Greening your business is pretty but it may be poisonous
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Greening your business is pretty but it may be poisonous

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The New York Greater Greener Buildings Program creates new opportunities and responsibilities for realty owners and developers. And risks, too. This is a Kevin Connolly study and that means ...

The New York Greater Greener Buildings Program creates new opportunities and responsibilities for realty owners and developers. And risks, too. This is a Kevin Connolly study and that means maintaining awareness of the risks.

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Greening your business is pretty but it may be poisonous Greening your business is pretty but it may be poisonous Document Transcript

  • Green is the New Black It’s fashionable. It may even be profitable. And,heaven help us, the Government has decided to help. The “green initiative” has many faces. Among themore visible of these have been anti-pollution acts, such asthe Clean Air Act and Clean Water Act that were the core ofthe United States environmental policy in the late 20thCentury. Now, however, the dangers of greenhouse gasesand climate change have come to the forefront. Thattransformation has been due, at least in part, to thesuccess of those earlier environmental efforts in reducingthe load of toxins that are still dumped into theenvironment. While the recovery of the American BaldEagle and its removal from the endangered species liststands as a visible reminder that environmentalresponsibility can pay dividends, the 21st Century faces adifferent set of environmental challenges. Whether or not human activity has played a role inbringing about climate change, the world is going tomandate reduced emissions of greenhouse gas. The finalshape of the rules that will mandate or encourage suchreductions cannot presently be predicted, but it issubstantially certain that something is coming. Some lawsare already in place. Even where there is no legal mandatefor reducing the carbon footprint of business activities,environmental responsibility is sometimes a voluntaryelection. Green businesses can differentiate themselvesfrom their competitors: some consumers will prefer to buygreen. Moreover, depending on the final shape taken byenvironmental laws, there may be an advantage inreducing a business’ carbon footprint in advance of thelegal mandate. For example, coping with a "carbon tax"may require more lead time than may be available once the
  • laws are enacted, but businesses that start to reduce theircarbon footprint now, in advance of the mandate, may findit easier to soften the impact of the tax once it actuallyarrives. Under Cap and Trade, a business that lowers itsoutput now may find that it has "credits" resulting from itssmall footprint. Regardless of the details, businesses aregoing to need to reduce their impact on the environment. Real estate is an especially fertile field for "greening."The energy demands of the built environment areastonishing, and include heating, ventilation and airconditioning; illumination; and vertical transportationsystems. These are energy-intensive uses. The builtenvironment is also the source of much of the solid wastethat urban planners, environmental engineers, andmunicipalities around the world struggle to dispose of.Standards for green real estate, however, began with newconstruction and major renovations. Standards forgreening an existing building are a later addition. The USGreen Building Council issued its first LEED guidelines--for New Construction and Major Renovations--in 1998,with guidelines for other projects following later. LEED hasestablished a significant lead over other "third party"certification programs.Voluntary GreeningThe market’s response to the green movement includes theemergence of companies that attest to products’ andactivities’ meeting standards of environmentalresponsibility. The most prominent of these is the UnitedStates Green Building Council, whose LEED certificationshave come to be commonly seen as THE brand thatconsumers identify with green properties. There are otherproviders of certification services, and some providers offera range of services that may be highly variable. However,
  • LEED has a dominating market share, due in no small partto the use of LEED by the federal government.1 This produces a kind of momentum that is hard tostop. The process of certifying a green building is notsimple. Having multiple, parallel certification programsmultiplies thje complexity and dilutes the experiencegained from the projects that have been completed. Asowners, developers and design professionals acquire moreand more experience in designing projects and shepherdingthem through the certification process, they acquire anincentive to continue using the system in which they haveexperience. This momentum is transferred to thecontractors, who are often required to demonstrate thatthey have experience with the certification system selectedby the owners and developers. In short, while there arealternatives to LEED, they need more time to develop intorobust systems that have the support of enough designprofessionals and contractors to make them feasible. Forthe present, there are few alternatives to LEED that arefeasible, and even LEED has its moments. Although the USGBC has been in operation fornearly 20 years, the LEED guidelines have not beenrushed. The guidelines for New Construction were firstreleased in 1999, so the market has had some time todevelop the resources--sometimes extensive--that areneeded to achieve certification as green. "Some" is not thesame as "enough." Scant though the resources are for a1See, e.g.,United States General Services Administration,“Sustainable Design,”http://www.gsa.gov/portal/content/104462: “The GSAuses the U.S. Green Building Council’s (USGBC)Leadership in Energy and Environmental Design (LEED®)green building certification system as a tool for evaluatingand measuring achievements in sustainable design.”
