefits of aggressive marketing of green expertise or LEED accredited professional status against the risk of being held to a higher standard of care than their particular experience would otherwise justify.

The standard of care applicable to the Architect on a green building project should be plainly articulated in the contract between the Owner and Architect. So long as the contractual standard of care is consistent with the professional liability policy (and the Architect's actual experience), the Owner will want to hold the Architect to a standard of care that requires the Architect to provide services in accordance with other LEED-APs with significant prior experience designing sustainable buildings in compliance with LEED NC guidelines. In the absence of such language or similar language, the Architect may be able to convince a court that an effectively lower standard of care governs, which is applicable to Architects in general operating in the same region and at the same time. Architects and their professional liability insurers are motivated to avoid assuming any obligation to perform services under a higher than normal standard of care. Both Owners and Architects have an interest in clearly articulating the applicable standard of care, which should reflect the design professional's actual green design experience/expertise and be consistent with the coverage requirements in the professional liability policy.

Multiple Prime Consultants

LEED projects typically call for a person or firm to serve as the “LEED consultant.” The role of the LEED consultant is to work with the Owner, design team and contractor to

  • Identify achievable LEED points;
  • Prepare a LEED Certification Plan;
  • Review the progress of design and construction to ensure conformity with the LEED Certification Plan;
  • Oversee the documentation of LEED credits; and
  • Interface with the GBCI for purposes of obtaining registration and certification of the green building.

Architectural firms will frequently seek to have the LEED consultant be an employee of the Architectural firm or, at minimum, a subconsultant under the Architect. Design firms typically do not want to forego the fees associated with the services of the LEED consultant and prefer the more comfortable working relationship offered by an employee or selected subconsultant serving as the LEED consultant (in lieu of a third party consultant under contract with the Owner).

It should be obvious, however, that assuming the responsibilities of the LEED consultant adds materially to the risk profile of an architectural firm. If the LEED consultant were the Owner's separately retained direct consultant, the Architect would be in a far better position to transfer or share liability on any potential green-related claim. Architects desiring to aggressively manage risk on green projects should advocate for the LEED consultant to be retained by the Owner or by the Architect as a subconsultant. Whether the LEED consultant is retained by the Owner or the Architect, the contract should require that the LEED consultant maintain a specified amount of professional liability coverage for the duration of the project and a stated period of time after project completion.

Assuming the Owner has done its due diligence and satisfied itself that the architectural firm or the subconsultant has the requisite LEED experience to serve as a LEED consultant, the Owner may be better served by having the LEED consultant working as a subconsultant under the Architect. The problem with the Owner retaining a separate LEED consultant is the inevitable finger pointing between prime consultants in the event of a green-related claim overlapping their collaborative scope of services. The preferred solution for the Owner involves having the LEED consultant contract as a subconsultant under the Architect with a separate professional liability insurance policy. In this context, the Architect would be vicariously responsible for its subconsultant's errors and omissions. The Architect would not then be able to engage in the nger pointing exercise associated with multiple prime consultants. Additionally, having the LEED consultant as a subconsultant with separate professional liability coverage will serve to increase (when compared to the LEED consultant as Architect's employee) the available amount of insurance coverage in the event of a covered green-related professional negligence claim. In turn, the spreading of liability between several policies will facilitate ultimate settlement of a green-related claim and work to the benefit of both Owners and Architects.

Insurance Issues

Insurers and their representatives have clearly stated their serious concerns about the increased exposure to claims arising from the design of green buildings.25 In the context of professional liability claims, underwriters are reportedly “terrified” of the new and poorly understood risks specific to the green market.26 Stephen Bushnell, a Director at Fireman's Fund, has said, “The number and scope of the risks have not been sorted out yet, and they probably won't be for another 10-15 years.”27

Professional liability insurers have not at this point introduced any new green-building liability products covering design professionals. Although there are currently no green liability insurance products specifically tailored to design firms engaging in sustainable design projects, insurers have introduced green property insurance products.28

Despite the current unavailability of a green endorsement on a professional liability policy, there is no reason for Owners (or Architects) to question the applicability of existing professional liability policies to many of the more likely green-related claims. Of course, the same exclusions that have applied traditionally to standard non-green design contracts will apply with equal force to green design contracts (e.g., no coverage for intentional acts, punitive damages, betterment, first costs, etc . . .).

The property insurer ACE USA offers a green building endorsement on its builders risk insurance product. This green building endorsement offers a benefit to Owners, developers, contractors, and design professionals. The endorsement is intended to address the insured's potential financial loss arising out of changes in environmental standards, repairs using green materials, additional debris-removal expenses (covering recycling of debris), and loss of green tax credits (due, for example, to late completion of the project as a result of some covered casualty event).29

For its part, Fireman's Fund, as part of its Green Gard suite of insurance products, is offering an endorsement on their property policies for Building Commissioning Coverage. After a covered loss, Fireman's Fund will cover the cost to hire a commissioning engineer to ensure that the building systems (i.e., mechanical, electrical and plumbing) operate at optimal performance levels and in a manner compatible with each other. This additional coverage also will pay for the commissioning engineer to run a test and balance on the mechanical system regardless of it being directly involved in the covered loss.

Scope of Services

The description of the Architect's scope of services has always been an important component of the Owner-Architect form of agreement. In the context of green building design, however, the standard AIA contract language is inadequate to properly describe the Architect's green design responsibility. The traditional form contracts should be modified to accommodate new green processes and practices.

The first mistake to avoid is any attempt to reduce the Architect's green design obligations to achieving a “silver” or “gold” LEED certification for a particular building. As discussed below, there are sound legal reasons for both the Owner and Architect to avoid this type of oversimplifying reference in the Owner-Architect Agreement. More fundamentally, however, the problem with a simple reference to achieving a certain level of LEED certification is that it fails to assist the parties in thinking through and negotiating at the front end the processes that will be utilized during the design (and construction) phases to achieve the intended level of green certification.

Both Owners and Architects should insist on a contract that describes how the LEED design will evolve during the life of the project. For example, the contract may expressly specify that the LEED consultant (or Architect) will be primarily responsible (with input from Owner, design team and Contractor) for generating a Preliminary LEED Certification Plan by the conclusion of the schematic design phase. The contract should require the Owner to expressly approve the content of the Preliminary Certification Plan. The preliminary Certification Plan describes all potential LEED points on a matrix and identifies on the matrix by categories (e.g., most likely, likely, unlikely and highly unlikely) the entire array of potential LEED points. The matrix also identifies who (e.g., Architect, engineer or contractor) is primarily responsible for achieving each specific targeted credit. This Preliminary Certification Plan will serve to guide the design team as it progresses from the schematic design phase into the design development phase. As the design evolves and the Owner is in a better position to perform meaningful budgeting exercises, there will be opportunities for the Owner, LEED Consultant (or Architect), design team and Contractor to refine the original Preliminary Certification Plan.

