Green Building Contracts

May 3, 2011

This article originally appeared in the Wisconsin Builders Association’s April 19, 2011 Builder Buzz Blog post.

The primary purpose of any construction contract is to identify the owner’s expectations for the completed project and to allocate the risk in the event the project does not meet those expectations. A contract for the construction of a “green building” is no exception. However, there are typically a set of concerns unique to green building construction that must be addressed in the contract.

Many owners contracting for the construction of a green building intend to seek certification of the building through one of several third party rating systems. While the LEED certification from the U.S. Green Building Council is the most well-known, there are several others, including Green Globes, GreenPoint Rated, BREEAM, and the National Association of Home Builders Green Building Program. The most obvious risk that should be allocated in a green building contract is the failure to achieve the sought-after third party certification. Other consequences could flow from that failure, including the potential loss of public financing or tax exempt status, failure of the local government to issue a use and occupancy permit, and the inability to qualify for tax credits or abatements. There could also be monetary penalties associated with the failure to achieve the sought-after certification. Finally, in the last few years there have been claims by commercial tenants, who request rent reduction because they leased space under (green building) assumptions which did not materialize.

Allocating these risks to the design professional or general contractor can raise another set of problems that should concern all of the project’s stakeholders. For example, the failure of a design professional or contractor to meet performance-based specifications is often not an insurable risk. Contracts that assign such risk to the design professional or contractor only to the extent of their fee or insurance coverage, in effect, allocates the actual risk to the owner. Similarly, contract clauses which require a higher standard of care of the design professional, because he or she may be LEED certified, may trigger insurance exclusions.

A clearly drafted construction contract will reduce the possibility of expensive litigation or arbitration. It can incorporate “performance standards,” such as energy usage and savings, water and air quality, water usage and recycling, as long as the insurance company coverage question is considered. Green building requirements can impact several standard contract clauses, including indemnity provisions, consequential damage waivers, change orders, delay costs, and insurance. If a third party rating is sought by the owner, it should be specified clearly, and the contract should include the applicable rating standard and its revision date. The party responsible for green goal reporting obligations and for green projects/systems “due diligence” should be clearly defined. Finally, the party responsible for preparing, collecting, assembling, and submitting green certification documentation should be specified.

National form contracts are often used for construction projects. Some have forms specific to green building projects. For example, AIA Document B214™ – 2007 is a standard form for architect services where green certification is sought. The use of such forms is a good starting point, but they do not include all of the considerations that are important to the project’s stakeholders.

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For more information about "Green Building Contracts," contact Steven M. Streck at sstreck@axley.com or 608.283.6721.