Anticipate the Possibility Your Project's Green Goals Won't Be Met

Date: June 3, 2009

Green projects often break ground brimming with optimism. Owners intend to win tax credits. Tenants aim for energy savings. LEED certification has become a mark of prestige; aiming for LEED platinum certification evidences a willingness to go the extra mile for the environment. Furthermore, public projects are increasingly subject to green mandates. New schools often have to meet some level of LEED certification or its equivalent. Many states are setting aside federal stimulus funds specifically for green projects.

So what happens if it all goes wrong? Who foots the bill for a failed certification? How will damages be computed? Such green project issues generally have not yet been conclusively addressed by the courts. But because the benefits of green building certification can be substantial, the costs of certification failures can be significant as well. Contractors and subcontractors can take actions at the contracting stage to protect themselves from green backcharges.

Most importantly, contracts must specifically allocate responsibility for the actions necessary to achieve LEED certification or similar recognition, and explicitly set down the timetable for such actions. Generally speaking, responsibility should flow from control. For example, because many of the LEED certification elements flow from the design of the building, the contractor on a traditional design-bid-build project should not be made to bear full responsibility for a project's LEED certification.

Timing is especially important where tax credits come into play, as delayed certification could push the credit into a different tax year for the developer, or even worse, could wipe out the credit if the pool from which the tax credit is to come is exhausted prior to certification. The case of Southern Builders, Inc. v. Shaw Development Co., filed in the Circuit Court for Somerset County, Maryland, is instructive on this point. That case concerned the construction of the Captain's Galley condominium in Crisfield, Maryland. The developer hoped to attain LEED Silver certification and thereby qualify for a tax credit from the State of Maryland worth around $635,000. Near the end of the project, the general contractor sought a mechanic's lien, claiming it was still owed $54,000. The developer answered with a staggering $1 million in backcharges, among these compensation for the $635,000 tax credit -- the developer's filings asserted that LEED certification had not been attained and the tax credit had accordingly been lost. The case subsequently settled out of court, so it is unclear how this backcharge was handled by the parties. It is possible that the certification was ultimately achieved, but only after the fund from which the tax credit would have been paid by the State was exhausted. Parties may wish to factor in the timing of tax credits in considering "no damages for delay" clauses.

The risk that changes to the project or changes in the economy will affect LEED certification should also be addressed upfront. Value engineering, for example, is of little value where it comes at the cost of valuable LEED points. If the project incorporates exotic supplies to meet green goals, the smaller markets in such goods may be subject to price spikes that are difficult to predict, so the parties may wish to utilize escalation clauses to allocate properly the burden of attaining certification. Subcontractors need to make themselves aware of their LEED responsibilities and the LEED goals of the project as a whole. If the contract between the general contractor and the owner is incorporated into the subcontract, the subcontractor is likely taking on LEED responsibilities to the general contractor for its portion of the work. If LEED certification fails or is delayed, the subcontractor may
face backcharges as a result.

It is worth noting that the owner and the contractor may be better off anticipating at the outset of the project the possibility that certification efforts will not be fully successful - for instance, that a project intended to be LEED Platinum will attain only LEED Gold certification - so that the project can be properly priced. This is especially true where the certification is not the result of a government mandate or spurred by the hope of tax benefits. Moreover, it appears that in some situations, owners and contractors are incorporating green elements into projects in hopes of attaining certification, but are not making certification itself a contractual goal. This approach eliminates the uncertainty present in the LEED certification process, but may deprive owners of the benefits of certification.