The Owner-Architect contract should then identify when the Certification Plan should be prepared. The milestone for the Certification Plan may, for example, be set at 100 percent design development documents. Whenever in the evolution of the design the contract requires the creation of the final Certification Plan, the contract language should also expressly direct that the Architect's scope of services will be amended to incorporate the Certification Plan into the Owner-Architect Agreement. The Certification Plan should expressly identify those targeted LEED credits that are the responsibility of the Architect and its subconsultants to achieve within the design of the green building.

The LEED Certification Plan must be a consensus-driven document that reflects the agreement of the Owner, design team, and LEED consultant with respect to both identifying targeted credits and allocating responsibility among the team members for each targeted LEED credit. The original Owner-Architect Agreement should contemplate that the contract will be amended by the incorporation of the Certification Plan into the Owner-Architect Agreement at the point in time specified in the contract when the parties anticipate that the design process will be sufficiently advanced to permit the creation of the Certification Plan.

The Certification Plan should not simply address the LEED credits that are the responsibility of the Architect and its subconsultants. It should also address those LEED credits that the Contractor will be primarily responsible for achieving. It is critical to identify the LEED credits the Contractor must earn so that those credits may be properly identified in the Owner-Contractor agreement and so that the Architect may ensure that specifications are prepared detailing the Contractor's responsibilities for achieving those Contractor-related LEED credits.

Finally, the Certification Plan should also clearly reflect what credits are not being targeted. For the sake of clarity, it is as important to record the credits that will not be targeted as those that are targeted. Owners should understand that any credits left hanging under a column marked “maybe” or the like will be treated by the Contractor as a “no” unless the Contractor is expressly directed to include the item in its price.

Although the process for creating the Certification Plan is not one most Owners are accustomed to, the benefits of adding contract language that describes the process for creating a Certification Plan should be obvious. First, the Certification Plan process compels the Owner to take its eye off the “golden prize” and focus on the cost/benefit analysis attendant to the earning of each LEED credit. Secondly, describing the Architect's design scope and responsibilities by reference to specific credits (as opposed to achieving a certain level of LEED certification) serves to add clarity to and remove ambiguity from the issue of design team responsibility for achieving green goals. Finally, the act of allocating specific credits to the design team (and the contractor) will ultimately serve to more clearly identify responsibility and liability at the conclusion of the project if the desired level of LEED certification is not achieved (as a result of the credits specified in the Certification Plan not being achieved). Without reference to a matrix specifying the party responsible for achieving each particular targeted credit, the collaborative nature of the green design process would naturally tend to produce fragmentation and diffusion of responsibility in the event of failure to achieve desired LEED certification levels. For example, in the absence of a detailed Certification Plan allocating responsibility for specific credits, an Architect may seek to deflect responsibility by noting certain unearned credits that are the responsibility of a different prime consultant or the Contractor whether or not such credits were seriously targeted by such prime consultant or Contractor. The presence of the Certification Plan will serve to greatly reduce the ambiguity that would otherwise exist in this context.

Creation of the Certification Plan will also serve to identify for the Owner what type of “margin for error” the Owner has in the proposed LEED point totals. If the Owner is firmly committed to achieving a LEED gold certification, for example, the creation of the Certification Plan will enable the Owner to evaluate the relative risk it faces of failing to achieve the desired certification level. It will be important for both the Owner and Architect to know as early as possible how great or small a margin for error exists, based on the LEED Certification Plan. It would be prudent for both Owners and Architects to build as much “contingency” into the Certification Plan as possible by including several more points in the Certification Plan than are necessary to achieve the desired level of certification.

Patent Infringement

Along with the recent rapid growth of the green building movement, there has been a proliferation of new green building products and systems. Manufacturers and distributors of these building products and systems market them as energy efficient or environmentally sustainable. Additionally, a number of new products and technologies are being imported from Europe and other countries for use in the United States. Manufacturers and distributors of these products will claim that the product “has been used for years in Europe.” Such claims are frequently difficult to investigate and are typically not researched in depth during the design process.

Due to the above factors, Owners building a green building need to be sensitive to the higher likelihood of patent infringement activity on an innovative green building project. In order to protect themselves, Owners need to ensure that there is an adequate indemnity undertaking by the Architect in favor of the Owner in the event of a claim of patent infringement arising from products or technology specified by the Architect. The AIA B101-2007 form of Owner-Architect Agreement does not contain any indemnification clause in favor of the Owner. Accordingly, Owners and their counsel will need to add an appropriate intellectual property indemnification clause to any AIA Owner-Architect form of agreement. Owners should require that the Architect defend, indemnify and hold them harmless from such intellectual property claims. Interestingly, the AIA's A201-2007 form of General Conditions to the Owner-Contractor agreement at § 3.17 contains an intellectual property-related indemnification clause by the contractor in favor of the Owner. This clause may be readily modified in the design context as follows: “The Architect shall defend, indemnify and hold the Owner harmless from claims for infringement of copyrights and patent rights when a particular design, process or product of a particular manufacturer or manufacturers is required by the contract documents or where the copyright or patent violations are contained in drawings, specifications or other documents prepared by or on behalf of the Architect.”

It is difficult for the Architect to argue during contract formation that it should not be responsible for copyright or patent infringement resulting directly from its design work. In order to mitigate this risk, the Architect needs to confirm that it has sufficient insurance coverage for such risk and that new products and technologies have been adequately investigated prior to inclusion in the project design. Architects should not assume that the advertisement injury part of their General Liability insurance policy will provide coverage for IP claims. The advertising injury coverage has been narrowed over the past few years to provide coverage only for IP claims arising out of an actual advertisement and not drawings or specifications. Although the market for IP insurance products covering claims for patent and copyright infringement is cyclical, there are a few carriers that are currently wording such policies. The Architect should direct its insurance agent to investigate and obtain pricing for such coverages so that a proper cost/benefit analysis might be undertaken.

Green Guaranty

Owners building a green building will naturally desire to have the Architect commit to the delivery of a green building achieving a certain desired level of LEED certification (e.g., silver or gold). In fact, language in the Owner-Architect Agreement stating or suggesting that the Architect is warranting or guarantying the delivery of a “LEED silver” or “LEED gold” building is undesirable for both Owner and Architect.

An Owner will not want to insist on a green guaranty from the Architect because such a guaranty or warranty from the Architect will not be insurable under the Architect's professional liability insurance. Architectural firms typically do not have a substantial capital structure and the professional liability policy is the primary source of compensation likely to be available to the Owner in the event of professional negligence by the Architect. Accordingly, the sophisticated Owner will not want to insist on a green warranty or guaranty from the Architect when such language is likely to void coverage under the applicable professional liability policy.

