Date: June 13th, 2011

The demand for projects that are “green” in one way or another is exponentially increasing. Among other driving forces, this increase is the result of new requirements for building certification and performance at the federal, state, and local levels. These requirements can expose contractors to a variety of new risks. Each project requires independent consideration, but before taking on a green project, general contractors should at least consider three general topics: (1) contractual risk shifting; (2) knowledge of applicable “green” laws and regulations; and (3) insurance coverage.

1. Review standard contracts carefully and revise them as necessary to address green-specific issues.

It is critical that contractors working on “green” projects carefully review any standard form contracts to address green-specific issues before beginning work. Standard form contracts will likely not adequately address green-specific issues because green terminology, technology, and applicable laws and regulations are steadily evolving.

In contrast to the amount of discussion regarding the potential for green building litigation in print and on the internet, there are few actual cases that specifically address green building issues. One of the first cases of “green building litigation” is a Maryland case, Shaw Development v. Southern Builders. The Shaw case involved several issues, but relevant to this discussion is the owner’s counter-complaint, which contained a green-specific allegation against the contractor:

[T]he Project Manual and Scope of Work required Southern Builders to construct an environmentally sound “Green Building,” in conformance with a “Silver Certification Level according to U.S. Green Building Council’s Leadership in Energy & Environmental Design (LEED) Rating System,” as more specifically set forth in the Project Manual and Project Specifications, Division I Section “LEED Requirements.” . . . In failing to comply with this contractual requirement, Shaw Development will suffer damages in the amount of a Six Hundred Thirty-Five Thousand Dollar ($635,000.00) tax credit.

One lesson of construction contracting generally is the importance of clarifying as many terms as possible. For green projects, the above allegation highlights the importance of defining all green terms, establishing when the desired level of certification is to be achieved, and assigning responsibility for achievement of the desired level of certification to a specific entity. For example, a specification that requires the contractor to construct a “green building” or “sustainable building” is not clear. By contrast, a specification that defines what “green” means and states that the project must “achieve LEED (Leadership in Energy and Environmental Design) Silver Certification on or before October 3, 2011” is clear.

Contractors should also clarify any deadlines for achieving the desired level of certification. Financing or other “green incentives” may be tied to project scheduling and many green laws and regulations relate to a building’s continued performance. Contractors should delete any clauses that make them responsible for the project’s continued “green performance” once their work is complete.

In addition to defining all key terms and certification deadlines, it is also important to make sure the contract clearly assigns responsibility for achieving any specified level of certification. This is important because legally, if a contractor is provided a detailed set of plans and specifications (design specifications) and follows those specifications, the contractor is generally not responsible if the end result is less than what was expected. In contrast, if a specification only dictates an end result and leaves it to the contractor to select the means for accomplishing that result (performance specification), the contractor generally is responsible for any failure in achieving the desired result.

There is uncertainty in the context of specifications for green buildings because the courts have not yet weighed in on whether a contract provision requiring achievement of a specific green building certification is a design specification or a performance specification. Without guidance, contractors cannot accurately gauge their exposure, which is why it is critical that they attempt to create as much contractual clarity as possible. Well thought out contractual provisions can help contractors avoid the uncertainty that exists where they agree to construct a certified buiding, but the architect’s design makes certification impractical.

Additionally, contractual provisions related to damages require special consideration for green projects. Because green buildings are relatively new, there are a number of unknowns and uncertainties associated with them. As a result, contractors who work on green projects could face arguments by owners that they are financially responsible for a variety of damages if a project, for example, fails to achieve the desired level of certification. Contractors can attempt to limit their exposure by including a waiver of consequential damages clause in their contract which specifically waives any consequential damages incurred by the owner as a result of the building not achieving the desired green certification. The parties should also consider agreeing to a liquidated damages clause that quantifies the reasonable amount of direct damages the owner will suffer if the project is not certified.

2. Get a handle on applicable green laws and regulations that may impact the project.

New green regulations can impact numerous aspects of a project including materials selection, energy efficiency, financing, and certification. Many green regulations were passed quickly and without much guidance or precedence for the drafters to look to. As a result, these regulations are often complicated and confusing and many will likely be refined as they are put into practice.

To navigate all of the new green laws and regulations, it is critical that contractors have someone on their team with a working knowledge of the applicable laws and regulations or enlist the help of one of the growing number of sustainability consultants with specific training and knowledge in this area. Taking this step will not only help avoid problems during the project, but will also allow the contractor to properly anticipate the risks associated with new green products and technologies prior to entering into the contract. Consulting with an experienced construction attorney familiar with green issues is also advised.

The fact that green construction practices are often mandated means contractors, particularly those working on public projects, are required to know and understand applicable regulations. For example, the City of Seattle has a policy that, “[a]ll facilities and buildings over 5,000 gross square feet of occupied space shall meet a minimum LEED Silver rating.” Similarly, at the state level, many public projects over 5,000 square feet must achieve LEED Silver certification. Interestingly, the same state law provides some safe harbor to contractors by stating that they may not be held liable if the project does not achieve LEED Silver certification if the contractor made a “good faith attempt.” However, because what constitutes “good faith” is unclear, contractors should attempt to limit their exposure as much as possible through contractual language.

3. Obtain insurance coverage for risks specific to green building projects.

Given the risks described above, contractors should carefully consider their insurance program before taking on a green project. Although the topic of insurance will be covered in greater detail in later postings, its importance merits discussion here as well.

Commercial General Liability policies typically cover only “property damage,” usually equated with “physical injury to tangible property.” Claims for failure to achieve a specified level of LEED certification would likely generate coverage disputes, but the answer to the question of whether coverage exists is complicated. In addition to creating some control over potential damages claims as discussed above, contractors should consider their current insurance program in relation to the specific risks associated with green projects. Thankfully, the insurance industry has responded to these new risks with new insurance products that are available from a variety of carriers.

As the landscape of the construction industry continues to evolve and green projects become more and more prevalent, contractors should attempt to reduce their exposure by taking into account a few basic considerations before undertaking a green project. At a minimum, contractors should clarify as many green-specific contractual provisions as possible, make sure they are well advised on all applicable green laws and regulations, and reconsider their current insurance program.