  • LEED project, they are even scarcer for other brands. Now,a developer has two sets of decisions to make with respectto green certification. First, he must decide whether toemploy LEED or a different brand; and second, if he selectsLEED, he needs to determine which of the seven differentprograms he will seek certification under. More decisionswill be needed as the process of project design goesforward. A similar set of choices must be made with respect toconstruction documents generally. A developer has tochoose between custom contracts or using forms publishedby the American Institute of Architects or similarorganizations; then it must decide which sort of projectdelivery system will be adopted; and whether to require thedesign team to write specifications in accordance with thestandards of the Construction Specifications Institute (theso-called MASTERSPEC system) are all part of the pre-construction process that should be considered for anysignificant project. Just as a developer has to select between using AIAforms or those of a different organization, so too adeveloper of a green project must choose between LEED orone of the competing organizations. That selection mustreflect the availability of qualified personnel to implementthat plan. One of the reasons why LEED has a growingmarket share is the relatively-greater supply of designprofessionals and contractors who have the requisitecredentials and experience. But one must still approachthe design of the project with an awareness that evenunder LEED, the best-established program, the personnelto perform the work are not as plentiful as constructiontrades generally. A developer who has selected AIA formsmust then select from between a number of “ProjectDelivery Systems:” lump-sum contracting, cost-plus
  • contracting of several kinds, construction management,and design-build are just the broad categories of systems.Likewise, having selected LEED as the overall program, adeveloper must choose among seven different LEED"pathways"--New Construction & Major Renovations,Existing Buildings Operation & Maintenance, Core & Shell,Commercial Interiors, Retail, Healthcare, andCommunities. Each of these pathways has a multiplicity ofprerequisites, credits and alternative pathways. This issimilar to selecting, e.g., "CM At Risk" from the library ofAIA forms. The exact credits selected in planning areanalogous to the process that applies to drafting contractdocuments generally. The coordination process is especially dauntingbecause LEED and similar programs affect the way inwhich the whole project is approached. These terms belongin the General Requirements of the Contract, also knownas Division I of the Specification. The process is dauntingbecause relatively few contract drafters have the technicalexperience to delve into the specification book and adjustthe contract documents to be consistent. The partiesshould be aware that if this coordination is not built intothe design of the project from the very start, they will havethe Devils own time trying to retrofit the green-ness intothe finished design of the project. While the multiplicity of choices and combinationscan seem bewildering, the multiple LEED programs can beused to simplify the design process. For example, securinga high rating for new construction sometimes requires thatthe developer know what the tenant mix is going to be. Forspeculative projects, this is often impossible to ascertainuntil the project is ready to receive the TenantImprovement Work.
  • LEED allows the developer to secure a high rating forthe Core and Shell Work, irrespective of the tenant mix.The tenant work can be certified and rating separately, as aCommercial Interior, Retail or Health Care space. Thisflexibility encourages developers to certify work so far as ispracticable, while reserving a final determination on futurework until that work is contracted-for. Despite the similarities between the decisions madewith respect to construction generally and greenconstruction, environmentally-responsible constructionhas some distinctive considerations. First and foremost,not all designers and contractors have experience in greenconstruction. It is not unheard of for public works thatmandate green-experienced contractors to receive only asingle bid from a qualified contractor. This has impacts onfeasibility and pricing. Second, communication is critical. Given the reality--general contractors cant be relied on to get the word out tothe trades--success on a LEED project requires frequent,effective meetings to reinforce the message and shamethose who behave irresponsibly. It is not enough to specifythat LEED credits must be earned, because many of thecredits for New Construction and related programs demandcertain processes during construction.Or Equivalent Some observers might think that the lack of LEED-qualified contractors might be ameliorated by allowingsystems other than LEED to be used as “equivalent.” Thiswould open up bidding to contractors who lack experiencein LEED but who have other experience that is deemed tobe equivalent. The "Or Equivalent" approach is often used inbidding projects so that the design does not in effect pre-