Architects obviously will want to avoid a green guaranty or warranty for several reasons. First, the Architect, like the Owner, wants to know that in the event the Owner brings a claim against it arising from a failure to achieve the expected level of green certification, the Owner's claim will be covered by the Architect's professional liability policy. Secondly, whether a particular green building achieves a certain level of LEED certification depends on factors beyond the Architect's control. For example, the Architect cannot control whether the contractor will perform its obligations in a manner sufficient to achieve the LEED credits expected from the contractor and necessary to achieve a certain level of LEED certification for the building.

Architects also need to be aware that LEED credit submittal templates include a declaration wherein the person signing (frequently the Architect) is certifying the accuracy of the information recited in the LEED credit submittal template. In order to avoid coverage issues associated with warranting services or information, the Architect and Owner should consider including language in the Owner-Architect Agreement such as the following:

The signing of any declaration or certification as part of any LEED credit submittal is for purposes of LEED certification only and any such declaration or certification signed by the Architect shall reflect the Architect's professional opinion to the best of his/her knowledge and belief and does not constitute a warranty or guaranty by the Architect  or the design firm.

The undesirability of including a “Green Guaranty” in the Owner-Architect Agreement only serves to underscore the importance of the description of the Architect's scope of services. As discussed above, it is critical for both the Owner and Architect that the scope of services (through the inclusion of a LEED Certification Plan) clearly identifies targeted LEED credits and the person primarily responsible for achieving each targeted LEED credit. Contracting for a specific scope will increase the likelihood of designer accountability and insurance coverage for unexcused failures to meet professional contractual undertakings.

Building Performance Issues

The performance of a green building and, specifically, its relative energy efficiency and operating costs are where the rubber meets the road in green development. Both Owners and tenants will expect the green building to have better indoor environmental quality at a lower operating cost than a comparable nongreen building. Accordingly, particular attention needs to be paid to building performance issues in the design and construction contracts.

The LEED rating system recognizes the importance of the performance of building systems and requires the Owner to retain a commissioning consultant as part of the LEED certification process. The commissioning consultant may be an employee of the LEED consultant or a separately-retained Owner consultant, but must be independent of the project's design and construction team (when the project exceeds 50,000 sq. ft.). The Owner-Architect Agreement should contemplate the Owner retaining a commissioning consultant and should specify the commissioning consultant's scope of services, which should include, at minimum, the following:

  • Development of an outline of commissioning criteria during design;
  • Review and comment on design development documents;
  • Preparation of a proposed construction phase commissioning plan;
  • Development of commissioning specifications;
  • Review and comment on construction documents;
  • Site observation during key phases of construction;
  • Creation and maintenance of logs and other reporting documentation required as submittals for LEED certification;
  • Review of operation and maintenance manuals and warranties;
  • Training and orientation of Owner facility personnel;
  • Preparation of a recommissioning manual; and
  • Conducting of system reviews during the warranty periods applicable to the mechanical systems.

In brief, the role of the commissioning consultant is to plan, coordinate and document the building commissioning process beginning during the design phase and continuing through the post-occupancy warranty period.

The vital role of the commissioning consultant and the nature of its interface with the Architect and design team needs to be spelled out in the Owner-Architect Agreement. Architects will want to ensure that the services of the commissioning agent are performed in a manner that do not cause delay to the completion of the design documents, including the specifications. Architects will want to include language in the Owner-Architect Agreement excusing any delays caused by failure of the commissioning consultant to timely complete its work. Owners will want to ensure that their contracts with the commissioning consultant contain requirements for the commissioning consultant to complete its services in a manner that does not cause delays to the design team.

When it comes to building performance goals, Owners should require the Architect and its engineers to commit to a certain percentage of operating efficiency above and beyond that expected of a baseline code-compliant non-green building. The LEED credit system under the category of “Energy & Atmosphere” provides for an increasing quantity of earned points based on the relative predicted optimization of energy performance of the green building. The scale ranges from one point awarded for a 12 percent improvement over baseline code to 19 points awarded for a 48 percent improvement over baseline code energy performance. The development of the Certification Plan and its eventual incorporation into the Owner-Architect Agreement will serve to document the energy efficiency standard the design team is obligating itself to achieve in the building design.

The key about building performance for the Owner and Architect to keep in mind is that the design of the building's systems is only one of several activities that must be performed well for the building to actually achieve the superior indoor environmental quality and efficient system operation expected of a green building. Other critical activities that will materially affect the building performance include the contractor's management of indoor air quality during construction, operation of building systems in accordance with manufacturers' guidelines and the commissioning plan, and maintenance of building systems in accordance with manufacturers' guidelines and the commissioning plan.

Importantly, maintenance of indoor air quality during construction, and operation and maintenance of the building systems after substantial completion of construction are beyond the control of the Architect. Accordingly, it is unreasonable to expect the Architect and its engineering design team to “guarantee” actual building performance that equates to a specified percentage better than baseline code performance would predict. By the same token, however, it is not unreasonable and an Owner should insist that the design team commit to a building that, as designed, will achieve a stated percentage improvement in energy efficiency over the baseline predicted by building code minimum requirements.

Additional compromise language reflecting the legitimate expectations of the Owner and reservations of the Architect may involve the Architect agreeing that “the building will perform in accordance with the predicted energy optimization subject to (i) the Contractor performing in accordance with the Construction IAQ Management Plan during construction, (ii) commissioning of the building systems in accordance with the commissioning plan, and (iii) operation and maintenance of the building systems in accordance with the commissioning plan and manufacturers' recommendations.”

Damages

The failure of a building to achieve LEED certification or the anticipated level of LEED certification is likely to have serious financial consequences for the Owner. A building's failure to achieve LEED certification may result in:

  • Termination of leases;
  • Reduction in lease payments;
  • Breach of a loan covenant;
  • Forfeiture of government approvals;
  • Loss of tax credits;
  • Lost profits from sale of building; and
  • Loss of reputation.

Many if not all of the above categories of damages fall under the umbrella of “consequential damages.” In 1997, the AIA contract documents introduced a mutual waiver of consequential damages into their commonly utilized Owner-Architect and Owner-Contractor forms of agreement. Since the inclusion of this mutual waiver in the AIA template, Architects have grown accustomed to demanding and receiving a mutual waiver of consequential damages clause in their Owner-Architect forms of agreement. Owners have frequently (and correctly) pointed out that the Owner typically gives up far more with its waiver of a right to recover consequential damages than does the design professional (or contractor).

The first issue that must be addressed on the subject of risk allocation for damages is the treatment of recovery of consequential damages. Owners should not be expected to waive all rights to recover consequential damages. Similarly, it is unrealistic to expect Architects to assume open-ended exposure to all of an Owner's consequential damages in exchange for the compensation paid to the Architect under the Owner-Architect Agreement. The most likely way to bridge the gulf between the positions of the Owner and Architect is through employment of either a liquidated damages clause or a limitation of damages clause.

