4 Tips for Navigating Green Construction Contracts

Leadership in Energy and Environmental Design (LEED) certifications have increased by more than 69,000 projects over the last 10 years, yet team members often enter into green building work with expectations based on the trend’s popularity rather than its reality.

Owners and developers may specify their desire to achieve a particular certification level during early stages of the design and/or bidding process, but as the LEED rating system recognizes successful environmental efforts after a building has been designed and completed, such certifications still cannot be guaranteed.

With nine categories in which a project can earn points toward LEED recognition from the United States Green Building Council (USGBC), targeted planning during development can help to prioritize resources and improve communication that can lead to more positive outcomes.

Green building is an effort that requires buy-in throughout all phases of the project in order to be successful. Whether the initial intention of the developer is to do something positive for the environment or to capture the market value of LEED certification, too diffuse or too myopic a focus can lead to increased risk along with missed opportunities.

With risks falling into two areas—qualitative and quantitative—it is recommended that contractors develop a greater awareness of some of the most common parameters and ramifications involved in green design and construction and of LEED certification and understanding the risks inherent in that particular project circumstance.

Expectations about green development and/or level of building performance can have a significant impact on liability. Contractors should be sure they don’t overlook the following four areas when moving forward with green building.

1. Tax Credits, Zoning Benefits & Similar Incentives

Many municipalities offer incentives for building green but a number of those perks have to be utilized within a fixed time period from application. The upsides of such incentives like tax credits, zoning relief or grant programs is they can nudge an owner or developer toward green; but the potential exists for any one of those incentives to disappear if certain milestones are missed.

These programs may also require achieving certification prior to having the incentives go live. One of the challenges that can create is that the final certification of the project is probably going to done by a third party, one that is independent of the project and operating on a timeline that is independent of the project timeline.

Missing a milestone because your project is still “in queue for review” can impact these types of incentives.

For contractors to properly protect themselves, they should work to include tax credits and grants as part of consequential damages determinations or in a separate clause that clearly represents that submissions for certifications are not guarantees of certification and that timelines for action may be outside of their control.

2. Schedule, Completion & Liquidated Damages

As is pointed out above, there are facets of green building project certification that are out of the control of the design and construction team, and these facets can greatly impact the schedule and completion.

Those impacts can trigger liquidated damages (LDs) clauses that may be included in time-sensitive projects. LDs are to be derived from a realistic and reasonable assessment of what the damages incurred would be when an exact quantification isn’t possible.

As stated earlier, there could be grants, taxation or similar funding impacts, but there is also a potential loss of use and/or value question. Green buildings have been shown to have higher lease rates and lower vacancy rates than traditional buildings. This differentiation is only likely to increase in a COVID-19 impacted market.

Those differences could increase the impact of loss of use or a failure to achieve the certification level desired. Valuation of losses from a certification that cannot be obtained in time or a building that is late should be considered during negotiations or it may later create an unaddressed risk for both sides of the table.

3. Consequential Damages & Rights

Similar to the liability surrounding delays, increased costs, lost economic opportunities, failure to meet a certification level may fall within the definition of consequential damages. Typical contracts from the American Institute of Architects contain a mutual waiver of these rights, but it can be worth negotiating a narrower scope that protects the contractor in the case of green building issues.

4. Green Building Performance

All construction project participants can be impacted by the actual performance of the building compared to expectations. LEED now requires that the performance, in the form of operating utility records, be submitted on an annual basis to see how a building is really performing compared to its predictions.

Design, construction and operations all intersect on the road to actual project performance, and real-world data can present a very different picture than model projections. Those variances may give rise to some tense discussions among the various teams involved in a project. LEED certification is not achieved by focusing on the environmental success of just one element of the project.

From design to materials to construction techniques to operation, these components all add up to the final certification, and more tangibly, the actual performance of a green building. Contractors and owners both need to be aware of their own—and each other’s— expectations and contributions, as well as their contractual obligations, to ensure resources are being best utilized to achieve the desired results