BUILDING GREEN WITHOUT LOSING GREEN: Managing Risks in Sustainable Design and Construction Contracts August 26, 2010 1:0

1. BUILDING GREEN WITHOUT LOSING GREEN: Managing Risks in Sustainable Design and Construction Contracts August 26, 2010 1:00 – 2:00 pm Central Time Presented by Michael R. Gibbons, Esq. Meritas Capability Webinar Dial In: 1-866-640-4044Participant Code: 969427

2. Housekeeping Issues • All phones are muted • Dial *0 at any time for technical support • Questions may be submitted to the presenter via the Chat feature on the right-hand side of your screen • Questions will be answered at the end of the presentation

3. SEMINAR OUTLINE • Introduction and Context • Managing Risks in the Sustainable Design Contract • Standard of care. • Scope of services. • Building performance issues. • Green guaranty. • Tenant Claims.

4. SEMINAR OUTLINE III. Managing Risks in the Sustainable Construction Contract A. Scope of work. B. Delays. C. LEED documentation. D. Damages. • Commissioning. IV. Summary of Actual Green Claims A. Standard of care. B. Intellectual property. C. Building performance. D. Green warranty. E. Tenant claims.

5. I. INTRODUCTION AND CONTEXT Media is writing regularly about green building subjects. Owners dialed into green building. In commercial development, four drivers of increasing use of green building model: • government mandates; • tenant demand; • return on investment; and, • risk management. From distance, green building projects appear to be delivered similarly to non-green buildings. • Easy for Owners, Architects and Contractors to fall back on traditional template forms of agreement. • Following path of least resistance will inevitably lead to ambiguity, misalignment of expectations, and attendant claims. • Special risks associated with green design and construction require fresh review of old template agreements.

6. II. MANAGING RISKS IN SUSTAINABLE DESIGN CONTRACTS A. STANDARD OF CARE • Traditional AIA standard of care. • LEED Accredited Professional (LEED AP). • Professional liability insurance coverage issues. • Review policy. • Standard of care must be consistent with professional liability coverage.

7. B. SCOPE OF SERVICES Avoid reducing architect’s green design obligations to achieving “silver or “gold” certification. Contract should require creation of a preliminary certification plan. • Content of preliminary certification plan. • Timing. Contract should require creation of a certification plan. • Content of certification plan. • Timing. • Consensus driven (targeted credits/allocation of responsibility).

8. B. SCOPE OF SERVICES (cont’d.) Incorporation into the owner-architect agreement. Contractor credits. • Development of specifications. • Inclusion in owner-contractor scope. Benefits of writing certification plan. • Owner focus. • Designer/contractor accountability. • Avoidance of fragmentation. • Creation of credit contingency.

9. C. BUILDING PERFORMANCE ISSUES Owners and tenants expect better IEQ at lower operating cost. LEED requires engagement of a commissioning consultant (E and A prerequisite). Enhanced commissioning achieves a separate credit and involves: • Reviewing and commenting on design documents. • Preparing construction phase commissioning plan. • Developing commissioning specifications. • Reviewing O & M manuals. • Participating in training of owner facility personnel. • Conducting system reviews during warranty periods.

10. C. BUILDING PERFORMANCE ISSUES (cont’d.) Optimizing predicted energy usage relative to ASHRAE baseline standards. • 12% = 1 point • 48% = 19 points Certification plan will establish the design team targeted goal.

11. BUILDING PERFORMANCE ISSUES (cont’d.) Designers cannot guarantee that building will achieve the energy optimization predicted by design energy modeling. • Factors beyond designers’ control: • Contractor’s compliance with Construction IAQ Management Plan. • Contractor’s commissioning of building systems in accordance with Commissioning Plan. • Owner’s operation and maintenance of building systems in accordance with Commissioning Plan and manufacturer guidelines.

12. BUILDING PERFORMANCE ISSUES (cont’d.) • Suggested Compromise: “A/E agrees that the building will perform in accordance with the predicted energy optimization subject to (i) compliance during construction with the Construction IAQ Management Plan, (ii) commissioning of the building systems in accordance with the Commissioning Plan and (iii) operation and maintenance of the building systems in accordance with the Commissioning Plan and manufacturer’s guidelines.” • Insurer Language: A/E not liable unless the A/E is solely at fault for the failure of the building to perform in accordance with design estimates. • Owner Response to Insurer: A/E is liable, to the extent of its relative fault, for the failure of the building to perform in accordance with design estimates.