In the event the building fails to achieve LEED certification or fails (as a result of design negligence) to achieve the anticipated level of LEED certification, the parties may agree that a stipulated amount of liquidated damages shall be recoverable by the Owner. There may be a different (and higher) liquidated amount if the building fails to achieve any level of LEED certification as opposed to achieving a lower level of LEED certification than originally targeted. As long as the stipulated liquidated amount bears some reasonable relationship to anticipated losses of the Owner, it is likely to be enforced.

The use of a limitation of liability clause offers more flexibility to the parties and may be more useful as a means of addressing exposure for consequential damages. One approach employing a limitation of liability clause would involve simply reciting that “in no event shall the Architect be liable for consequential damages in excess of the total sum of $1,000,000.00.”

A more nuanced approach to the limitation of liability issue would resemble the following: “The Architect's liability for any consequential damages suffered by Owner shall not exceed the sum of $500,000.00 or the available amount of Architect's applicable insurance coverage, whichever is greater.” The foregoing clause would allow the design professional to negotiate a lower “uninsured” liability limitation while at the same time offering the Owner a potentially significantly higher limitation of liability to the extent that the Architect has in place responsive professional liability coverage in excess of $500,000.00. By way of contract, the Owner can ensure that the Architect carries professional liability coverage substantially in excess of the uninsured limit negotiated in this clause. From the Owner's perspective, there is generally a poor likelihood of recovery of substantial damages (whether direct or consequential) from the Architect in the absence of applicable professional liability insurance coverage.

Both Owners and Architects will want to have their legal counsel carefully review the relationship between the liquidated damages or limitation of liability clause and any mutual waiver of consequential damages clause found in the proposed form of agreement. Assuming the parties agree to the Owner's right to recover a portion of its consequential damages in the form of liquidated damages or a specified limitation of damages, the form mutual waiver language will need to be eliminated or, more likely, modified to expressly permit the recovery of consequential damages as specified in the liquidated damages clause or as constrained by the limitation of liability agreed upon by the parties.

Tenant Claims

One of the frequently cited major benefits of building green lies in the promise of enhanced indoor environmental quality. The mainstream media and industry sources, including the USGBC Web site, for example, expressly discuss how the superior indoor environmental quality in green buildings leads to healthier, happier and more productive tenants and building occupants. Inevitably, there have been and will be particular “green buildings” that for a variety of reasons fail to deliver on the promise of superior indoor environmental quality. The combination of an underperforming building and outsized expectations from tenants will produce tenant claims and litigation activity.

In order to protect against the risks of such claims, Owners should add language to their standard form of lease agreement that expressly disclaims any express or implied warranty that the green building or the tenants' lease space will reduce the number of employee sick days and increase productivity. This may be a delicate balancing act for Owners who will not want to dampen or temper the enthusiasm of tenants for the anticipated green space. The following language is suggested as one way to address this issue:

Owner (or lessor) makes no representations, express or implied, regarding the relative health and productivity of employees working in the building. A variety of factors (many of which are beyond the control of Owner) affect employee health and productivity and Owner shall not be liable for any claims by tenant, whether for damages, or rent abatement or other cause of action, arising out of or relating to employee sick days or loss of productivity.

Architects will obviously benefit from Owners including such clauses in their standard form of lease agreements since such disclaimers will tend to reduce suits against Owners and related Owner claims against Architects. Architects do not contract with tenants and have no way of mitigating the risk contractually with tenants. Architects can, in their agreements with Owners, seek to require the Owner to “use its best efforts” to include a disclaimer such as the one suggested above in their standard form of lease agreement. Alternatively, and more aggressively, an Architect may seek to have the Owner in the Owner-Architect Agreement waive or release any claims against the Architect for increased tenant sick days and decreased productivity-based claims.

Claims by a tenant for damages or rent abatement relating to increased sick days and decreased  productivity fall within the category of damages known as “consequential damages”. As such, without any specially drafted clause, such claims would be waived as between the Owner and Architect in the standard AIA B101 (2007) form of Owner-Architect Agreement which includes a mutual waiver of consequential damages. Owners who do not intend to release the Architect from liability for such claims will need to strike or, at minimum, modify the mutual waiver of consequential damages clause to preserve this claim against the Architect.

Identifying and Managing Risks in the Sustainable Construction Contract

Although, for good reason, the Architect's role in the evolution of a LEED building has received substantial attention, the Contractor also plays a significant role and is a critical team member on a green building project. Depending on the particular credits targeted in the Certification Plan, a Contractor may be responsible for as much as one-third of the total targeted credits. Accordingly, it is  important for the Owner-Contractor Agreement to clearly describe the responsibilities allocated to the Contractor related to achieving a LEED certified building.

Initially, many Contractors were reluctant to accept the new additional paperwork and administrative responsibilities associated with documenting credits for a LEED certified building. Over the past few years, however, as Contractors began to understand that sustainable development was here to stay and not a passing fad, more Contractors began to see green development as an opportunity and not a burden. Contractors across the country have encouraged key employees to become LEED AP's and have sought to position themselves as the “Contractor of choice” for green construction projects. As in the case of Architects, however, both Owners and Contractors need to carefully review existing construction contract templates to make the necessary revisions to reflect and mitigate against the emerging green risks present in sustainable construction contracts.

Delays

Time of performance and construction delays have long been the subjects of close review in Owner-Contractor Agreements. The presence of a green construction project, however, serves to add new sources of delay to the familiar litany of delay events on nongreen buildings. New green delays, for example, may arise from the following circumstances: (i) unavailability of sufficient quantities of regional materials, (ii) unavailability of sufficient quantities of recycled content materials, and (iii) unavailability of sufficient quantities of certified wood materials.

The difference between the green-related delay events cited above and the traditional construction delay event associated with unavailability of materials is that in the context of a sustainable building project, alternate non-green materials would likely be readily available but would result in the loss of targeted credits. The Owner-Contractor Agreement should propose a process for addressing this foreseeable circumstance.

First, the contract should require notification by the Contractor to the Owner whenever there is a shortage of green materials that threatens to delay construction progress. The contract should require the Contractor to provide written notice to the Owner within a short period (e.g., three business days) after Contractor first becomes aware of the shortage of the required green materials. The Owner-Contractor Agreement should then provide the Owner with a similar duration of time (i.e., three business days) within which to direct the Contractor to either procure non-green materials to avoid delaying the project or, alternatively, to wait until the Contractor can obtain the green materials as originally targeted in the Certification Plan.

The Owner-Contractor Agreement should require in any notice from the Contractor regarding unavailability of green materials that the Contractor provide an estimate (based upon diligent inquiry) of when the green materials will become available to the Contractor in sufficient quantities to allow construction to progress and should further require the Contractor to provide an estimate of the delay to the critical path of activities on the project. Armed with this information, the Owner will be in a better position to make an informed decision weighing the prospect of project delay on the one hand with the prospect of losing a particular targeted credit on the other hand.

