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Surety Industry Raises Red Flags Over D.C. Green Building Act

Concerns over LEED creep (the application of LEED mandates to private projects) include the potential for awkwardly- or hastily-drafted legislation to change the risk structure associated with a given green construction project for various project stakeholders. For example, back in early August, the Surety and Fidelity Association of America (“SFAA”) and the National Association of Surety Bond Producers (“NASBP”), which collectively represent the surety companies that underwrite most of the surety bonds that are issued on construction projects in the United States, wrote a joint letter to the Washington, D.C. Department of Consumer and Regulatory Affairs regarding the District’s well-publicized Green Building Act of 2006, which will eventually apply to all public and private construction in D.C. over 50,000 square feet and require either a Certified or Silver LEED rating, depending on the type of project.

In a recent newsletter describing the scope of the letter, Mark H. McCallum, general counsel to NASBP, noted that “[i]t is evident from a reading of the ‘performance’ bond requirements contained in the new law that the underwriting and operation of surety bonds was not well understood by the drafters.” Mr. McCallum’s letter to the Department of Consumer Affairs, authored in cooperation with Matthew Klimczak, Director of Underwriting for SFAA, both points out numerous, significant concerns implicated by the D.C. legislation for the surety industry, as well as suggests broader implications for green building legislation at large that local governments should remain vigilant of when considering such mandates in both the public and private sectors.

McCallum and Klimczak first point out that D.C. Green Building Act incorrectly uses the term “performance bond.” A performance bond is generally issued by a surety and assures one party (for example, the owner) that another party (such as its general contractor) will perform as required under its contract. In the event that the latter party doesn’t perform, the surety will step in and determine what steps are necessary to make sure that both the contract is completed and the project itself is finished. However, the D.C. Act’s concept of a “performance bond” in Section 6 is ostensibly designed to serve as a penal sum in the event that a project does not meet the requirements of the Act, to be deposited into a Green Building Fund and used to fund staffing, inspections, and green building education programs.

Moreover, there is no language in the Act that designates which party on the project must supply the “performance bond.” McCallum and Klimczak note that the LEED program, necessarily, involves a large number of project stakeholders- from designers to contractors and suppliers- who “all may have responsibilities that bear upon the fulfillment of the LEED criteria.” Although the owner is in the best position to make sure that the LEED requirements are met, the Act does not expressly prohibit- or permit- the delegation of the bond requirement from the owner to any of those types of parties. If such an owner did delegate its bond-procuring duty, a surety would likely decline to issue the bond because “neither the design professional’s nor the contractor’s responsibilities will involve the complete [project] undertaking,” making the surety leery of such a party’s ability to physically control the project’s completion.

McCallum and Klimczak next identify an “inherent conflict of interest” in the Act. The staff responsible for evaluating compliance are those whose positions are being funded by projects that forfeit the “performance bond” into the Green Building Fund. As the authors accurately point out, “[t]his will impose considerable tension on objective verification of green building requirements.” The letter concludes by observing that many other bond-related considerations are not addressed by the Act as drafted, and requests a meeting with the Department of Consumer Affairs after noting that “[w]ithout needed clarifications and modifications, sureties likely will be reticent to write these ‘performance bonds.’” It’s not clear whether this meeting has taken place yet, or what type of response the letter has solicited from the D.C. government, but we’ll obviously be keeping track of the surety industry’s position with respect to the D.C. legislation.

From a broader point of view, green initiatives are rapidly changing the scope of responsibility that owners are requiring from construction project stakeholders. All parties- legislators, owners, contractors, and design professionals- must be aware that their risk profile can- and in many cases has- changed, and guide themselves accordingly in order to achieve the desired sustainable outcome.

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One Response to Surety Industry Raises Red Flags Over D.C. Green Building Act

  1. Emily Meyer October 11, 2007 at 8:20 pm #

    Good point – poorly written green legislation is worse than no legislation.

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