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Hidden Risks of Green Construction

Tammie Clark AlexanderSteptoe & Johnson PLLCCAWV Mid-Year Meeting

January 2011

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OVERVIEW• Introduction• Risk Assessment

– Financial Risks– Technical Risks– Legal Risks

• Managing Risks• Q & A

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INTRODUCTION• Green construction is NOT a fad. Green

construction is the future and it is here to stay.

• Green construction is on the rise, particularly in government and schools construction.

• Green construction can also be risky.

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COSTS OF DOING BUSINESS??

• Buildings Represent:

– 72% of electricity use– 39% of energy use– 38% of carbon dioxide– 40% of raw materials– 30% of waste output– 14% of potable water

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WHY GO GREEN?• Energy/Operational Cost Savings• Tax Incentives• Financing• Healthier Workspace• Increased Productivity• Better for Environment• Positive Press

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LEED CERTIFIED• 26% less energy• 13% lower maintenance• 27% higher satisfaction• 33% reduced carbon

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RISK ASSESSMENT• We know what we know.• We know what we don’t know.• We don’t know what we don’t know.

• This is the real risk!

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RISK ASSESSMENT

• Financial Risks• Technical Risks• Legal Risks

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WHAT DOES GREEN BUILDING REALLY COST?

• Most comprehensive study to date is the 2004 Davis Langdon Study, Costing Green: A Comprehensive Cost Database and Budgeting Methodology.

• The study measured the square-foot construction costs of 61 buildings seeking certification under the LEED green building rating system against those of buildings of similar type that did not aim for sustainability. Taking into account a range of construction factors including climate, location, market conditions and local standards, the study found that for many of the green projects, pursuing LEED certification had little or no budgetary impact.

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COST ANALYSIS METHODOLOGIES1. Comparing the cost of completed green projects with original

project budget (budget versus actual method)

2. Analyzing and separating the cost of individual green features so as to compare the cost of the same building with and without the green features (cost of features method)

3. Comparing a sampling of similar buildings, some of which have green features and some of which do not (population sampling method)

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ANALYSIS METHODOLOGIESMethod ConsiderationsBudget vs.Actual

*Assumes all cost delta associated with green strategies rather than any other project elements*Original budget reasonable to begin with?*Note: a budget and market pricing are not both apples

Cost of Features

*Assumes individual features are distinctly additive as opposed to integrally tied to other project elements*Can be difficult to accurately segregate costs*Assumptions about what would have been built otherwise

Population Sampling

*Eliminates subjectivity regarding baseline budgets and designs, but carries significant challenges in:

**Assembling appropriate population samples**Normalizing for such factors as time and location

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GREEN CAN COST MORE BUTDOES IT HAVE TO?

Method Average Cost Premium

Budget vs.Actual 1-2% Over “…50% of the population…report no

increase in cost over the budget to incorporate sustainable features.

Costs of Features 2-6% 23 to 29 LEED points eligible for many projects with no cost, low cost, or minimal construction and soft cost impacts

Population Sampling 0% “…there is no significant difference in average cost

for green buildings as compared to non-green buildings”(Langdon 2007)

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ADDITIONAL COST/BENEFIT ANALYSIS FACTORS TO CONSIDER• Energy Reduction• Water Reduction• Employee Productivity• Incentives, Grants, Tax Credits• Special Financing Terms• Expedited Permitting• Appeal to Tenants

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INSURANCE CONCERNS• Problems that are not covered by insurance –

E&O• New terminology that can trigger insurance

policy exclusions• New & untested products can lead to

warranty/insurance issues• Bonds for Green Performance

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TECHNICAL RISKS5 Technical Risks to Consider:

1. High risk LEED credits in certain climates2. New & untested green products3. Innovative technical approaches4. Emerging green building requirements5. Maintaining “green” standards

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PROJECT RISKS FOR GREEN BUILDINGS• Schedule overruns due to delivery problems with new

projects or construction impacts of green requirements• Cost impacts of sole source products• Not clearly defining what is meant by “green”• Contractors, subcontractors, and designers who are

unfamiliar with green products and innovative approaches

• Specifying green products that have minimal in-field testing and poor warranties

• Problems that are not covered by insurance

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LEGAL RISKS OF GREEN CONSTRUCTION

• Non-Realization• Contract Issues• Extra-contractual Issues

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NON-REALIZATION• The risk that the Owner’s Project aspirations are

not realized to the Owner’s detriment, with possible claims and disputes– Who is at risk?– What is “Leedigation”?– How can you protect yourself?