It is important for the Owner-Contractor Agreement to specify whether a shortage or unavailability of green materials shall be treated as a compensable or noncompensable delay under the Contract Documents. If the shortage of green materials is treated as a non-compensable delay, for example, the Contractor would be entitled to a time extension as its sole remedy for the unavailability of the green materials and its impact on the construction schedule. On the other hand, if the unavailability of green materials is expressly treated as a compensable delay, then the Contractor would be entitled to both dollars and time in the event of such a delay.

Owners will want to negotiate an Owner-Contractor Agreement that characterizes the unavailability of green materials as a noncompensable delay. In support of this position, Owners will want to emphasize that the Owner is not the cause or responsible for the unavailability of the required green materials. The Owner will want to analogize the unavailability of green materials to the occurrence of other events the Owner is not responsible for such as hurricanes or other force majeure events which frequently are treated within contracts as non-compensable delay events under which the Contractor is entitled to a time extension but not additional dollars for its extended general conditions and unabsorbed home office overhead.

Contractors, on the other hand, will want  to emphasize that the Owner chose through the contract documents to specify and limit the Contractor's use of materials to certain green materials even though other comparable and traditionally utilized suitable materials that may not have the required percentage of recycled content or may not be regionally produced are readily available. Contractor will maintain that the Owner is tying the Contractor's hands and precluding it from accessing otherwise available materials solely to allow the Owner to achieve its sustainable building goal. The weight of this argument may be impacted by whether the Owner is building the project under a governmental mandate to achieve a certain level of certification or as an elective without governmental mandate.

A suggested middle ground for the resolution of this type of delay issue in the contract documents is to negotiate a specified limited duration of impact to the critical path which would be non-compensable (e.g., 14 days). Any impact to the critical path caused by the unavailability of targeted green materials beyond the specified non-compensable period would be a compensable delay for which the Contractor would be entitled to both additional time and dollars for its extended general conditions and  unabsorbed home office overhead.

Scope of Work

The scope of work of a Contractor constructing a LEED certified building will include activities and responsibilities absent from the traditional scope of work in a non-green building. Accordingly, both Owners and Contractors need to clearly describe those activities which must be performed by Contractor (and its subcontractors) in order to achieve the targeted LEED certification.30

The ground work for the Contractor's green scope of work is properly laid during the earlier design phase when the design team (and, ideally, the Contractor/Construction Manager) is preparing the LEED Certification Plan. As previously discussed, the Certification Plan will identify certain targeted credits as the primary responsibility of the Contractor to obtain and document. The Owner should include the Certification Plan as an exhibit to the Owner-Contractor Agreement and define it as one of the Contract Documents. The Contractor's green scope of responsibilities will also be detailed in the project specifications prepared by the design team. The Owner should require the design team to include detailed specifications for each of the targeted credits for which the Contractor is primarily responsible. The specifications should be included, where appropriate, in each trade division and not simply in a general category to ensure that the cost of complying with such responsibilities are included in each subcontractor bid.

1. Project Buy-Out Activity. Assuming an Owner has contracted with a Construction Manager to provide pre-construction services and participate with the design team in the integrated design process, the Owner will not typically solicit bids for the prime Contractor position. In this context, the Owner will negotiate a general conditions amount and a fee (inclusive of home office overhead and profit) payable to the Construction Manager for performing all the activities of a Construction Manager at-risk on the project. Although the Construction Manager's general conditions and fee will amount to substantial dollars, the dollar value of the subcontracts on the project will dwarf the Construction Manager's compensation. It is, therefore, critical for an Owner seeking to control costs to include in the Contractor's preconstruction scope a proper buy-out process. The Owner-Contractor Agreement (likely an agreement, initially, for preconstruction services) on a green project should require the Contractor to assemble detailed bid packages that break down and explain the LEED requirements applicable to each trade bidding on a particular bid package. The Owner-Contractor Agreement should further require the Contractor to hold a mandatory pre-bid meeting for all interested subcontractors. At this mandatory pre-bid meeting, the Contractor (led, preferably, by a LEED AP representative of the Contractor) will explain the LEED requirements applicable to the bid package, respond to questions and attempt to remove the mystery (and related bid premium) from the LEED processes. Detailed bid packages and mandatory pre-bid meetings with each trade are essential in getting the best pricing from subcontractors.

2. Subcontractor Submittals. Contractors are always expected to review subcontractor submittals on construction projects. When a project is seeking LEED certification, however, the submittal review must be broadened to include a review of materials for compliance with targeted LEED credit requirements. The Owner-Contractor Agreement should contain language expressly requiring the Contractor to review subcontractor submittals for compliance with targeted LEED credits. By way of example, assuming the Project is seeking a credit for low emitting materials (IEQ cr. 4.1), the Contractor must review product submittals for adhesives and sealants to ensure that the quantity of volatile organic compounds (“VOCs”) meets thelow thresholds set forth in the LEED credit criteria.

3. On-Site Material Staging and Approvals. Assuming there are no site constraints limiting the designation of a material staging area, the Owner-Contractor Agreement should require the Contractor to designate a mutually agreeable area where all material deliveries will be temporarily staged pending mandatory Contractor review of the materials for compliance with the LEED credit requirements. Prior to any subcontractor removing material from this staging area and incorporating the material in the project, the Contractor should be required to review the material in the pallets, boxes and crates for conformity with LEED requirements. The Contractor should be required to place a green stamp on all product containers that comply with applicable LEED project criteria. Only after the Contractor has reviewed the materials in the staging area and affixed the green stamp of approval to them should the subcontractors be permitted to remove the materials for incorporation into the building. This process should be a contractual requirement in the Owner-Contractor Agreement. The terms of the Owner-Contractor Agreement should further require the Contractor to “flow down” these provisions to each subcontractor such that the subcontractor is contractually obligated to only utilize and incorporate building materials that have been reviewed and approved by the Contractor in the manner set forth above. The Contractor should be further required to include in its subcontracts a clause requiring the subcontractor to absorb all costs associated with removing and replacing materials that do not comply with applicable LEED requirements which were installed without the review and approval of the Contractor. In the Owner-Contractor Agreement, the Contractor should assume a similar responsibility vis-à-vis the Owner to remove and replace at its cost and expense any materials incorporated into the building which do not comply with the applicable LEED requirements.

Contractors will want to limit or modify any obligation to remove and replace nonconforming materials. Contractors should insist that they not be obligated to remove and replace nonconforming materials when such activity would constitute economic waste (i.e., the cost of effecting such removal and replacement would far exceed the diminishment in value associated with leaving the material in place). Contractors will also want to avoid responsibility for removing and replacing nonconforming materials in the event that the Owner, Architect and/or LEED Consultant has expressly approved the incorporation of such materials.

4. Mid-Project Audit. The Owner-Contractor Agreement should expressly require the Contractor to conduct a midproject audit at the point when Contractor's billings first equate to 50 percent or more of the Contract Sum or Guaranteed Maximum Price. During this audit, the Contractor, design team and subcontractor representatives should be required to meet to review the adequacy of existing documentation supporting targeted LEED credits. It is critical to schedule and conduct such a meeting well before the end of the project so that there is adequate time to address deficiencies and adequate leverage (in the form of withholding payment) to encourage engagement of all subcontractors.