  • select the manufacturer or installer. If there is only onecontractor in a market who is qualified to implement aparticular brand of green construction, then specifying thatbrand is a selection of that one contractor, and the biddingmay be open to attack. That one contractor may have theability to charge a monopoly price and--more importantly--can dictate terms for performing the work. Achievingsignificant improvements in energy efficiency andenvironmental impacts may require a change in the waypublic contracting is handled in America. The higherqualifications demanded by LEED (and similar programs)may be inconsistent with the sealed public bidding thatremains central to public contracting. The result, as in theE&A Restoration case is that there are not enough qualifiedcontractors in a market to make real competitive biddingpossible. Moreover, the fact that four out of five bidders inE&A were unqualified reflects another reality ofconstruction: the best contract is no substitute forvigilance. This is not an occasion to delve into howwidespread are the shady practices of constructioncontractors--but neither should a developer fail tosupervise their forces closely. The alternatives to LEED do offer some advantages interms of expense,2 but they have their own problems. Morecontractors and designers will be familiar with andqualified under LEED than are likely to be found under anyof the alternative programs. The alternatives have lessrecognition, and many of them are less comprehensivethan LEED. For example, a building can receive a ratingunder the Green Globe system merely by reducing energyconsumption below a benchmark: no water conservation is2 See, e.g., “Green Globes certification rises as alternative to LEED,” Philadelphia Business Journals August 20,2007 <http://www.bizjournals.com/philadelphia/stories/2007/08/20/focus5.html?page=all>
  • required, while LEED always requires at least someattention to water consumption as well as powerreduction. There is a certain alignment between LEED andEnergy Star, and Energy Star is one of the certificationpathways that can be incorporated into a LEED program.However, other brands of green certification are often notequivalent. They call for their own qualifications, whichmay be entirely distinct from the criteria for obtainingLEED credentials.Managing the Risks The process of greening the real estate of a businessdepends in large part on awarding one or more contracts.Like all contracts and commercial activity, there are risksto be managed, and contracts should be used as aprincipal tool for allocating and sharing risks. At the veryleast, a contract should express the risks that a party takesby breaking, rather than performing, the contract. The most patent risk added by greening the project isthat of failure to achieve “certification” or a desired“rating.” 3 Such failures can be ascribed to a variety of causes.Perhaps the project’s LEED consultant misconstrued therequirements for certification or rating; perhaps theconsultant took credits that were not really justified by thedesign of the project; or perhaps the construction team’sfailure to follow the mandate of the contract documents iswhat led to the downfall. Whenever there is a failure, wecan expect a great deal of blame to go around; some of thatblame will likely lead to a claim; and claims are of coursegrist for the risk management mill.3 In LEED terminology, a project may be “certified” as being LEED-compliant. This is the lowest rung inthe LEED system and and in “ its achievement is a prerequisite to the project’s receipt of a Silver, Gold orPlatinum “Rating.”
  • There is another level of risk management at workwith respect to green real estate, and that is the recognitionthat something is coming. This is essentially a political risk.Curbs on greenhouse gas emissions are just around thecorner, if not already in place. The exact shape that thesecontrols will take cannot be predicted, and the debatebetween “cap and trade,” “carbon tax” and other paradigmswill not be concluded soon. But some policies are alreadyin effect, and they include the New York City GreaterGreener Buildings Program (“GGBP”). This program hashad enormous impacts on owning and operating real estatein the City of New York. New York City has adopted a policy of reducingannual CO2-equivalent emissions by more than 22 millionmetric tons by 2025, a reduction of more than 40% of theCity’s carbon footprint; sixty per cent of this reduction is tobe found by improving the energy efficiency of New York’sbuildings. Owners of affected real estate are going to incursignificant capital expenditures to meet these objectives by2025. It appears that owners may be able to mitigate thisburden by getting started now.Farewell to Grandfathering Changes in the laws governing the ownership andoperation of real estate can, if enforced “in one fell swoop”impose a financial burden on landlords that iseconomically infeasible or politically unpalatable. In manycases, municipalities and higher government echelons havegenerally allowed existing stock to persist as “legalnonconforming uses” until replaced or substantiallyreconstructed. The colloquial term for this process, ofcourse, is “grandfathering.” New improvements mustcomply with the revised legislation, but the existing