13. D. GREEN GUARANTY Avoid contract language guaranteeing or warranting delivery of “LEED” silver” or “LEED gold” buildings. • Not in Owner’s interests. • Not in Architect’s interests. • Beyond Architect’s control.

14. D. GREEN GUARANTY (cont’d.) LEED credit submittal templates. • Declarant certifies accuracy of information. • Coverage issue relating to guarantees and warranties. • Include clause in Owner-Architect Agreement: “The signing of any declaration or certification supporting any LEED credit submittal is solely for purposes of LEED certification and any such declaration or certification signed by the Architect shall reflect the Architect’s professional opinion to the best of his/her knowledge and belief and does not constitute a warranty or guaranty by the Architect.”

15. E. TENANT CLAIMS Media and USGBC trumpet superior IEQ of green buildings. There have been and will be particular “green” buildings that have IEQ issues and perform below expectations. Important for Owners in standard form of Lease Agreement to expressly disclaim any express or implied warranties regarding employee productivity or number of employee sick days. Balancing act for Owners. • Suggested language: “Owner (or Lessor) makes no representations, express or implied, regarding the relative health and productivity of employees working in the building. A variety of factors (many of which are beyond Owner’s control) affect employee health and productivity and neither Owner nor Architect shall be liable for any claims by tenant, whether for damages, or rent abatement or other cause of action, arising out of or relating to employee sick days or loss of productivity.”

16. E. TENANT CLAIMS (cont’d.) Architect has no privity with tenants. Architect may seek to require Owner to include disclaimer or have Owner use “best efforts” to include disclaimer in Lease Agreement. Architect may seek to have Owner waive claims against Architect or defend and indemnify Architect for claims arising from loss of productivity or increased employee sick days.

17. III. MANAGING RISKS IN SUSTAINABLE CONSTRUCTION CONTRACTS A. SCOPE OF WORK LEED project versus traditional project. Certification Plan and Specifications. • Buy-out activity. • Subcontractor submittal review. • On-site material staging and approvals. • Mid-project LEED audit.

18. B. DELAYS Building green adds new sources of delay. • Unavailability of regional materials. • Unavailability of recycled content materials. • Unavailability of certified wood materials. • Unavailability of rapidly renewable materials. Difference between green delay and traditional delay events. Owner-Contractor Agreement should address. • Notice from Contractor – form, content and timing. • Response from Owner – form, content and timing.

19. B. DELAYS (cont’d.) Non-compensable delay versus compensable delay. Compromise position: specify limited number of green delay days as non-compensable; impacts to critical path beyond specified limit are compensable delays.

20. C. LEED DOCUMENTATION LEED projects entail added administrative responsibilities for Contractor. • Generate, collect and manage documentation supporting targeted credits and prerequisites. • Credits may be lost if inadequate or improper documentation. • Critical for Contractor to have proper planning and processes in place to manage the documentation.

21. C. LEED DOCUMENTATION (cont’d.) Owner should require Contractor to prepare (prior to contract execution for inclusion as a Contract Document): • Construction Waste Management Plan. • IAQ Management Plan. • Erosion and Sedimentation Control Plan. • Material and Resource Selection Plan. • Low Emitting Material Management Plan. Incorporate as Contract Documents to flow down to subcontractors. • Management Plans need to be included in subcontractor scope of work and pricing.

22. C. LEED DOCUMENTATION (cont’d.) Owner-Contractor Agreement should require monthly submittal of LEED Progress Report. • Submit with pay application (condition precedent to payment). • Narrative and spreadsheets comparing actual performance with LEED credit goals. • Certify compliance with various Management Plans. • Copy of LEED Progress Report to LEED Consultant. • LEED Consultant to provide Owner with written notice of any concerns/deficiencies within 7 days of receipt.

23. C. LEED DOCUMENTATION (cont’d.) Owner-Contractor Agreement should require Contractor to regularly photograph and submit with LEED Progress Report. Materials and Resources credits earned on basis of percentage of total project material costs. • Owner-Contractor Agreement should require monthly tracking of all material costs. • Flow down material tracking to subcontractors.

24. D. DAMAGES Insurance for risk of failure to achieve certification. • GL policy. Import of mutual waiver of consequential damages. • Carve out for liquidated damages or limitation of liability. Mitigate risk by monthly LEED Progress Reports and review by LEED Consultant.

25. E. COMMISSIONING Systematic process of ensuring that building systems perform in accordance with Owner’s project requirements and bases of design. Failure to optimize system may result in: • poor performing system that runs inefficiently; • frequent breakdowns; and, • additional operation and maintenance costs. Correctly implemented, commissioning more than pays for itself. LEED requires fundamental building commissioning as a prerequisite to certification. • Not required during design.