LEED Documentation

There is no question that constructing a LEED certified building entails added administrative responsibilities for a Contractor in the form of generating, collecting and maintaining documentation supporting targeted LEED credits. LEED credits will be lost if the supporting documentation is not presented to the GBCI during the building certification process. Accordingly, it is critical for the Owner to ensure that the Contractor has the proper planning and processes in place to generate, collect and manage the documentation supporting the targeted LEED credits.

In order to ensure that the Contractor has the proper planning and processes in place, the Owner should require the Contractor to prepare (prior to contract execution) for inclusion as a Contract Document:

  • A Construction Waste Management Plan;
  • An IAQ Management Plan;
  • An Erosion and Sedimentation Control Plan;
  • A Material and Resource Selection Plan; and
  • A Low Emitting Material Management Plan.

These plans should be incorporated as Contract Documents in order that they may be properly flowed down to the subcontractors and the responsibilities described therein be included in the subcontractors' scope of work and pricing.

The Owner-Contractor Agreement should require the Contractor on a monthly basis (typically with submittal of each monthly pay application) to include a LEED Progress Report. The LEED Progress Report will contain a narrative as well as spreadsheets describing the actual performance of LEED-related activities and comparing actual performance with LEED credit goals as well as with processes set forth in the Construction Waste Management Plan, the IAQ Management Plan, and project specifications. The Owner-Contractor Agreement should require the submission of a LEED Progress Report on a monthly basis with the pay application as a condition precedent to Contractor's entitlement to receive payment. The Owner-Contractor Agreement should require that a copy of the LEED Progress Report be submitted to the LEED Consultant and the Owner should in turn require the LEED Consultant to report promptly any issues or concerns with the LEED Progress Report.

Under the LEED category entitled Materials and Resources, many credits are earned on the basis of a percentage of material costs model. As a result, it is critical for material costs to be separately tracked from the beginning through the end of the project. The Owner-Contractor Agreement should require the Contractor to break out and track all applicable project material costs in order to ensure compliance with targeted LEED credits. Similarly, the Owner-Contractor Agreement should require the Contractor to include in all subcontracts an identical requirement for the subcontractors to break out and track all material product costs. Subcontractors traditionally have an aversion to breaking out material costs. It is imperative, therefore, that this be included as a subcontractual requirement and stressed as a project requirement from the first pre-bid meeting with subcontractors. Subcontractors' concerns typically are alleviated when they understand that the material cost tracking is being done to satisfy a third party rating requirement and not to second guess the subcontractors' pricing.

Photographs are an additional support for establishing many targeted LEED credits. The Owner-Contractor Agreement should require the Contractor to document regularly over the course of the project through photographs the Contractor's compliance with targeted LEED credits. These photographs should be included in each monthly LEED Progress Report and should be reviewed by the LEED Consultant for adequacy in light of the targeted LEED credits. The Owner should require the LEED Consultant to provide comments promptly after receipt of the monthly LEED Progress Report in order to address any shortcomings in real time and before changed conditions preclude proper photo documentation.

Damages

The analysis of damages discussed above in the context of the Owner-Architect Agreement applies with equal force in the context of the Owner-Contractor Agreement. Contractors are more accustomed than Architects to contracting for liquidated damages as a measure of damages in the event of a breach by the Contractor. The concept of a mutual waiver of consequential damages is also one that Contractors are accustomed to negotiating and the discussion above in the Architect context will apply with equal force in the Contractor context.

The principal difference in the treatment of risk between the Architect and the Contractor is that the Architect carries professional liability insurance which should provide a defense and indemnity in the event it becomes liable for a breach of the applicable standard of care and resulting compensable damages flowing from failure to achieve LEED certification. In the Contractor setting, however, there is no comparable insurance product that would indemnify the Contractor for damages it becomes liable for as a result of the Contractor becoming responsible for the failure of a building to achieve LEED certification or the targeted level of LEED certification (as a result of Contractor's failure to achieve the LEED credits assigned to Contractor).

The Contractor's General Liability insurance policy protects against the risk of bodily injury or property damage. The Contractor's failure to properly document or otherwise earn a targeted LEED credit would not be a risk covered by the Contractors' General Liability insurer. Accordingly, the Contractor, unlike the Architect, faces the prospect of assuming the risk of non-certification without the benefit of insurance coverage to provide a defense and indemnity in the event of a subsequent claim. Without being able to transfer the risk to an insurance carrier, the Contractor will be forced to pay any such damages out of operating capital. The unavailability of insurance coverage for a Contractor who is responsible for the failure of a project to achieve LEED certification underscores the importance of the provisions in the Owner-Contractor Agreement and the Owner-Architect Agreement mandating regular LEED Progress Reports from the Contractor and prompt review and comment on such reports from the Architect/LEED Consultant. The best way for an Owner to mitigate the risk of a Contractor causing damages by failing to achieve targeted LEED credits is by having a knowledgeable Architect/LEED Consultant regularly review the Contractor's progress toward achieving the LEED credits and the Contractor's conformity with applicable management plans and specifications.

Commissioning

Commissioning is a systematic process (ideally beginning in the early design stages) of ensuring, through documented verification, that building systems perform in accordance with the Owner's project requirements and the bases of design for the systems. Building owners spend substantial sums of money on sophisticated building systems. Failure to optimize these systems during a commissioning process may result in a poor performing system that runs inefficiently, breaks down frequently, and costs the Owner additional sums of money instead of saving money. The commissioning process tests, verifies, and fine-tunes the performance of critical building systems so that optimal levels of performance are achieved. When correctly implemented, the incremental additional cost of commissioning is far outweighed by the benefits obtained including the following:

  • Elimination or reduction of system deficiencies at building turnover;
  • Improved indoor air quality, occupant comfort and productivity;
  • Decreased exposure to liability for indoor air quality claims;
  • Reduced operation and maintenance and equipment replacement costs; and
  • Reduced energy consumption.

LEED requires fundamental building commissioning as a prerequisite to achieving certified status for a new building. Fundamental building commissioning does not require the Owner to retain a Commissioning Agent during the design process. LEED does, however, incentivise Owners to retain Commission Agents early in the design process by providing a credit for “enhanced commissioning.” Enhanced commissioning requires an Owner to retain a Commissioning Agent early in the design process so that the Commissioning Agent can review and influence the evolution of the design for critical building systems. In addition to the benefits stated above from such enhanced commissioning, enhanced commissioning also benefits the Owner during the construction process by reducing potentially significant change orders. It is, for example, far less expensive to modify lines on a paper or computer during the design process (as a result of input from the Commissioning Agent) than to modify constructed improvements in response to the comments of a Commissioning Agent retained after the completion of the design and during the construction process. Enhanced commissioning actually benefits both the Contractor and the Architect in addition to the Owner. The Contractor benefits from enhanced commissioning in the following manner:

  • Assistance in organizing turnover of the Project;
  • Early identification of problems with building systems;
  • Reduction in call backs and warranty issues; and
  • Happier Owner and tenants.