  • building can remain until replaced. Generally speaking,small improvements, renovations and additions have beenpermitted without requiring the existing building to be“brought up to Code,” and a rule of 50% has long applied tocode changes: until more than 50% of a building (or, insome settings, a floor) has been reconstructed, theremainder of the existing construction may remain incompliance with the “Old Code.”“As national and state energy laws become updated periodically,New York Citys energy laws must also be updated to reflect equalor more stringent regulations. No longer exempting renovationsaffecting less than half of the building system, Local Law 85(LL85), the second law in the Greener, Greater Buildings Plan(GGBP), now requires buildings to meet the most current energycode for any renovation or alteration project. LL85s requirementis based on a series of local energy laws, collectively called NewYork City Energy Conservation Code (NYCECC). NYCEECcurrently comprises the 2010 Energy Conservation ConstructionCode of New York State (ECCCNYS), Local Law 85 of 2009,Local Law 48 of 2010 and Local Law 1 of 2011.”4 Other components of the City Plan require annual“benchmarking” of energy and water consumption by“large” buildings,5 the conduct of energy audits and"retrocommissioning,"6 and the installation of lightingupgrades and submetering.7 It should not be surprising that there are parallelsbetween the NYC ECC and the LEED Guidelines. One part of the GGBP that may not have beenthought through is the requirement that buildings bebrought up to code in connection with even a minor4 http://www.nyc.gov/html/gbee/html/plan/ll85.shtml5 Local Law 84. New York City real estate is “concentrated:” the top 2% of the City’s buildings--those withmore than 50,000 square feet of internal space--generate nearly than half of the City’s carbon footprint.6 Local Law 87.7 Local Law 88.
  • renovation or alteration. While exemptions are available,the fact that the GGBP even potentially applies to a projectis another obstacle to be navigated before the project canproceed. There was a time--long before 9/11 changedeverything--when a special overlay district existed in lowerManhattan just south of the World Trade Center. Buildingsin this district had to be built with pedestrian circulationspaces--like an indoor mall--at the second story level. Thiswas a prelude to the permanent separation of pedestrianand vehicle traffic. Vehicles would operate at the existingstreet level and pedestrians would circulate in the newspaces. This district would be the pioneer in Manhattan’sleap into the 21st Century. It didn’t happen. The numbers of compliant buildings could becounted with the fingers of one hand. Instead, the buildingstock in the district aged rather than take on the burden ofconstructing interior space that would never producerevenue. One important difference between the failedoverlay district and the GGBP lies in the benefits thatGGBP is expected to bring to owners: green buildings costless to operate, especially as the expense of energy, waterand carbon emissions continues to rise, while the specialoverlay district, with the second-story pedestriancirculation facilities it mandated, was a pure burden.Make the Tenants Pay The GGBP is targeted at the largest 2% of thebuildings in the City--those with more than 50,000 squarefeet of space. The vast majority of this space is income-producing under leases of building space to tenants.Compliance with the NYCECC will produce expenses thatmust be borne, in the first instance, by landlords. Whetherthe landlords can recover these expenses from the tenants,
  • and how that can be accomplished, will depend on manyfactors. Some expenses will represent operating expenses.The most obvious example of an operating expense thatcan have an impact on energy consumption is the periodicreplacement of light bulbs. Under the typical New YorkCity commercial lease, increased operating costs will berecouped through rent “escalators.” Some rent escalationclauses are based on metrics (such as the prevailing rate ofporters’ wages) that might not reflect the expenses incurredto comply with the Code. However, augmented operatingexpenses are at least addressed (or consciously omittedfrom) the leases. In the absence of a pass-through clause,the rent fixed in the lease will not be subject toadjustment. In cases where the expenses are capital in nature,recoupment may be more complicated. Capitalexpenditures are not operating expenses that can result inadditional rent pursuant to an escalation clause; on thecontrary, they produce reduced operating expenses thatmay be passed through to tenants under the rent“escalation” clause, or reaped directly by the tenantthrough reduced utility bills. This produces a disconnectbetween the benefits of the project and its burdens: ownerspay for the Work and tenants reap the cost savings. Historically, commercial leases have not alwaysconsidered capital expenditures when providing for rentescalation. In theory, landlords paid for Work that couldimprove their bottom line, and they did not pay for Workthat was not to their benefit. At the same time, theregulated residential markets--governed by Rent Controland Rent Stabilization--have always permitted rentincreases to recover the cost of “major capitalimprovements.” Importing the idea of rent escalation that
  • reflects capital expenditures into commercial leasing is notalways easy. For one thing, it is open to negotiation. New York City real estate lawyers are infamous fortheir ability to prolong lease negotiations. In a remarkableexercise in social responsibility, the New York City realestate industry has developed a model clause foraddressing the brave new world of energy efficiency and itsimpact on commercial leases.The Future of Sustainability? The New York City Mayors Office of Long-TermPlanning and Sustainability has developed model leaselanguage that addresses sharing the costs and benefits ofenergy efficiency projects by providing for a pass-throughstructure based on predicted energy savings and expenses.The problem of underperforming projects is addressedthrough a "performance buffer," by setting annualpayments at 80 percent and extending the payback periodby 25 percent. The parties are of course free to negotiate their ownpath through the thickets of competing concerns. They canslow down the payments to a greater extent, or acceleratethem depending on their objectives and success at thebargaining table. Indeed, anyone negotiating a long-termlease of space in New York City needs to recognize that thelaw will require more, not fewer, steps to reduce the City’scarbon footprint. The City’s plans call for reducing theCity’s annual carbon footprint by 22.1 million metric tonsof CO2 by 2025; of this, nearly 60% is expected to comefrom buildings. It’s an ambitious plan, one that will have asignificant impact on New York City real estate for theforeseeable future. One of the engines that is expected to drive the wholeGGBP is the mandate, in Local Law 87, for periodic