26. E. COMMISSIONING (cont’d.) Credit for enhanced commissioning; benefits include: • fewer construction change orders (and lower costs) as a result of changes made during design instead of during construction; • early identification of problems with building systems; • reduction in call-backs and warranty issues; and, • added set of trained eyes to solve constructability and O & M issues when less expensive to do so. Suggested changes to Owner-Contractor template: • Schedule coordination. • Templates typically fail to assign importance to commissioning. • Make commissioning a condition of substantial completion. • Incorporate all commissioning activities in Contractor’s CPM Schedule.

27. E. COMMISSIONING (cont’d.) • Depending on size and complexity of building systems, commissioning may add from several days or weeks to the substantial completion schedule. • If applicable constraints do not permit making commissioning a condition of substantial completion, then modify contract to make it a condition of final completion. • If building will be occupied, need to plan on commissioning activities occurring during evening hours and weekends and have pricing for such in contractor’s and subcontractor’s contracts. • Component commissioning. • Traditionally, commissioning only applied to MEP systems. • LEED only requires for MEP systems. • Focus on mechanical systems while ignoring building systems (e.g. building envelope) that interact with mechanical system has led to serious building failures.

28. E. COMMISSIONING (cont’d.) • Modify Owner-Contractor Agreement to have contractor coordinate commissioning of more than MEP systems. • Include commissioning of building envelope during construction (testing of walls, windows, doors, balconies and roofs). • Identify early (before cover up and installation of finishes) construction or design issues that permit excessive moisture to migrate within the building.

29. IV. SUMMARY OF ACTUAL GREEN CLAIMS A. STANDARD OF CARE Green design jeopardizes client’s business operations. • Architect contracts with government contractor client providing military systems designs and terrorism I.D. services. • Client wanted green design. • Architect designed building with extensive daylighting. • Federal government later determined that client was putting confidential data at risk. • Federal government threatened to revoke client’s security clearance, cancel contracts and refuse future consideration of contracting opportunities. • Client sued the Architect for breach of applicable standard of care.

30. B. INTELLECTUAL PROPERTY Media shines light on the shade. • Architect designs useful system for moving solar shading for a building. • After completion, favorable media coverage arising out of use of innovative solar shading. • Patent holder becomes aware of similar solar shading system and demands payment of large licensing fee or removal of system. • Owner files suit against Architect for professional negligence, alleging inadequate research of existing applicable patent and for breach of contractual indemnity for patent infringement claims.

31. C. BUILDING PERFORMANCE All is not what it seems. • Architect hires LEED-AP consultant suggested by Owner. • Consultant recommends specific materials and systems that increase costs to the Owner. • Owner sues architect for professional negligence due to increased construction costs, construction delays and higher than anticipated energy costs. • Architect finds fault with advice of consultant. • LEED-AP consultant has no insurance coverage.

32. C. BUILDING PERFORMANCE (cont’d.) The promise that could not be delivered. • Designers agree to design three schools that were to serve as prototypes of sustainable design and energy efficiency. • Architects and consulting engineers executed contracts stating that operating costs would be reduced by 50% over comparable non-green schools. • Administers at prototype energy efficient schools see red when promised reduced operating costs do not materialize. • Actual energy usage at the three schools was comparable to recently completed non-green schools. • School system brought claim against design team for building performance issues.

33. C. BUILDING PERFORMANCE (cont’d.) The pigeons drop in. • Architect designed operable sashes and solar shading on University’s library windows. • University raises concerns about effect of untreated air on building operations, but ultimately approves design after design team stresses import of outside air for health of students. • Pigeons take up residence on solar shading systems. • Students utilizing library experience respiratory illnesses reported in the media as “epidemic”. Parents are in an uproar. • University sued the architect for professional negligence alleging introduction of diseases associated with pigeon droppings.

34. D. GREEN WARRANTY Architect’s tarnished guarantee. • Architect agrees to design building with Gold LEED Certification. • Developer’s markets the building to prospective tenants by emphasizing the building’s reduced operating costs & healthier indoor environmental quality. • Budget and time constraints preclude achieving the gold goal. • Developer files suit against Architect for breach of warranty based on its guarantee.

35. E. TENANT CLAIMS The silver lining. • Tenant persuaded to lease office space based on benefits of building’s Silver LEED Certification (better IEQ and higher worker productivity). • After one year, employee productivity goes down. • Employee sick days go up. • Tenant demands rent reduction from landlord. • Tenant sues Architect for bodily injury claims resulting from poor indoor air quality.