Green Building Contracts: Key Issues to Consider
No longer labeled a fad, green building holds an established place in the construction industry. Green building refers to designing and constructing buildings that consider impacts on the environment and the community, such as energy use, water use, indoor environmental quality, and construction materials. Because of these unique considerations, green building contracts and projects can entail risks and concerns not commonly faced in traditional jobs. Successfully negotiating these risks includes considering the following issues.
What Type of Form Contract is Used?
Using form contracts is an industry convention. But many of these form contracts predate the development of green building standards and lack provisions and clauses necessary for green building projects. Thankfully, industry organizations, such as the American Institute of Architects, are creating form contracts specifically tailored for green building projects. The wise contractor makes sure to use these forms when agreeing to work on a green building project.
What Green Building Standard Must the Project Meet and How Will That Standard Be Measured?
Green building projects often aim to have a final building that meets one or more environmentally-oriented standards, such as energy efficiency. Typically that standard reflects or incorporates those established by an independent organization, such as those the United States Green Building Council requires for Leadership in Energy and Environmental Design (“LEED”) certification. Whatever standard used, the contract should state clearly the project’s measurable benchmarks. For example, a requirement that a contractor construct a “green and sustainable building” lacks sufficient specificity. In fact, a similar provision led to an owner-initiated litigation in Illinois, where a residential architectural contract included an objective to achieve “a sustainable green modern single-family home,” and the owner claimed the architect breached the contract by failing to obtain LEED Certification. As this case illustrates, such vague language can invite disputes and potentially costly litigation.
Who Has Responsibility to Ensure the Project Meets Required Green Building Standards?
In addition to articulating precise standards, a green building contract needs to designate who has responsibility for meeting those standards. Design professionals and contractors each play roles in whether a building achieves the requisite standard. Determining how the contract apportions that role poses a challenge because of designers’ and contractors’ adverse interests. Designers do not want to take on full responsibility for achieving green building standards because contractors may not implement their designs properly. Contractors also do not want full responsibility lest they take on liability for faulty designs. This tension presents great potential for risk and exposure: where the project fails the required green building standard, all will look to blame each other. Further complicating the issue, green building requirements often include a separate certification from an independent organization—yet another stakeholder in the process.
When Must Green Building Standards Be Achieved? What Happens When They Are Not?
Like traditional construction contracts, timing plays a significant role in green building projects. First, an owner may need particular green building standards achieved by a certain date to take advantage of regulatory incentives, such as tax credits. In addition, green building benchmarks need a definite duration. For example, a requirement to achieve LEED certification should limit how long a contractor or designer bears responsibility for the building meeting requirements for that certification. If not, the agreement may create a virtual indefinite warranty. Finally, in the event an owner tries to claim a green building requirement was not reached, the contract should exclude consequential damages, such as increased energy costs.
Do the Project Plans Align With Green Building Standards?
Green building projects carry another potential risk: that a contractor bears responsibility for how a building performs, not just whether the contractor built it according to plans. Typically, where the owner’s architect (or engineer or both) provides the project design, the Spearin Doctrine protects the contractor from liability for project flaws as long as the contractor followed the project design. Green building projects, however, often have performance standards, such as energy efficiency ratings, not merely design requirements. No case has yet applied the Spearin Doctrine to protect contractor liability for a building’s failure to meet green building requirements, even where the contractor completes the project as designed. Consequently, a contractor may face liability where the as-built project does not achieve contractual requirements for sustainability. Before committing to achieving green building standards, contractors need to ensure that the project as planned can and will lead to a building that meets those requirements. Contractors should have an independent consultant review project plans with attention to this issue, in particular when the contractor performs value engineering or is working as a team with the developer and engineer or architect.
What Federal, State, or Local Regulations Apply to the Project?
Federal, state, and local laws and regulations either require meeting sustainability standards or providing worthwhile incentives for such construction. To the extent such regulations apply, contractors need to make sure their contracts comply. Failing to do so could result in regulatory interference to ensure compliance—creating delays and complications that increase cost but which could have been avoided.
Although green building projects entail their own unique set of issues, with proper guidance, those issues should not discourage contractors from taking advantage of the business opportunities such projects provide. For guidance on issues related to specific green building projects, consult an attorney.