The Intersection of Green Building Certifications and Surety Bonds: Complexity Compounds Risk
There are a number of sustainable certification programs in North America that mandate construction materials, techniques, and processes necessary to achieve green status for projects. The most common certification, LEED (Leadership in Energy and Environmental Design) system sets forth rigorous standards for environmentally sustainable construction across all phases of construction projects – from project inception to ongoing occupancy. LEED is administered by the USGBC (U.S. Green Building Council) in the US and the CAGBC (Canadian Green Building Council) in Canada.
In order to meet these standards, contractors are required to obtain significant knowledge and experience in specialized project considerations, such as:
- locally sourced materials
- specific product handling measures
- specific construction techniques
- waste management and recycling plans
- strict adherence to sustainable construction best practices
These factors inherently introduce complexities into construction projects that ultimately affect the risk profile for bonded contractors performing the work. In the context of green building projects, the benchmarks for contractor performance are not only higher but are also more diligent and specialized. Therefore, the surety’s claim response when a contractor on a green building project is found to be in default or terminated can be complex to remediate.
In this post, we discuss the key considerations of claims involving green building projects including:
- the complexities of risk management associated with green building projects
- project-driven surety claim triggers for green buildings
- the essentials of managing a potential claim
- the LEED credits likely to be affected by a claim
- what executives need to know about green building claims
Enhanced Risk Management
For the surety company, the risk assessment of contractors performing green building projects necessitates a deeper understanding of sustainable construction practices and the specific requirements of the individual project certification type. Underwriters are typically familiar with the general complexities of green building projects and many surety companies have processes in place to adjust their principal assessments accordingly. While additional underwriting measures and construction monitoring can reduce the risk of contractor default, the reality is that any instance of increased complexity inevitably comes with increased risk.
When a principal is found to be in default, the claims response must be adjusted according to the complexities of the project. Expertise in the unique aspects of green building projects is required to ensure that:
- the project remains on target
- the outstanding credit plans are maintained as closely as possible
- the green certification is achieved
In the event of a claim, the contract and bond wording will ultimately determine how meticulously the surety must respond as well as how a replacement contractor will be responsible for maintaining documentation and achieving the planned credits for the project.
Claim Triggers in Green Projects
In addition to typical surety performance claim triggers, green building projects have additional threshold considerations including:
- Non-Compliance with Program Standards: Failure to meet the required certification level could lead to a claim. A lack of required documentation, lack of formal inspections, misuse of volatile products, lack of cleaning standards, or incorrect material disposal and recycling may all contribute to a contract default. The terms of most sustainable projects include a requirement to meet the baseline standard of the projected rating system.
- Material Sourcing: Sustainable materials can prove difficult to locate and, in many cases, must be procured from a specific distance to the project site. Some programs require the products to include specific documentation, including cradle-to-grave lifecycle assessment and the distance that products or materials travel to the site. Lack of compliance can lead to further project delays or the potential loss of credits, putting the target certification level at risk.
- Cost Overruns: Higher costs of sustainable materials or specialized product applications not accounted for in the bid documents by the contractor can strain the project timeline and budget. In addition, some materials or applications may require additional inspections or documentation that are not required on a typical construction project, generating unplanned costs.
- Loss of Knowledge: The contractor’s accredited professional, or operational knowledge holder may take an unexpected leave of absence or leave the company. If additional knowledgeable team members are not available to step in, the certification program level could be at risk.
Managing a Potential Claim
The approach to a performance claim resolution must be tailored to the project’s specific needs. Knowledgeable participants in the means and methods required to maintain the green building certification are critical to ensuring a satisfactory outcome. An effective approach involves:
- Detailed documentation: Maintaining comprehensive records of compliance with the rating system standards, including any takeover documentation and any approval documentation for a potential replacement contractor.
- Proactive communication: Keeping key stakeholders informed about the project’s progress with a competent superintendent and project manager to oversee day-to-day management of the site is critical to ensuring that key credit plans are maintained.
- Specialized consultants: Engaging experts accredited in sustainable construction for the claim assessment, management and oversight.
LEED Credits Impacted By a Claim
Some credits under the LEED rating system could be directly susceptible to claims interventions. Impacted credits are primarily earned during the construction phase of the project. Examples of LEED V4 credits potentially affected could include:
- Construction Activity Pollution Prevention
- Storage and Collection of Recyclables
- Construction and Demolition Waste Management
- Construction Indoor Air Quality Management Plan
- Low-Emitting Materials and Sourcing of Raw Materials
- Fundamental Commissioning and Verification
- Fundamental Refrigerant Management
Best Practices for Executives in Handling Green Building Performance Claims
Project Expertise and Contractor Selection
It is essential to ensure that any replacement contractor team has proven expertise in the specified green building certification system. The selection of a contractor with a strong track record in sustainable projects reduces the likelihood of additional performance issues. That vetting process needs to include evaluating the contractor’s past performance, financial stability and certification specific experience.
Continuous Monitoring
Continuous monitoring and requests for documentation of the project’s certification plan can prevent potential issues. This may involve regular audits or inspections throughout the project’s lifecycle by both the original project consultant and a surety’s consultant in cooperation with the replacement contractor.
Regulatory Complexities and Funding Considerations
A missed credit or lack of credit backup documentation can quickly derail a sustainable certification and, in drastic scenarios, call into question secured or potential funding. This could be direct or indirect funding from third parties such as governments or regulatory bodies financing the project. Adherence to standards and achievement of the specific sustainable certification is often a prerequisite to receive project funding.
By missing targets, there is the potential that the project not receive planned funding, although the original contract should have detailed provisions of how issues with certification will be handled in the event certification is not achieved.
Consequential Damages
Typical of any construction claim, the original contract will describe notice provisions, dispute resolution, timelines and outlines for action should a certification not be achieved. In many contracts, green building certifications are not deemed to be “primary completion indicators.” Rather, lawyers on both sides of the contract may undertake that certification is third party to the contract, and is not a completion milestone. It is good practice to ensure that green building certifications are indicated under consequential damage provisions to ensure contractors are not the sole risk holders.
Summary
Performance bond claims in green building certified projects represent a unique intersection of construction, sustainability considerations and risk management; layer in a defaulting contractor and the situation quickly becomes difficult to manage. Engaging a knowledgeable claim manager ensures that risks are identified, evaluated and mitigated.
If you are looking for assistance in navigating LEED certification construction project claims, or another green building credit system, VERTEX has accredited professionals and certified experts ready to support your performance claim, project considerations and risk management profiles. For more information, contact cchow@vertexeng.com or assignments@vertexeng.com.
