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Remedies in Review: DBIA’s Sustainable Project Goals Construction Contract Exhibit

Design-Build Institute of AmericaEach green building contract exhibit we review here at GRELJ comes closer to addressing some of the core risks inherent with sustainable design and construction. Consider the Design-Build Institute of America’s (“DBIA”) Sustainable Project Goals Exhibit, which was released last May. Although the document is intended to be annexed to a design-build contract, the ways through which specific risks are allocated between the owner and design-builder are worth describing in some detail and have implications for general contractors, construction managers, design professionals, and consultants alike.

Article 1 of the Exhibit – Project Goals – allows the parties to describe the project’s green building aims with specificity and align their expectations from the beginning; as many insurers have observed, “claims begin with violated expectations.” Article 5 addresses some of the insurance claims which have been reported to date, and includes language that aims to manage the risks that may arise from the use of experimental products, designs, or building systems. (Note that “aggressive design” was one specific risk identified by Marsh in its report last summer about green building-related risks perceived by A/E/C executives).

However, Article 4 – Remedies, is the provision which I think deserves the most attention. It offers the owner and its design-builder a menu of options to choose in the event that the project fails to earn the anticipated level of LEED or other third-party certification, or other green building project goal that may be described elsewhere in the Exhibit. Critically, though, the obligation for determining whether any green building regulatory requirements exist with which the project must comply rests not with the design-builder, but with the owner. More on that in a moment.

With respect to how potential remedies are organized in Article 4, the owner can first expressly agree that a failure is not a breach of contract, and simply waive any claims against the design-builder arising out of the project’s failure “to satisfy or achieve LEED certification at any level or other sustainable standards.” If the owner’s green goals for the project are purely aspirational, this may be a viable request for the design-builder or contractor to make during negotiations. Of course, if third-party or other certification is required by code or other legislation, such a provision will likely be unacceptable to the owner.

Alternatively, the parties can agree to a fixed dollar amount as liquidated damages in the event of a failure. In this provision, the owner also provides the design-builder with a waiver of claims for other related damages, including consequential damages. As we have discussed here at GRELJ previously, this may be problematic for a variety of reasons. From a legal perspective, whether a liquidated damages provision in this context would be considered a penalty rather than a legitimate estimate of the damages the owner would stand to incur is still a question mark. It will likely be a significant period of time before we have a court opinion weighing on this critical issue.

Finally, the Exhibit includes what I believe to be the most interesting approach to allocating risk in Section 4.3. There, the parties can choose to impose a limited obligation to cure the project’s failure on the design-builder. This obligation is “to cure the situation through the addition, replacement or correction of materials, configurations, systems or equipments in order to obtain the level of LEED certification indicated above and/or to satisfy or achieve other sustainable standards as are identified, or as required by the Legal Requirements [defined in Article 3 of the Exhibit].”

However, the extent of the curing costs for which the design-builder will be responsible is limited to: (i) any remaining funds in the construction contingency (typically a percentage of the overall cost of the work that exists to cover unanticipated construction expenses, which requires the builder to obtain the owner’s prior written approval before accessing it); (ii) the design-builder’s share in the savings if the cost of the work comes in less than the design-builder’s guaranteed maximum price of the work; or (iii) a fixed sum agreed to by the parties.

What is also important to note about the Exhibit is that it places the obligation for determining the Legal Requirements (again, as defined in Article 3) squarely on the shoulders of the owner. In other words, the party which is generally in the least adequate position to determine what those legal requirements might be is actually responsible for them by contract. This makes little sense, and I cannot imagine an owner agreeing to carry that burden, particularly in the current regulatory climate which is changing so rapidly and varies so widely depending on the particular jurisdiction. It seems like an odd approach, and I am curious if anyone has any insight or feedback as to why DBIA crafted Article 3 in this manner.

The entire Exhibit is certainly worth reviewing in detail, but one other provision that I want to draw your particular attention to is Section 6.2, which states clearly that “[i]n no event shall the dates of Substantial Completion and Final Completion be contingent on any certification of the Project to meet any level of the USGBC’s LEED rating system or other similar system.” This is critical, particularly where project schedules are tight and other penalties – liquidated or otherwise – may begin accruing if substantial completion is not reached as required.

One other final thought – it’s also interesting to me that the first green building contract addendum – the AIA’s B214-2004 – purely addressed scope when it debuted three years ago. Notwithstanding the inherent limitations with form contracts and exhibits, and the fact that scope documents such as the B214 do remain useful tools for project teams, the industry clearly perceives risks arising out of green building projects. I anticipate that we will see more organizations developing and promoting similar consensus documents with risk management provisions as we continue to move forward in 2010.

