One of the prominent questions contractors ask is why the risks of green building are so much higher than regular construction. The answer is because of the LEED certification process and higher demands for ROI.
Building owners anticipate in advance what kinds of credits they’ll qualify for, and if the building is unable to attain promised certification, they won’t hesitate to file a claim. The bottom line is that green buildings have a much more concretely defined scale of success and failure, and that means the contractor can easily be held responsible for unexpected shortcomings.
It’s not uncommon for construction projects to specify sustainable building practices, especially with energy costs continuing to rise and building standards becoming more environmentally rigorous. Capitalizing on the trend to build green can quickly turn profit margins from black to red if there is no clear understanding of the process, risks or additional contract exposures.
What is Green Construction?
According to the Environmental Protection Agency (EPA), green building is the practice of creating structures and using processes that are environmentally responsible and resource-efficient throughout a building’s lifecycle–from siting to design, construction, operation, maintenance, renovation and deconstruction.
The U.S. Green Building Council (USGBC) estimates 40 percent to 48 percent of new non-residential construction will be green, equating to $120 billion to $145 billion in opportunity. As the construction industry continues to rebound and green construction projects come to fruition, it’s important to understand and mitigate risks.
The best way to protect a company from risk is to be open and honest.
- Create marketing materials with reality in mind, rather than making lofty promises.
- Don’t allow clients to have high expectations for things the company can’t deliver.
- Improve the project management process to more clearly define company goals, requirements and limits.
- Seek insurance coverage for green-specific areas, especially for green services and warranties on green projects
- Pay attention when drafting or signing contracts to make sure the language accurately reflects expectations and realistic goals.
Manage and Minimize Contract Exposures
1. Limit Contract Warranties
It’s true that green building leads to operational cost savings, healthier work and living spaces, and increased tax incentives, but it’s important to limit warranties to those expressly provided in the contract.
Additionally, no single party is responsible for meeting a construction project’s certification goals, and certification is typically regulated by a third party over which a contractor has no control. Therefore, never guarantee the level of certification on a project. Instead, warrant that the work will meet project specifications and accepted industry standards.
2. Reduce Delay Risks
Anticipate unexpected delays, such as a shortage of green materials or lack of skilled workers, by updating the contract’s force majeure clause to shift the risk allocation for these types of delays to the owner.
Also, specifically define in the contract what’s meant by substantial completion, and don’t tie it to a project’s certification status. Obtaining certification may take up to a year after substantial completion of a project is reached. Therefore, it’s also advisable to revise the contract if it restricts payments based on certification status.
3. Define Consequential Damages
While many traditional construction contracts include mutual waivers of consequential damages, it’s unclear if the courts consider lost tax incentives, decreased energy savings, decreased water bill savings, etc., as consequential damages. To ensure these types of sustainable construction damages are waived, include them in the clause waiving consequential damages.
4. Retain Right to Cure
Green building projects often use new, unproven materials and technologies, which may lead to future maintenance and performance issues. Spell out in the contract who is responsible for a component’s maintenance or malfunction, or what happens if a manufacturer goes out of business. Additionally, incorporate a clause that states the company retains the right to cure any alleged defective work, materials or equipment prior to the owner hiring another contractor to repair the work.
The process of taking a green building project from conception to use is complex. Utilize well-informed risk managers to help pinpoint exposures unique to construction and the potential ways to manage or transfer those risks. While this is in no way an exhaustive list of possible risks and exposures in green building, it should be a start to protecting the company.