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Construction Litigation

Emerging Risks in the Design and Construction of Green Buildings

By Christopher Nutter – April 11, 2012

Although new design and construction in the United States may have dramatically slowed during the recent recession, the rate of change within the industry has not slowed at all. The last few years have seen the adoption of new building and energy codes as well as widespread incorporation of voluntary standards that are intended to produce less wasteful and more environmentally sensitive remodels and new construction. While these changes are generally heralded as positive steps, their collective impact on the building industry has not yet been fully evaluated in light of the new risks that come with these new materials, new construction methods, and new compliance requirements. However, one thing is certain—the new standards, voluntary or mandatory, are not going away. Here’s why.

  • Public entities, representing the majority of construction dollars being expended today, are demanding improved environmental practices. Civic projects are thus defining current construction practices that will, over time, also alter the standard practices in the industry.

  • Even when the standards are optional, a strong argument can be made for the direct economic benefits of sustainable design and construction, including decreased operating costs, increased building values, increased occupancies, and higher rents. CoreNet, Global Survey on Corporate Real Estate and Sustainability, (2009). Furthermore, for about the same cost as traditional design, (Cost of Green Revisited (Davis Langdon 2007)), a sustainably designed building consumes 26 percent less energy than a traditional building (GSA Public Buildings Service, Assessing Green Building Performance (2008)). As a result, private developers are clamoring for professionals with the experience to deliver this type of project.

  • In many cases, design professionals are now obligated to present sustainable options to their clients, regardless of code requirements (see Canon IV of the 2007 AIA Code of Ethics & Professional Conduct), proving that professional ethics also drive change.

In fact, over the past few years, the legal and contractual requirements to comply with previously voluntary standards have become the rule rather than the exception in both private and public construction projects. But who is responsible for nailing down this moving target of laws and standards? What happens when the standards are not met? What are the risks, and how can they be avoided? If risks can’t be avoided, who is responsible? The answers to these questions require a brief review of the standards.

The Standards
The standards relevant to sustainable design and construction, also known as green building, vary widely, but they follow the same basic tenets—encouraging consideration of the siting of the building, the energy required to operate the building, the materials used in construction, the management and consumption of water, as well as the air quality, both inside and outside the building. Numerous competing and complementary standards were developed to evaluate these criteria, with revisions and updates continuing at a fairly rapid pace. Standards also vary state by state and country by country, with different methods for measuring success.

The Green Building Initiative’s Green Globes, Build It Green’s GreenPoint rating, the International Living Future Institute’s Living Building Challenge, the National Association of Home Builders’ Green Building, the Environmental Protection Agency’s Energy Star, BRE’s Environmental Assessment Method, and the U.S. Green Building Commission’s Leadership in Energy and Environmental Design (LEED) certification are just a few of the currently published standards. LEED is the most widely known of these standards and the one most commonly cited when green building is being discussed. LEED is also a good example of the shifting nature of the standards as it went through significant revisions in 2009, with more planned for late 2012. To complicate matters further, referenced standards from independent organizations such as the American Society of Heating, Refrigerating and Air-Conditioning Engineers (ASHRAE), ASTM, and the American National Standards Institute (ANSI), which also undergo regular revision, are often incorporated into the basic requirements for these standards. This is certainly the case with LEED.

In an increasing number of states, model building codes and associated acts and statutes are being modified to incorporate new mandatory green building requirements. In California, CalGreen was enacted (effective January 1, 2011) as a firm requirement at the state level and is to be used in conjunction with existing building codes and other preexisting local greening requirements, regardless of their inherent incompatibility. For example, San Francisco had to reconcile the existing requirement for LEED certification of commercial buildings and Green Point ratings for residential projects with the new state-mandated building code. Other states, such as Maryland, have opted for a less complicated solution by directly adopting the International Green Construction Code, which was designed as a complement to the other International Code Council model codes already in place in Maryland. This reduced the likelihood of uncovering conflicting or incomplete provisions that can occur with uncoordinated standards.

The Risks
Given the widespread adoption of green design standards nationally, it may now be more accurate to refer to the risks associated with green design and construction simply as “current building risks.” Many of these so-called green risks are very similar to issues traditionally associated with construction projects—uncoordinated drawings, construction delays, and noncompliant construction, just to name a few. But other risks can be specifically related to sustainable design and construction practices primarily because of the use of green materials, systems, and procedures. Six of the top green risks are described in the matrix below, along with the likelihood of occurrence, the likelihood of associated litigation, the financial significance of the risk, and the party or parties typically held responsible for the issue. Discussion of the risks as well as examples follow the matrix.