  • “auditing” of building systems, to include implementing therecommendations of the audit for improving the building’sperformance. The law calls for a ten-year cycle for repeatingthe audit-recommendation-implementation process.Coupling the decennial cycle for upgrades with themandate that all renovation and alteration projects bringthe building into compliance with the then-current energyefficiency code, the expectation is that buildings willupgrade to current energy standards every ten years. We have no experience with how the ECC will evolve.If it is reasonably stable then owners may be able torecover the capital costs over the twenty-five year periodcontemplated by the model “Energy Aligned Clause.”However, if the ECC evolves rapidly, it may well turn outthat the installations currently being made to bring abuilding into compliance will need to be superseded in tenyears’ time, when the next round of audits and upgradesarrives. This is precisely the kind of uncertainty thatshould be relieved by remedial legislation or the adoption ofregulations to the extent feasible. In the meantime, Owners should pay close attentionto the kinds of projects they can undertake to improve theirenergy efficiency score without triggering the obligation toupgrade the entire building. As provided in NYCECC101.4.4:Exception: The following need not comply with this code,provided the energy use of the building is not increased:1. Storm windows installed over existing fenestration.2. Glass only replacements in an existing sash and frame.3. Existing ceiling, wall or floor cavities exposed duringconstruction provided that these cavities are filled withinsulation.4. Construction where the existing roof, wall or floor cavity isnot exposed.
  • Doing well by doing good Quite apart from the growing mandates forenvironmentally-responsible development, there iseconomic value in many of the activities that green aproject. A building that capitalizes on capturing the energyof the Sun to provide a measure of heat can save money ascompared to a conventional HVAC system. Those costsavings can translate into increased rent (or enhancedsales prices from condominium and cooperative offerings.Sustainable systems generally are expected to benefitowners through reduced operating and replacement costs. Beyond these quantifiable measures of benefit, thereis a more numinous benefit in securing the certification ofa project as being environmentally responsible. TheLEED(R) family of certifications, developed and sponsoredby the US Green Building Council, is widely advertised inofferings of new and remodeled space. The LEED systemprovides designers and planners with a scorecard, wherebya project may qualify for status as “LEED Certified” or thehigher levels of Silver, Gold and Platinum. Separate criteriaare established for new construction, renovations, andwhole communities. Other certification providers haveemerged as well. There are, of course, flies in the ointment. During thedesign of a green project, a properly-credentialled designeror consultant will establish a projected score or rating. Likethe architect’s report found in offerings of condominiumand cooperative interests under New York’s Martin Act, aprojected score depends on the project being constructed inaccordance with the design documents. When makingstatements about a building that has not been constructed
  • yet, a design professional should of course make it clearthat the statements are predicated on the Work beingperformed in accordance with the ConstructionDocument. There have been many tales shared in a variety ofsettings about projects that were required to achievecertification or ratings that did not, in fact, receive thedesired evaluation. There have been many lawsuits filed bypurchasers of condominium and cooperative apartments,against the design professional who signed off on the“Statement of Building Condition.” When a building fails to achieve the desired ratingafter completion, there will be repercussions. It’s notunheard of for the compensation of the “operating” or “dirtyshoe partner” in a development venture to depend, in part,on achieving a LEED rating of a particular level. There arereports that government financing for public works mayrequire LEED certifications or ratings.8 For example, a building may have planned to score“points” because the design documents called for stringentattention to waste products, including the preservation ofstructures already present, recycling or salvaging materialsfrom the demolition process, and other creditable practices.If those points are not awarded during the as-built reviewand rating process, the points not awarded can make theall the difference in whether the project is certified orrated.LEED as a moving target Although LEED is a voluntary program, and itsrating criteria lack the “official” characteristic of ANSI andsimilar standards, the US Green Building Council has8 The project in the E&A Restoration case, discussed below, required a LEED Gold rating as aprecondition to funding from certain State agencies.