Finally, Architects receive benefits from enhanced commissioning activities as follows:

a)      an additional set of trained eyes produce better Contract Documents; and

b)      Commissioning Agent provides expertise in solving eld issues, constructability issues and practical operation and maintenance issues when it is less expensive to do so during the design phase.

With the foregoing background material in mind, there are two important modifications to the template form of Owner-Contractor Agreement that are recommended to ensure proper commissioning of a new building.

1. Schedule Coordination. Template forms of Owner-Contractor Agreement typically fail to assign priority to the commissioning process and fail to identify commissioning as a significant milestone in the scheduling and performance of a Project. Owners should require the Contractor, in the Owner-Contractor Agreement, to commission the building systems as an express condition precedent to achieving Substantial Completion of the Work. Typically, Contractors achieve Substantial Completion upon issuance of a Certificate of Occupancy (i.e., when the building may be occupied by the enduser and utilized for its intended purposes). The Owner-Contractor Agreement should also require the Contractor to identify and specify in the construction schedule the expected duration of each activity within the commissioning process. The Owner-Contractor Agreement should require the Contractor to integrate the commissioning activities into its overall project schedule and plan how the Contractor will achieve Substantial Completion of the Work inclusive of the commissioning activities by the contracted-for Substantial Completion deadline.

While requiring the Contractor to coordinate and include commissioning activities in its Substantial Completion schedule brings certain benefits to the Owner, there is also a cost to the Owner which needs to be fully understood at the beginning of the Project. The most efficient environment for commissioning a new building calls for the building to be unoccupied. Depending on the size and complexity of the improvements, building commissioning may add several days to several weeks to the construction schedule (and related loss of income to Owner). The Owner must weigh this cost against the cost of inadequately testing building systems as a result of facility use and occupancy demands.

If applicable constraints do not permit the inclusion of commissioning as a condition precedent to the Contractor's achievement of Substantial Completion of the Work, it is recommended that commissioning be expressly listed in the Owner-Contractor Agreement as a condition precedent to “Final Completion” of the Work. Contracting for commissioning to be completed as an express condition of Final Completion would allow for building occupancy upon Substantial Completion. Identifying the completion of commissioning activities as a condition precedent to Owner's obligation to make final payment will serve to attach the requisite importance to the commissioning activities and motivate the Contractor to properly complete the activities in order to qualify for final payment. In order to properly commission the building systems without negatively impacting building tenants, the Contract should contemplate that the commissioning activities will take place during weekends or after normal business hours and the Contractor should include the additional labor costs associated with such a schedule.

2. Component Conditioning. Traditionally, the commissioning process has related mostly to the installation and operation of mechanical systems. Commissioning activities have focused on the operation and performance of the mechanical systems without paying much attention to other building systems that interact with the mechanical systems. This approach has led to some serious building failures even after the mechanical system was commissioned.

LEED currently recommends but does not mandate commissioning of building systems other than the mechanical, electrical and plumbing systems. The major additional building system that interacts with the mechanical system and materially affects its performance is the building envelope system. The building envelope, inclusive of the roof, walls, windows, doors and penetrations, has the capability of impairing a properly designed and adequately commissioned mechanical system. A building envelope (as designed or as built) that permits excessive quantities of moisture or humid air to migrate within the building will lead to inefficient system operation and indoor air quality problems regardless of the commissioning of the mechanical system.

The Owner-Contractor Agreement should contemplate that the Contractor will be coordinating more than just the commissioning of mechanical, electrical and plumbing systems in isolation. The Contractor's commissioning activities should include commissioning of the building envelope (i.e., roof, walls, windows, doors and balconies) to ensure that the operation of the building envelope does not impair the operations of the mechanical system. Such commissioning activities may include water testing of the roof and selected windows, doors and balconies in accordance with AAMA and ASTM published guidelines. The commissioning of the building envelope should occur during construction so that errors and deficiencies can be caught early and expensive and time-consuming remediation may be avoided or minimized. All penetrations should be visually inspected to ensure the presence of adequate flashing and sealants. Finally, although it is not in the Owner-Contractor Agreement, the Owner's contract with the Commissioning Agent should include a requirement that the Commissioning Agent, during the design review process, evaluate the building envelope design for issues that might reasonably be expected to impair the operation of the other building systems.

Summary of Actual Green Claims

Although there have been very few reported lawsuits involving green claims, a number of such claims have been filed at the trial court level and registered with the professional liability carriers of various defendant design professionals. The following claim summaries are derived from materials provided by Frank Musica, senior risk management attorney with Victor O. Schinnerer & Company,31 the largest underwriter of professional liability insurance in the United States.

Standard of Care

Architect contracts with a client operating as a government contractor providing military systems designs and terrorism identification services. The client wanted a green design and Architect delivered a sustainable design that included extensive daylighting systems. The federal government subsequently determined that the client was putting confidential data at risk as a direct result of the extensive use of windows and skylights. The federal government threatened to revoke the client's security clearance rating, cancel existing contracts, and refuse its future consideration. The client sued the Architect for breach of the applicable standard of care on the basis that the Architect knew the client's business and the government's emphasis on security and confidentiality of information when it designed the building with extensive daylighting features.

Intellectual Property

Architect designs a useful system for moving solar shading for a building. After the completion of the building, there is favorable media coverage arising out of the use of the innovative solar-shading system. The holder of a valid patent for a similar solar-shading system becomes aware of the use and demands payment of a significant licensing fee or the removal of the solar-shading system from the building. The Owner filed suit against the Architect for professional negligence, alleging that the Architect failed to adequately research the existence of an applicable patent. The Owner also sought to enforce a contractual indemnity provision that required the Architect to defend and indemnify the Owner for patent infringement claims.

Building Performance

1. Architect hires LEED-AP consultant to assist on sustainable design issues. This consultant proposes several specific materials and systems for use on the project. After the building was completed, the Owner was dissatisfied due to increased construction costs, construction delays, and energy costs that were greater than expected. The Owner sued the Architect for professional negligence. The Architect found fault with the advice of the consultant; however, the consultant had no insurance coverage.

2. Designers agree to design three schools that were to serve as prototypes of sustainable design and energy effciency. The schools were designed, constructed, commissioned and opened for use. The Architects and consulting engineers executed contracts that stated the projects would “reduce operating costs by 50%” over similarly situated non-green schools. According to measurements of energy usage after the completion of the buildings, the energy usage at the three prototype schools was comparable to other non-green schools recently designed and completed. The school system was disappointed and felt duped by the design team. The school system brought a claim based on the building performance issues.

