Contractor Risks on LEED and ‘Green’ Construction Projects
Green building is expected to become the standard rather than the exception. High-performance and “green” buildings are designed and built to minimize resource consumption, reduce life-cycle costs, maximize health and productivity for the building’s occupants and improve performance. To achieve this, owners, architects and contractors must engage new construction practices and behaviors.
The standard in the green-construction movement is the Leadership in Energy & Environmental Design program (or LEED). LEED certification looks at various aspects of building and awards recognition to buildings that meet certain standards. LEED projects earn credits on a point-based system in several categories. Based upon the number of points earned, the project will earn one of four graduated certification levels: certified, silver, gold or platinum.
From a construction law perspective, green construction raises new and old risk-management issues. General contractors, subcontractors, architects and owners should understand differing processes and site conditions related to green construction contracts is critical.
If the contractor takes responsibility for obtaining LEED certification, then it should do so with knowledge of the contractual risks. The contractor may instead build the project in accordance with LEED principles and assist in obtaining credits, but not guarantee LEED certification and leave the burden of certification with the owner and/or architect.
There are a few industry contract forms that are appropriate in certain circumstances (Consensus Docs 310 Green Building Addendum; AIA B214 2007, Standard Form of Architect’s Services: LEED Certification). However, industry contracts have generally fallen behind and failed to thoroughly address the issues arising in LEED construction. The usual “standard contracts” for design and construction do not address green building risk and liability.
A LEED project contract must address responsibility for LEED certification, paperwork and fees, liability for green materials, building performance and construction waste recycling and management. There are significant, unique issues related to insurance coverage, indemnity clauses, substantial completion and design defect liability that arise in a LEED project.
Contract documents must address what damages the parties can or cannot recover related to the LEED process and certification. The parties may stipulate that certain damage categories are or are not recoverable, such as lost rental income or resale value if the building fails to reach certification. Contracts should clearly state whether energy savings and LEED certification are anticipated or guaranteed.
Although construction lawyers predict a significant amount of litigation regarding green building in coming years, there are not many green construction appellate cases recorded presently. Southern Builders Inc. vs. Shaw Development LLC is the seminal LEED/green construction lawsuit. There were numerous problems and the general contractor filed a lien on the project and sued the developer. The developer countersued and claimed, among other things, a loss of $635,000 in tax credits under a state-run program due to the failure to achieve certification in a timely fashion.
The only statement in the Southern Builders contract documents pertaining to the green nature of the project was in the project manual that the project was designed to comply with the silver-LEED certification. But the contract did not stipulate who was responsible for obtaining the certification. The case was settled but not before the parties expended substantial amounts in litigation. Sustainability is changing the face of the risk-management equation and the Southern Builders case will likely go down in history as just the tip of the coming iceberg. It demonstrates the danger for contractors, owners and designers who rely on form construction contracts for green projects. Although the claim was asserted against the contractor, a slight twist in the facts above could have resulted in a suit being asserted against the architect, engineer or LEED consultant.
Owners want to get their projects out of the ground quickly. Given current economic conditions, contractors and design professionals may feel pressure to sign up for work quickly, Southern Builders demonstrates the need for caution and careful contract preparation. Contractors should utilize all their bargaining power and endeavor to negotiate clear contract terms that do not unreasonably hold the contractor and subcontractors responsible for the owner’s design, energy and efficiency goals.