  • committed to making LEED a consensus-based standard.The Council had prepared a revision of the standard--known as LEED2012--but delayed issuing it due topushback from a wide range of stakeholders.9 At the same time, LEED is having an impact ongovernment contracting. A recent case in New York had tograpple with a bid package issued by a local governmentthat required bidders to show that they had recentexperience in successful completion of several LEED-certified projects. In E&A Restoration v. Town of NorthHempstead, 2011 NY Slip Op. 30252(U), a bidder wasdisqualified because it lacked the experience and staffingrequired by the invitation to bid:The Town will not accept bids from, nor award a contract to,anyone who cannot prove to the satisfaction of the Town Boardthat he has sufficient experience in this type of construction andfinancially able and organized to successfully carry out the workcovered by the Plans and Specifications in the requiredcompletion time. Special qualification requirements are containedin the Contract Documents.The technical requirements outlined in the Project biddocuments required that a responsive contractordemonstrate, among other things:(a) Sufficient experience in the completion of five projects similarin nature, size and extent to this Project, and familiarity with thespecial requirements indicated in the Bid documents.(b) The experience and expertise required to perform the work soas to achieve the desired LEED rating; and(c) An experienced LEED accredited professional be engaged tocoordinate the LEED requirements of the Project. The petitioner did not have the experience called forby the bid documents. It did not have a LEED-credentialledemployee on staff, and there was no indication of how the9 See http://archrecord.construction.com/news/2012/07/120720-Tumult-Grows-Over-LEED-Rating-System-Update.asp
  • petitioner intended to comply with the limitations onpersonnel and organizations that may “sign off” on a LEEDrating. Notably, the LEED rules have a sliding scale thatdetermines who may be selected as the “certificationauthority” for the certification and/or rating of the project.A project of this magnitude calls for an independentcommissioning authority, but the petitioner did notdemonstrate that it was even aware of this rule. Contractors are used to certification rules underwhich the contractor certifies that the Work is insubstantial accordance with the construction documents.The architect serves to check on the completeness andpropriety of the work--usually as a precondition topayments--and the governmental authorities may conductsome critical or final inspections of their own. However, thespecial nature of LEED certifications means that thearchitect or engineer cannot be presumed to have thespecial knowledge needed to evaluate and score the as-built condition of the property. There is also a conflict of interest that is inherent inhaving the LEED certifications issued by a contractor,construction manager, architect or engineer of record. TheLEED rules allow small projects to be signed-off by thecontractor, but as the size of the project increases, theauthority to issue the certifications is progressively-restricted to personnel with increasing amounts of training,education, experience and independence. As it turned out, the disappointed bidder did noteven remotely satisfy the qualifications required by the bidpackage. And the court made it clear that it was not goingto second-guess the decision of the Town to require a LEEDplatinum rating for the project. One attack that doesn’t appear from the record tohave been raised by the disappointed bidder is whether or
  • not the qualifications demanded were in fact consistentwith the mandatory public bidding laws of New York. A bidpackage that demands restrictions and qualifications maybe attacked on the ground that only a very fewcontractors--perhaps only one--can meet the technicalrequirements of the bid package. When this problem isrecognized, some municipalities permit the bidders topropose alternate means to satisfy the requirements.10 In E&A Restoration, only one bidder demonstratedthat it had the means to fulfill the technical requirementsto bid. On its facts, it does not seem likely that this attackwould have succeeded in E&A Restoration. The Town held apre-bid conference, which the disappointed bidderattended. The record does not indicate that thedisappointed bidder objected to the mandatedqualifications and experience. It did not suggest that theLEED mandate was inconsistent with the legal policy offree competitive bidding. The Town also held post-bidmeetings with the three lowest bidders, inviting them tosubmit additional materials to establish that they had theknowledge and experience to bring the project insuccessfully. None of the three lowest bidders was able toestablish any level of competence with respect to LEEDprojects. As a result, the Town determined that the threelowest bids were “non-responsive.” It held further post-bidmeetings with the fourth and fifth lowest bidders. Itdetermined that the fourth lowest bidder did meet all of thecriteria set forth in the Invitation to Bid, and awarded thecontract accordingly. The disappointed bidder filed suit toset aside the contract award. To prevail, he had to showthat the Town’s determination that his bid was “non-10 See, e.g., League of Minnesota Cities, “Competitive Bidding Requirements in Cities” (May 2012)www.lmc.org/media/document/1/competitivebidding.pdf