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CONTRACT ISSUES• The risks of imprecision in the contracting

process– Who has agreed to do what?– Who is responsible for performance?– Who is responsible for failure?– Are parties clearly defined (very important for

LEED Online Reporting)

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MANAGING RISKS, also known as

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1.GET INVOLVED EARLY & PICK AN EXPERIENCED TEAM• Pre-Construction

– Concepts– Schematics– Design Development– Construction Documents

• Construction

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EXTRA-CONTRACTURAL ISSUES

• Outdated Form Contract Agreements• Product Choices• Third Party Claims• Federal, State, and Municipal Regulations

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2. EDUCATE YOUR TEAM

Make sure the entire team knows and understands the requirements for the credits you are seeking

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3. DON’T PROMISE MORE THAN YOU CAN DELIVER

• Disclaims promises – “All warranties are limited to those expressly stated in the Contract. No other warranties, written or implied shall be binding or enforceable against (your name here).”

• Manage expectations

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4. DON’T GUARANTEE THE LEVEL OF CERTIFICATION“(Your name here) warrants that the work will be in

accordance with the plans and specifications, and accepted industry standards. (Your name here) does not guarantee this Project will achieve LEED _____ Certification or that the Project will obtain any or all Materials and Resource Credits sought from GBCI.”

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5. IDENTIFY PARTICIPANTS, THEIR ROLES, AND RESPONSIBILITIES• Documentation, Documentation,Documentation!!!

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6. DON’T TIE PAYMENT TO ACHIEVING LEED CERTIFICATION FOR THE PROJECT

“The attainment of LEED Certification as selected above shall not be a condition precedent to progress payments or the final payment on the project.”

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7. MAKE SURE YOU HAVE ADEQUATE INSURANCE IN PLACE• Fireman’s Fund has a “Green Guard” Suite of

Coverages for green buildings– Green Update Coverage– Green Certified Building CoverageIf suffer covered loss, provides coverage for

vegetative roofs, alternate water systems, green power generation, costs to hire LEED-AP to oversee repairs of systems, etc.

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8. ONLY TAKE RESPONSIBILITY FOR DELAYS THAT YOU CAN CONTROLA. The attainment of LEED certification is dependent upon the approval of

third parties like the USGBC, over which (your name here) has no control. Therefore, the attainment of LEED certification is not a perquisite to the achievement of Substantial Completion of Final Completion of the Project.

B. If (your name here) is delayed, hindered or prevented from performing its services for any reason beyond (your name here) control, including but not limited to lack or unavailability of sustainable construction material or technology which has been specified, or other third parties to approve or to disapprove the (your name here) work; (your name here) shall be granted an extension of time equivalent to the period of delay in which to complete (your name here) services.

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9. ADDRESS CONSEQUENTIAL DAMAGES• Waiver of Consequential Damages. Owner’s loss of tax incentives

and/or credits other similar benefits or credits, loss of anticipated energy, water, or similar operation and maintenance savings, loss of green grants, loss of future development rights, loss of income or profit, loss of marketing opportunities and other similar opportunities or benefits, resulting from a failure to attain the level of LEED certification selected above, shall be deemed consequential damages and subject to the waiver of consequential damages in the Agreement between _______________________.”

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10. SPECIFY WHO WILL PAY FOR LEED APPEALS• “(Your name here) shall not be responsible for

any costs associated with the appeal of any LEED credits.”

• Be aware of time limitations established by USGBC

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QUESTIONS???

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THANK YOU!Tammie Clark AlexanderSteptoe & Johnson PLLC1085 Van Voorhis Road Suite 400Morgantown, WV 26505(304) 598-8110 (phone)(304) 933-8712 (fax)Tammie.alexander@steptoe-johnson.com