3. Architect on a University building designs operable sashes for library windows. University raises concerns over the effect of untreated air on building operations, but approves the design, including the operable sash. The design team stresses the importance of outside air for the health and well-being of the student occupants. The Architect had also designed solar shading above the operable windows for energy conservation. The solar shading structures provided shelter for pigeons. After the building was open, students began reporting respiratory illnesses when utilizing the library. Local media reported an “epidemic.” Parents expressed concern to the University. The University brought suit against the Architect, alleging professional negligence because of the introduction of diseases associated with the pigeon droppings.

Green Warranty

Architect agreed to design a building to achieve LEED gold certification. The developer marketed the office building, touting the reduced operating costs and the healthier indoor environmental quality as selling points to obtain higher rents. Subsequently, budget and time constraints precluded the certification of the building at the LEED gold level.  The developer filed suit against the Architect for professional negligence, breach of contract, and breach of warranty based on the Architect's “guarantee” of gold certification for the building.

Tenant Claims

Tenant claims to have agreed to lease space in an office building based on promises of better indoor environmental quality and increased productivity of employees working in the green building. The building was certified at the LEED silver level. At the end of the first year of the lease term, the tenant found that employees had an increased number of sick days and productivity among employees was down. There was an increased number of complaints about eye strain and drafts. The tenant demanded a rent reduction from the Owner based on the earlier representations of a healthful workplace and filed suit against the Architect for bodily injury claims related to the poor indoor air quality.

NOTES:

1For ease of reference, the term “Owner” is used throughout this article to refer to both record Owners of property and developers who may not own the property but are responsible for contracting with design and construction professionals in order to develop a particular building for an Owner.

2See; http://www.nytimes.com/2009/04/07empire.html?scp=28sq=Empire%20State%20B....

3See, e.g., http://www.smartcommunities.ncat.org/buildings/gbsstoc.shtml for links to corporate green building success stories.

4See, http://www.usgbc.org/Government.

5Smith, A., “To Be Green or Not To Be Green? Why That is Not the Question,” published by Pramerica Real Estate Investors.

6See, http://www.ocio.usda.gov/directives/doc/DR5500-001.pdf.

7See, http://www.epa.gov/oaintrnt/projects/policy.htm.

8See, http://www.governor.state.az.us/eo/2005_05.pdf.

9See, http://www.green.ca.gov/default.htm.

10See, http://www.nyc.gov/html/ddc/html/ddcgreen/ll86.html.

11See, http://www.lacity.org/mayor/myrpress/mayormyrpress27452348_04222008.pdf.

12See, http://www.usgbc.org/Government.

13See, http://www.usgbc.org.

14Anderson, B. “Green Building Representations and the Emerging Potential for Securities Fraud Liability,” Real Est. Issues v. 33, Issue 3 (Oct 1, 2008).

15See USGBC Memorandum available at http://www.usgbc.org/News/USGBCInTheNewsDetails.aspx?ID=4008.

16See, www.usgbc.org/Government (as of February 1, 2009).

17USGBC Web site “About LEED” presentation at http://www.usgbc.org/DisplayPage.aspx?CMSPageID=1720.

18“Q&A on Green Buildings With Rick Fedrizzi,” Rebecca J. Bell, Boston Globe, 9/20/2008.

19USGBC Memorandum available at http://www.usgbc.org/ShowFile.aspx?DocumentID=3340.

20 http://www.usgbc.org/News/USGBCInTheNewsDetails.aspx?ID=3786.

21 http://www.uslaw.com/library/ConstructionLaw/USGBC.

22LEED v.3 Frequently Asked Questions available at: http://www.usgbc.org/.

23For ease of reference, this article typically refers to the design professional as the “Architect”. In fact, although the Architect is usually the prime consultant, a significant number of LEED credits fall under the design scope of the civil engineer and mechanical, electrical and plumbing (“MEP”) engineer. The civil engineer is frequently another prime consultant while the MEP engineer is typically a subconsultant of the Architect.

24Registration of a project is distinct from certification of a project. Registration may occur early in the design process. It is granted prior to construction and is far easier to achieve than certification. Certification of a LEED project may only occur after the completion of construction. It is typically issued anywhere from three months to one year after completion of construction. Certification involves a systematic review of project documentation to confirm that the project was actually built in accordance with the LEED score sheet proposed at project registration (as amended by subsequent developments adding or dropping proposed credits). There are far more LEED-registered projects than LEED-certified projects. Interestingly, however, the vast majority of the general public would be unable to distinguish between a LEED-registered building and a LEED-certified building.

25See, e.g., Tulacz, G. “Insurers Worry About Green-Building Risks,” Engineering News-Rec. Volume 261; Issue 1 (July 14, 2008).

26Tulacz, G. “Insurers Worry About Green-Building Risks,” Engineering News-Rec. Volume 261; Issue 1 (July 14, 2008).

27Tulacz, G. “Insurers Worry About Green-Building Risks,” Engineering News-Rec. Volume 261; Issue 1 (July 14, 2008).

28In October 2006, for example, Fireman's Fund introduced a Green Gard suite of insurance products intended to cover green buildings certied under the LEED program. See Meder, R., “Insurers Go Green,” Risk Management Vol. 54; Issue 12 (Dec 1, 2007). The Green-Gard product features the elimination of exclusions previously present for vegetative roofs, full coverage for alternative power and water systems including loss of income, and expenses associated with hiring a LEED-AP to oversee post-loss repair and/or reconstruction. Id. Additionally, Green Gard has a green upgrade property insurance product intended to provide the insured with post-loss “betterment” in the form of reconstruction of a previously non-green building with building components, personal property and interior finish products consistent with a green certified property. In the event of a total loss, Fireman's Fund would pay to rebuild the building as a LEED-certified building, including all green ling fees charged by the USGBC. Id.

29See, www.insurancejournal.com/news/national/2008/10/21/94835.htm.

30Portions of the material in this section are derived from a paper published by George Carlson entitled “A View from the Trailer — A Contractor's Perspective of LEED at the Jobsite” available at http://www.usgbc.org/Docs/Archive/MediaArchive/608_Carlson_PA420.pdf.

31See, Musica, F., “Don't Let Green Design Cause Red Ink,” at www.greenbuildinglawupdate.com/uploads/file/conted_TH0507.pdf.

 

© 2009 Thomson ReutersNational Law Review, Volume , Number 32
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About this Author

Michael Gibbons, construction, law, attorney, Lowndes, law firm
Partner

A LEED certified attorney and former Assistant State Attorney, partner Michael Gibbons represents owners, developers, contractors, design professionals and subcontractors asserting a variety of construction claims (and defenses to such claims) including actions for breach of contract, delay, latent defects, water intrusion and mold, differing site conditions, extra work, indemnity and warranty. Michael  Gibbons frequently counsels clients on issues related to construction claims of lien and surety bond claims and regularly represents clients in litigation and...

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