  • responsive” was arbitrary, capricious, or lacked asubstantial basis in fact. He did not succeed and thecontract award was upheld. It should not be overlookedthat the Town made extra efforts to give the “low” biddersevery opportunity to demonstrate their ability to fulfill thecontract. The Town ended up on the receiving end of alawsuit anyway.Weighing the Risks Construction is already a risk-laden adventure.Getting work done correctly, on time, on budget, withoutleaving a wake of broken property and bodies is not anautomatic process. Construction, like aviation, is anopportunity for things to go wrong, in the worst possibleway and at the worst possible moment. Greening theproject--whether through LEED or another certificationprogram--represents an additional layer of complicationsand risks. The litigation risk--such as arose in E&ARestoration--is but the tip of the iceberg. The costs of LEED compliance are oftenunderestimated. An early LEED project in Ohio wasawarded on the assumption that there was no substantialadditional cost in securing certification for the building.The way in which LEED compliance was specified in thecontract documents and priced was less than ideal:Since it was impossible to command the bidders to read LEEDguidelines prior to the bid due date, the information had to beincluded in the specs. The university decided to bid many LEEDrequirements as Add Alternates in the hope it could contain costs.It was quickly discovered if a contractor did not want to beresponsible for a LEED requirement, he simply bid a high amounton the alternate, and hoped the owner would either omit the item,
  • or pay an outrageous sum for its inclusion. Under state rules, highalternate costs do not necessarily affect a base bid. Rather thancontain costs, it forced the owner (i.e. the university) to spendmore money than anticipated just to gain minimal compliance.This is not cost-containment. 11Contract Administration and the ContractDocuments The “standard” form construction contracts--such asthose published by the American Institute of Architects--contain a significant number of administration tools thatare not always attended-to. One of these--the “alternate”bid--is often misunderstood, although it can be very usefulwhen considering whether to require certification or ratingof a project. Sometimes, an owner or its designers have notdecided, at the time that bids are solicited, on all of thedetails of the work. By specifying some elements of thework as additions that the Owner may elect to haveperformed or omitted, an Owner can defer making adecision on certain design elements. Properly handled,alternate bids can help an owner make decisions in light ofthe price to be paid for the alternatives. Perhaps the Owneris considering the use of a vegetated roof, but isuncommitted to the expense of installing and thenmaintaining the plant cover. In such a case, the biddingdocuments could instruct the bidder to include an ordinarybuilt-up roof in the “base” bid, and that the bid also specifythe cost and time needed to install the vegetated roof (orother roofing systems that may earn a bonus for preventing11LenHarding,"Specifying LEED Under Public Bid Rules," The ConstructionSpecifier (July 2005) ftp://ftp.osfc.ohio.gov/LEED%20and%20Green%20Schools/Specifications/Specifiying%20LEED%20in%20public%20bidding.pdf
  • heat wells). An alternate bid gives the Owner the option, ata stated price and subject to other terms to requireperformance of additional work. Contractors have severaltools available to avoid undertaking the alternate, mostnotably by overpricing the alternate work so as to make itprohibitive. The antidote to that move on the contractor’s part isto structure the package for “deduct” alternates: thecontractor is required to include the green roof in the basebid, with an amount to be deducted from the contract sumif the Owner decides to delete that work. While the twoapproaches can produce the same result, the Contractorhas a disincentive to overprice the green roof, since under adeduct alternate, the Owner would be able to elect to omitthe green roof, and obtain an unreasonably large reductionin the price of the overall project. This exemplifies why it is important to include LEEDor other certifications in the program from the very start.Simply taking the documents for a conventionally-designedproject, and expecting a LEED or other consultant to grafton the green provisions as an afterthought is a bad idea. The quest to satisfy prerequisites and then to rackup points as needed to certify or rate the project reallyneeds to be part of the task before Schematic Design evenbegins. After all, one of the most fertile sources of pointslies in Site Selection. Much emphasis is laid on thesustainability of the site--something that you can’t adjustonce the project reaches the point of site acquisition andschematic design. Environmental responsibility needs to beaddressed as part of the Owners program: it is truly a pre-design concern.Preparing the Contract Documents