Risk Matrix

1. Higher Than Anticipated Operating Expenses—Excessive Energy Use, Water Use, and Maintenance

It is a common expectation that long-term savings will be associated with a conservation-oriented design; the design will allow for less consumption, and less consumption must equal greater savings. Unfortunately, this is not always the case. For example, a Wisconsin public school, Northland Pines High, was granted a LEED Gold rating in 2006. Several years later, that rating was challenged, and the building was found not to be in compliance with the basic LEED requirements for heating, cooling, and ventilation (ANSI/ASHRAE 62.1-1999). Although it is generally believed that the problems have since been corrected, it was not without cost or impact, including $40,000 expended by the school district to address the issues identified with its brand new school. Ken Anderson, Pines High School to Stay at Gold Level, Says Green Council, Vilas County News-Review (Eagle River, Wis.), June 22, 2010. Also, although not quantified in this case, there is no doubt that the alleged improperly designed and improperly commissioned system consumed more energy than was intended before the issues were identified and corrected. Imagine that the problems were never identified; the actual energy use could have exceeded that of a traditional, inefficient building.

Regardless of the criteria that must be met to comply with state, county, city, or campus standards, the risk is that projections of cost savings, savings that are being invested in with increased construction costs and time, may not be present in the completed building or at least not at the anticipated levels. Or, even if savings are achieved, are there other costs to those savings? For example, the physical discomfort associated with poorly lit, heated, or ventilated spaces. These are not typically considered to be reasonable trade-offs for more efficient buildings.

Resource consumption is of interest in part because it typically represents a significant portion of a building’s operating costs. It is also one of the mantras of sustainable design: Consume fewer resources. Therefore, the risk associated with unanticipated operating expenses does pose the greatest risk in green projects—it involves large dollar values; it is an issue in lawsuits that are already under way; and the burden of the risks falls to designers (engineers), contractors (subcontractors), and owners.

2. Establishing Conflicting Standards—Creating Unachievable Project Requirements

New standards are being developed and instituted in cities and counties at such a pace that it is unreasonable to expect that they will all be compatible, complementary, and coherent. Designs must be able to satisfy the basic code requirements, while also meeting the elevated requirements of LEED or any other standard adopted by a local government or state. What happens when the LEED standards do not mesh with existing design standards?

Even with review and consideration during the design process, some requirements are nearly impossible to establish in advance. In another LEED-based project, a dormitory for a private university in Georgia, the design professionals chose to top a required fire lane with a grass paving matrix. The paving was designed to support over 5,000 pounds per square inch, more than enough for a fire truck or any other emergency vehicle that might need access. The fire lane paving was also designed to increase the pervious nature of the site, which equates with additional LEED points. After completing the design and confirming that it satisfied the code as well as campus standards, the project was submitted to and approved by the planning department and the building department, and ultimately routed to the fire marshal for final approval. At the time of his final review, the fire marshal refused to approve the pervious fire lane and required it to be paved with concrete. The additional points for achieving a more pervious site were lost.

Two other recent examples also relate to the problems that can occur when conflicting measures are adopted. In two separate litigation actions, one in Washington State and the other in Albuquerque, New Mexico, locally instituted requirements for the energy performance of new equipment in new construction were determined to be more stringent than what was allowed by federal law (BIAW et al. v. Washington State Bldg. Code Council, No. C09-5633RJB (W.D. Wash. 2011) and AHRI v. City of Albuquerque, No. 08-633 MV/RLP (D.N.M. 2010)). The circumstances in both cases arose out of a political decision to increase sustainability requirements regionally without fully understanding the legal implications of doing so. Other public agencies may experience similar problems as they attempt to increase the sustainability of their own standards.

In many cases, conflicting standards can be addressed as they emerge. Standards can be brought into alignment with new codes, or orders of precedence among the standards can be established to make corrections automatically when identified. Where significant financial interests are at stake, as was true for the manufacturers involved in the Washington and New Mexico cases, litigation becomes a more likely possibility. If deeply conflicting standards or requirements exist at the time a project is undertaken and they are not identified and resolved until after construction is under way, the potential for delays, significant cost overruns, and accompanying litigation is heightened.

3. Construction Schedule and Cost Impacts Associated with Delivering a Sustainable Building

Delay is one of the most commonly litigated issues in construction and often represents the largest dollar values in a dispute. While construction contracts may lean toward liquidated damages as motivation to keep a contractor on schedule, the magnitude of the resulting damages often causes the dispute to end up in litigation. Obviously, delay is not a new green issue; however, the impact of delay on green projects may lead to unexpected results.

In one of the first and most publicly discussed green building cases, Shaw Development v. Southern Builders, No. 19-C-07-011405 (Cir. Ct., Somerset Cnty., Md. 2007), it was initially thought that the “Captain’s Galley” condominium construction was in dispute because it failed to meet the LEED Silver certification level set forth in the construction contract. In fact, the dispute was over a sizeable state tax credit that was lost because the project was delayed. While the delay in that case does not appear to have been specifically related to the sustainable nature of the project, the tax credit was a green incentive; therefore, it can be considered a green delay case.