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7 Responses to Remedies in Review: DBIA’s Sustainable Project Goals Construction Contract Exhibit

  1. Michael Gibbons April 16, 2010 at 3:29 am #

    Stephen,
    I read your article with more than passing interest since I recently finished drafting and negotiating a $41MM design build agreement for the development of a 235,000 sq. ft. LEED Silver manufacturing facility. We utilized the DBIA Cost Plus GMP form along with the DBIA form of General Conditions.
    My client was the owner and I found (not surprisingly) that the DBIA forms contain many subtle and some not so subtle examples of bias in favor of the design builder (not dissimilar to the treatment of Architects in the AIA family of contract documents). I completely agree with you that no halfway sophisticated owner is going to agree to shoulder the burden of identifying Legal Requirements applicable to the design and construction of the contracted improvements. Owners prequalify, select and compensate a design team, in part, to have the design team identify Legal Requirements applicable to the Work and prepare plans and specs in conformity with same. Most designers understand this and I find it somewhat bizarre that the DBIA would attempt to protect design builders by shifting to the owner the responsibility to determine Legal Requirements.
    We did not utilize the DBIA Sustainable Project Goals Exhibit in our Contract Documents. I prepared a separate exhibit entitled “LEED Conditions” and we utilzed that document to capture in one place the myriad rights, responsibilities and risks placed on the owner and design builder seeking to design and construct a LEED Silver building.
    In our project, the design builder insisted and the owner agreed on a liquidated damage sum ($50k)to be paid to owner in the event of failure to achieve the targeted LEED Silver certification. The contract calls for the owner to retain this sum at the time of what otherwise would be final payment. The owner holds the sum until the certification decision is made by the GBCI or six months after substantial completion, whichever comes first. If the GBCI determines that the building has earned the LEED Silver certification, then the owner is obligated to release the $50k to the design builder. If the GBCI determines that LEED silver certification is not earned or if more than six months pass from substantial completion with no determination from GBCI, then owner retains the final payment of $50k as liquidated damages.
    In my experience, the marketplace is gravitating towards liquidated damages to address the risk of failure to achieve targeted LEED certification. Additionally, owners do not want to be held hostage indefinitely waiting on a decision from the GBCI. Accordingly, especially in the design build context (which eliminates the designer v.contractor “finger pointing” evident frequently in the traditional design-bid-build procurement model)expect to see more owners bargaining for a deadline by which certification must be obtained or LD’s are triggered. Design builders can mitigate this risk somewhat by seeking provisional approval of design credits at the conclusion of the design stage and prior to commencement of construction. While the improvements are being constructed, the GBCI contracted reviewers can be commenting on and providing provisional credit for the targeted design credits. When construction concludes, in theory, the design builder will only have the construction credits subject to new review. This two part review process should facilitate earlier completion of the GBCI certification process.
    Due to the significant time lag associated with issuance by the GBCI of a certification determination, it makes little sense to make such certification a condition of achieving substantial completion of the Work and parties seem to understand this readily. As long as the financial impact on the design buider/contractor is clearly expressed and limited, LEED certification may be linked to achievement of “final completion” of the Work. I think it is cleaner, however, to carve out the LEED certification milestone from the definition of final completion (typically completion of punch list items and delivery of various deliverables) and treat it as a condition subsequent to final completion with separate financial implications for the parties.

    • Stephen Del Percio April 28, 2010 at 2:15 am #

      Michael,

      As usual, many thanks for your thoughtful comment and insight. One thing I’m not sure of, though, is why the design-builder (or consultant, or design professional, as the case might be) would be willing to expose itself to liquidated damages by accepting the risk of a third-party entity’s certification decision when that process is almost completely outside of the design-builder’s control. As you point out, some of that risk can be mitigated by understanding the two-tiered nature of the USGBC/GBCI certification review process, but there is still an awful lot of responsibility for the final certification that rests completely with an unaccountable third party. As Ujjval points out in his comment below, the lag times associated with third-party review are still an issue, notwithstanding USGBC/GBCI’s commitment last year to address the ongoing backlog. In the negotiation you describe above, was there any pushback from the design-builder on that issue?

      • Michael Gibbons April 28, 2010 at 4:13 am #

        Stephen,
        There are several reasons supporting the decision of a design builder to agree to LD’s tied to failure to achieve or timely achieve LEED certification. First, for a design builder with substantial prior experience designing and building LEED projects, the risk is not dissimilar to the traditional risk of a general contractor promising an owner to obtain a Certificate of Occupancy (from a building department it doesn’t and cannot control) within a time certain or suffer imposition of LD’s. There is a risk but it is perceived as a manageable and not unreasonable one.