  • There are reports from the trenches that it can makea big difference where you put the green requirements forthe Work. Of course, this is true of construction documentsgenerally If the documents are being drawn up in the“conventional” manner, there are several containers for thelegal terms that are concocted by the design team and thelawyers. Since all of the terms of all of the documents areread together, the legal effect of a provision might notdepend on whether it is in the Owner-ContractorAgreement, or in the General, Supplementary & SpecialConditions of the Contract; or in the General Requirements(Division I of the Specifications) or in Divisions II thoroughXVI (more or less), and contractors are usually required toread all of the conract documents. However, tradecontractors are notorious for ignoring all of theSpecifications beyond the one division that pertains mostclosely to their Work. If you put the LEED requirementsinto Division I (where they technically do belong), tradesmay never read them. Many contract drafters include theLEED (or other green) terms in the Contract Conditions, orthey prepare a distinctive binder of LEED provisions (whichis adopted as a Special Condition of the Contract). Otherdrafters include detailed alerts in the Contracts General &Supplementary Conditions, on the theory that thosedocuments might be read by the contractors’ lawyers. These problems, which are essentially problems incommunication, result from another dirty little secret aboutconstruction contracts: you can provide that the terms andconditions of the Owner-Contractor Contract areincorporated by reference into the subcontracts. You canmandate that the full Project Manual and reduceddrawings be furnished to every bidder. And you will stillfind, when push comes to shove, that the GeneralContractor did not provide complete bid packages to the
  • trades. This is a widespread problem, not limited to LEED,but LEED amplifies the problems because of its demandthat the entire team participate in the process. Those who write construction-related contractssometimes think that once the contract is signed anddelivered, the policies and procedures written into thedocuments will somehow “just happen.” This problem isnot limited to green construction. The “standard” form ofGeneral Conditions published by the American Institute ofArchitects calls for a large number of submittals by theconstruction team. These include a variety of schedules,shop drawings, product samples and information, as wellas miscellaneous documents, to include permits, insurancecertificates and policies, licenses, applications for payment,notices and a wide variety of other documents. Thereshould also be a schedule of submittals, one that identifiesall the submittals that are required under the ContractDocuments. Nonetheless when legal counsel returns to theproject to try to fix problems, one of the recurrent problemswe see is the lack of conrol over submissions andschedules. Experienced contractors know the importance ofkeeping current with submittals, but many are notconversant with the special submittals that are requiredunder the LEED program. Their compliance with controlsis less than exemplary in many cases, and LEED simplymultiplies the problem. So long as green construction remains a novelty,owners and developers should pay special heed to thecoordination between the general submittals and the LEEDsubmittals. There is a saying in construction that troublecreeps in whenever the work of two different trades has to"join." The same can be said of contracts and theiradministration. The LEED program has its own special
  • demands, but unless the flow of LEED information iscoordinated with the larger flow of information about theproject as a whole, bad outcomes can be expected.Key Take-Aways The Green Mandate is here, and it is going toincrease in magnitude. Start green: dont try to engraft green constructioninto a project that is already under way. Green is a pre-design issue. Start with the small, easy projects. Replacing all ofthe incandescent light bulbs with compact fluorescents is agood start. It is already inevitable, so the marginal cost ofCFLs is minimized. Highlight the LEED requirements in the contractdocuments to preclude later claims that the contractor didnot include LEED costs in his base bid. Consider using "deduct alternates," rather than "addalternates" to maintain flexibility in the scope of work inlight of actual costs.