Delay can also arise from a lack of availability of materials. In 2005, one of the key ingredients used as a sustainable concrete additive, fly ash, was running short. This supply shortage was further compounded by an overall shortage in concrete. Because the use of the fly ash waste product is associated with material and resource credits within LEED and because concrete is also a more sustainable material than steel and is credited accordingly, the concrete and fly ash shortage had the potential to substantially delay or derail a number of projects. While concrete or fly ash shortages may not be a problem in the future, it is likely that any other number of critical resources may fall in short supply and risk delaying projects with specific green material requirements.

There are other examples where seemingly unimportant design decisions related to finish materials in a project may result in delay. One of the considerations in a LEED project is the distance of the material supply source to the project site. If a local manufacturer and supplier do not have the necessary specified materials, it may not be an option to secure the materials from non-local suppliers without risking the loss of points or certification. Material supply holdups are common in disputes involving construction delays, and by making the supply location-dependent, the risk of delay is increased.

Delay can also come from a lack of appropriate planning for and understanding of the steps required to complete a green project. In particular, commissioning of the building—thorough testing of the heating, ventilating, and air-conditioning systems, and the plumbing and electrical systems, among others—is a prerequisite for most sustainable designs and can be complicated and time consuming. If the contractor is not familiar with the required testing standards (e.g., ASHRAE 90.1) and has not adequately addressed the testing in the schedule, a delay may be inevitable.

As sustainable design processes and products become more common, designers, contractors, and owners will likely encounter fewer delays or supply issues that are green-specific. In the meantime, as construction specifications are refined to accommodate more supply options and as builders become more versed in the complexities of compliance with green standards, issues and disputes will continue to arise. When these issues compound time and dollars, such as delays that trigger liquidated damages and losses of tax credits, expensive litigation becomes more likely.

4. Failure to Meet Green Code or Green Certification Requirements—During the Original Design Phase, Due to End User Design Changes, or During Construction

Design and construction professionals have traditionally had an obligation to provide services that satisfy the requirements of the law as well as the additional requirements of their contracts. When those obligations are not met, there are consequences. Green design and construction is really no different except the standards are newer, and in many cases more complicated, and the expectations may be higher. In a recent case in Syracuse, New York, the developers of a shopping center, Destiny USA, received $255 million in tax-exempt bonds for their proposal to reclaim a brownfield site and to LEED-certify at least 75 percent of the square footage of the new construction. Those commitments were not ultimately fulfilled. As a result, the Internal Revenue Service is currently seeking payment of back taxes, an action that will add significant construction cost to the project. In that case, not meeting the sustainable requirements turned out to be a very expensive error.

When considering the risk associated with not meeting green design standards, it is important to remember that most of the local enforcement agencies or entities—building departments and the U.S. Green Building Commission, for example—are not entirely inflexible. It is very rare that a certificate of occupancy is withheld due to a minor code infraction or that a narrowly missed LEED certification is not granted on appeal. Furthermore, if someone, such as a LEED-accredited professional, is tracking the anticipated credits for the project, changes to flooring or equipment would likely be identified as potential problems and could be corrected contemporaneously.

5. Employing Materials and Equipment with Reduced Life Cycles or Immediate Aesthetic or Performance Failures

Owners interested in green building have traditionally sought out the long-lasting and time-tested materials and equipment for their buildings—in other words, the most sustainable materials. With new codes and standards broadening the definition of “sustainable,” some of the obvious choices are changing. New products are launched regularly, with touted LEED points and sustainable performance. Some of these products are new to the market with only laboratory testing to confirm basic performance and code compliance, and without extensive field testing.

An example of this is oriented strand board (OSB). In an effort to develop processed wood products that do not affect air quality in buildings (a prerequisite of LEED), the formulation of the resins that hold the materials together has been altered, and formaldehyde has been eliminated. While this reconfiguration may not affect building materials like wall sheathing that are well protected, it does affect doors. The newer OSB-core doors are more expensive than their predecessors and are also more susceptible to impact and compression damage. In short, they will not last as long and will need to be replaced sooner. In this case, the reconstituted product is greener, but in other ways it may be considered less sustainable.

Maintenance and cleaning are also factors in the life span of green materials and equipment. Depending on composition, green materials may require more cleaning and maintenance than conventional materials and may also require the use of different cleaning products to preserve and protect less resilient finishes. Sustainable cleaning practices, which may be a requirement of a facility or may be tied to a particular green certification, typically call for the use of cleaning materials that are less toxic to people and to the environment. This may also factor into the lifetime appearance and performance of the project.

