The gray in green: as sustainable design and construction gains momentum, project teams are facing new risks and finding limited solutions.
As more government entities use a mix of mandates and incentives to push for greener buildings in both the public and private arenas, the stakes in sustainable design and construction are getting much higher. With green certification becoming a requirement on an increasing number of projects, owners and developers face an expanding field of financial and regulatory risks. In some parts of the country, failure to achieve green certification could result in onerous code violations or lead to the loss of significant tax credits.
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In trying to establish who bears the risk when a project misses its sustainability goals, project teams are finding a lot of gray area in green construction. Limited contract vehicles, few targeted insurance programs, and a lack of legal precedents have left companies scrambling for answers.
As more buildings in the recent sustainability wave reach completion, failed projects are starting to wash up in court. The first known case of a project that didn’t meet green certification was brought before a Maryland circuit court in 2007. Shaw Development sued Southern Builders after its $7.5 million Captain’s Galley condominium project failed to meet U.S. Green Building Council LEED Silver certification. Shaw claimed that it lost $635,000 in state tax credits as a result.
The case was settled in November 2008—the terms were not disclosed.
The Shaw case is likely to be the first of many lawsuits to spring up in the coming years, says Frank Musica, a senior risk management attorney with Victor O. Schinnerer & Company in Chevy Chase, Maryland. “We’ve already started to see quite a few claims related to green design and with the increasing demand for it, we expect to see a blossoming of claims over green design and construction,” he says.
Edward Gentilcore, a partner at the law firm of Duane Morris in Pittsburgh, says that although the Shaw case settled, it illustrates the often ambiguous allocation of risk in projects. Shaw and Southern Builders used a standard AIA owner/contractor agreement that Gentilcore says didn’t address the risks of not achieving LEED Silver. “This gets to the heart of the problem,” he says. “We see owners with a desire to have a green building, but too often there’s nothing in the contract that addresses what ‘green’ means: Who is responsible to get the project to that goal, and what happens if we don’t get there?”
Sticky issues over determining the appropriate standard of care and who is responsible for a building’s performance are among the greatest concerns within the construction industry, according to “Green Building: Assessing the Risks,” a report released this spring by New York-based insurance brokerage firm Marsh.
As a project aims for green certification, team members, particularly on the design side, could be put in a position to make guarantees that fall outside a typical standard of care, says Michael Feigin, global construction practice leader at Marsh. Although a project may be designed to meet green requirements, the certification process is ultimately left to third-party organizations, like the Green Building Certification Institute (who took over this function from USGBC in 2009). “You can’t be held responsible for something outside your control,” he says. “You don’t guarantee to the owner that it will happen—you guarantee that you will do everything you need to do to make it happen.”
Although green-design practice is rapidly expanding, it is still new territory for most architects, says Brian Anderson, a shareholder at the law firm Whyte Hirschboeck Dudek in Madison, Wisconsin. The AIA added language to its Code of Ethics in 2007 that requires its members to discuss sustainable-design approaches with clients, which could further complicate standard-of-care issues. “You [the architect] have to represent yourself as being an expert on sustainability,” he says. “It’s implicit that you’re going to make recommendations. If you’ve never done a green project before, would you know the right recommendation to make and would you know how to deal with that contractually?”
Beyond certification goals, building-performance expectations often loom over green projects. In the era of greenwashing, where product manufacturers make unsubstantiated claims about new energy-efficient building materials and systems, product performance and reliability are seen as substantial risks, according to the Marsh report. Musica notes that with new products come new companies that could be here today and gone tomorrow. “In this economy, you’ve got a definite risk of specifying brand new products from a company that could end up going bankrupt in the next nine months,” he says. “Then you’ve got a delay claim on your hands. Even if the manufacturer is still around, there is no long-term testing of some of these products. What happens if, after a certain amount of time, a product warranty is no longer in place? A design team could have risks stretching out for decades.”
The performance of systems specified by a project team could also hinge on an owner’s ability to operate and maintain them properly, Musica adds.
As green practices continue to gain speed, industry experts express concern about the risks of bringing in unqualified consultants and subcontractors. “Construction firms now have to depend on the subs’ ability to do things like make sure that materials are recycled in the correct bins and that proper records are kept,” Gentilcore says. “When a sub demolishes a floor, they might need to make sure to protect it for reuse. If new materials come in, were they procured locally? It’s all an education process.”
Beyond finding appropriate contract language to allocate risk on a job, team members see few new options in the insurance arena to address green-specific issues. A 2008 market survey by Marsh showed that the insurance industry was gaining interest in green risk issues, but that it was “premature to draw any conclusions or to offer new coverage.”
Marsh’s Feigin says that if a contract is well written, most firms should find that their existing insurance coverage will be sufficient. He says that as more claims come to light, specific green products are likely to emerge. “The insurance industry is at the very early stages with this,” he says. “Some are developing products, but it’s still in its infancy. Some may be racing to the finish with products, but you need to be careful about that. Be sure to pull apart anything that purports to be green coverage and make sure you understand what you’re really getting.”
Although green issues can be project- and location-specific, efforts are underway to clarify the approach. Associated Builders and Contractors (ABC) is currently developing an addendum to its ConsensusDOCs that it expects to release by the end of the year. Among its recommendations, ABC is calling for the creation of a green-building facilitator, who would be responsible for overseeing and carrying a green project through to completion. Brian Perlberg, senior counsel at ABC, says the new role could fall on the architect, contractor, or a third-party consultant. “We think this is the best way to clarify who is responsible,” he says. “Right now, there’s not one single party that is responsible. If everyone is responsible, then no one is responsible.”
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