        Secondly, the downside is limited. While $50k is not a small sum, in the context of a $41MM budget, it can be paid and the job can still be a good and profitable one for the design builder.

        Thirdly, the need to be accountable to the Owner becomes a deal point that must be addressed in an acceptable manner by the design builder. After typically selling the owner on the desgin bulder’s expertise in sustainable design and familiarity with LEED building rating system, it is difficult for the design builder to throw up her hands and say ” I’m not assuming any risk on this LEED certification deal that I am designing and building”.

        I do think it becomes more complex once one leaves the design build project delivery system. Under the traditional design-bid-build delivery system, both the A/E and the GC are independently responsible for differing credits sought by the project owner. In such cases, it is only fair and reasonable to hold each entity responsible for achieving the targeted credits each has (hopefully) expressly assumed responsibility for in their (hopefully well drafted) contract.

        What I haven’t seen discussed but is a real distinct eventuality is what happens when LEED certification is not achieved due to failure to obtain, for example, 4 targeted credits. As a result, the LEED scoresheet falls one credit short of either certification or the desired level of certification. Assume further that responsibility for failure to achieve the 4 credits is allocated as follows: 1 credit to each of the architect, civil engineer, general contractor, and landscape architect (each of which has a separate direct contract with the Owner). This is not a far fetched hypothetical and yet all but the most exacting (and coordinated) set of contracts will fail to address it.

  2. Ujjval K. Vyas, Ph.D., J. D. April 17, 2010 at 6:20 am #

    Stephen,

    An excellent post and once again we are discussing an issue that shows the weakness of organizations and associations in this area. The AIA, DBIA, AGC (though this seems the most thoughtful), and many other associations and even standard setting bodies are trapped in trying to attach their label to the green marketing train while relying on the standard internal processes to craft language addressing the risks and opportunities. Michael Gibbons response is also on target though I do not share his faith that architects are the best party to determine the Legal Requirements of green issues. Frankly, design professionals are probably the worst group to really address the legal or risk issues as I have seen repeatedly in my practice in this arena. They most often, as the AIA desires, cast themselves in the role of green advocates with little or no knowledge of the legal issues surrounding their recommendations. The significant participation by architects in the various USGBC state and local government lobbying efforts demonstrate their lack of policy knowledge in spades and continue to create liability chains that will lard litigation in this area for some time to come.

    It is disappointing that the DBIA did not take this opportunity to demonstrate that its delivery system actually provides the potential for creating real high-performing buildings instead of green marketing alone. Traditionally owners that seek out DB options are interested, for various reasons, in the performance and efficiency of delivery associated with their building assets. The DBIA I think missed a real opportunity here to show its radical departure from the AIA’s views. The DBIA could have easily taken the view that it would absorb the risk, as it does for so much else, to assure the certification while creating a mutually agreed upon dollar ceiling for its liability given the lack of control over third-parties. This would have allowed owners a sense of comfort and provided solid pricing signals in the market for obtaining the certification.

    It is also good to see that the problems associated with substantial and final completion are beginning to be addressed. I was recently involved in drafting documents for my client in a LEED Gold building project for a prominent building association and was stunned to discover that they have still not received certification almost two years after project completion.

  3. Michael Gibbons April 20, 2010 at 12:12 am #

    Ujval,
    The reference to Architects being the proper party to determine “Legal Requirements” was intended by me primarily to address code and regulatory compliance issues. I believe Stephen’s article also discusses it in this context. Hopefully, we can agree that the design professional, and not the owner, is the proper party who should be responsible for determining the proper building codes and regulations (other than zoning/land use which the Owner should be responsible for) affecting design that must be consulted by the design team and complied with in order to legally develop a parcel.

    With respect to identifying and allocating as between Owner and design professional those risks that relate to sustainable design and construction, I agree that to date the industry generated forms have been inadequate. For this reason, I prepared a separate contract document addressing in detail LEED related processes, liabilities and rights. Addressing these matters in detail at the beginning of the project serves to avoid the misaligned expectations between owner and design builder that consign so many projects to years of protracted litigation/arbitration.

    • Stephen Del Percio April 28, 2010 at 2:16 am #

      I think Ujjval’s comment was addressing the broader failures of the A/E industry to embrace the possibility that sustainable design practices can increase risk profiles. I don’t think it’s unfair to say that we’re all on the same page regarding who is in the best position to address the controlling legal requirements for a green building project (i.e., the design professional or consultant), notwithstanding the obligations in the DBIA exhibit as discussed.

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