While product inadequacy or failure is not exclusively a green issue, it does appear that these types of claims will be on the rise as new products are rapidly developed, brought to market, and put into use. Depending on the areas affected, the embedded nature of the product (how easy is it to remove and replace), and the necessity of repair or replacement, green material and equipment failures could result in a wide range of cost impacts.

6. Damage to Environmental and Professional Reputation

The consideration of sustainability in building design and construction is often a priority that goes beyond purely economic decision making. Those who are making the extra effort and, in some cases, the extra investment for green building may be vocal about the commitment and may be judged on that commitment as well. If a green building falls short of the immediate expected goals of certification and energy savings, or the longer term performance goals, it could blemish the reputation of the company or person behind its commissioning. It could also affect the professional reputation of the project’s designers and contractors.

The issue of unmet promises surfaced in a green/LEED-related residential dispute at the Riverhouse in Battery Park City, New York. In the 2010 case, the developer of a LEED Gold-hopeful condominium building was alleged to have misrepresented the true sustainability of the building based on a variety of alleged construction defects, including the inadequacy of the “green” heating system and excessive air infiltration at the curtain wall (Craig Karmin, Condo Owners Go for Green with Suit, Wall St. J., May 29, 2010). This is yet another example of how green promotion and promises can be challenged publicly.

Mitigating Green Risk

Although the specific risks and impacts of green building vary, the best approach to mitigating all of these risks is to allocate them clearly and appropriately in advance of a dispute. While it is typically the owner and its architect/engineering professionals who will carry the most risk, it is still in the interest of all participating parties to clearly assign the risks before any work is performed.

In a green project, contracts should allocate all special compliance requirements that are associated with the work, including any specifics in the design, construction, commissioning, or documentation of the project. For example, if the project is slated to be LEED-certified at any level, proper documentation related to disposal of materials must be secured during the course of construction as it may not be possible to obtain it later. This may require the participation of the general contractor, several subcontractors, and a LEED consultant.

It is also very important to ensure that contracts for green construction projects do not provide guarantees, particularly guarantees to meet subjective compliance levels (e.g., guarantees of LEED Gold certification). While it may be the implicit, and perhaps explicit, requirement for the designer and builder to comply with building codes and regionally applicable statutes, offering guarantees or promises that the completed design or completed building will be certified at a particular level by an independent organization such as the U.S. Green Building Commission creates exposure that is not likely to be covered by a standard insurance policy. This would be the equivalent of an architect guaranteeing an owner planning commission approval for its project—impossible and imprudent. Model contract forms and language are available from a variety of industry groups, including the Associated General Contractors of America (Consensus Docs 310 Green Building Addendum) and the American Institute of Architects (Owner Architect Agreement B214-2007).

In addition to the consideration given to adopting appropriate contracts, consideration must be given to the makeup and leadership of the project team. If at all possible, team members should have experience with green design and construction and understand the new procedures and processes that are required. At the very least, project participants must be open to the type of required collaborative working environment. This has been consistently cited as the number one reason for success in green projects. Peng Wu & Sui Pheng Low, Project Management and Green Buildings: Lessons from the Rating Systems, 136 J. Prof. Issues Eng’g Educ. Pract. 64 (April 2010). Collaboration minimizes risk.

Throughout the project, it is important to regularly revisit previously stated or defined sustainable design goals and to confirm adherence to those goals. This is true during both design and construction. For many professionals, this type of quality control review is already standard practice to ensure compliance with construction documents, with code, and with owner requirements. If not, it should be included as a contract requirement.

Finally, tight definition of roles and responsibilities for the project’s green requirements must be established at the beginning to avoid any confusion as the project proceeds. For example, a single agent should be assigned to stay current on the federal, state, and local environmental laws that may have an impact on the project and to keep the other participants informed throughout design and construction.

Beyond the general strategies listed above, owners need to set priorities regarding green design in order to establish appropriate protections. If actual energy conservation and reduced water use are priorities, then rigorous monitoring and commissioning should be established regardless of the measures that are dictated by codes or by certification. If beautiful, durable, and sustainable buildings are important, it may be more prudent to use only tried and tested materials and systems; new is inherently riskier. In other words, it is essential that owners define the primary sustainable goals and work with the project teams to reduce risks throughout the design and construction process.

Keywords: litigation, construction litigation, LEED, CalGreen, sustainability, green code, green certification

Christopher Nutter, AIA, LEED BD+C, is an associate director with the Global Construction Practice of Navigant Consulting, Inc., in its Seattle, Washington, and San Francisco, California, offices.

Navigant Consulting is a sponsor of the Section of Litigation, and this article appears in connection with the Sectionís sponsorship agreement with Navigant Consulting. Neither the ABA nor ABA sections endorse non-ABA products or services.

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