An Introduction to Sustainable Building Risks and Opportunities

An Introduction to Sustainable Building: Risks and Opportunities BCBEC Presentation May 25, 2006 Ujjval K. Vyas, Ph. D. , Esq. , LEED AP Foran Glennon Palandech & Ponzi P. C. Ujjval K. Vyas, Ph. D. , J. D.

Introduction Ø Confluence of four factors leading to success of sustainable building movement l l Design professionals, especially architects, involved in activist-like support for sustainability Economic changes and studies showing viability of sustainability Political changes resulting in the elimination of sustainability as “hot button” issue Technological changes to make sustainability viable Ujjval K. Vyas, Ph. D. , J. D.

Introduction Ø Economics l l Intangible goodwill advantages Tangible higher asset valuation, higher resale value, reduced operation and maintenance costs and reduced exposure to energy price volatility Benchmarking and plausible studies to show cost benefit outcomes Especially important for long-term real estate asset holders: universities, schools, government buildings, hospitals, industrial/manufacturing facilities, nonprofits, REITs, investment portfolios, etc. Ujjval K. Vyas, Ph. D. , J. D.

Introduction Sustainability does not equal energy concerns alone, but energy is the most important factor in determining economic viability Ø Claims about increased worker productivity and performance in sustainable buildings are questionable Ø Claims about indoor air quality and decreased health problems may prove plausible Ø Ujjval K. Vyas, Ph. D. , J. D.

Introduction Ø Life-cycle cost analysis is the lynch-pin of the sustainability question l l l Energy modeling is at the core of the life-cycle cost analysis Design professionals who produce the models may face increased exposure due to the large potential damages if the performance fails Increased marginal cost can be minimized by seeking sustainable attributes from the outset Ujjval K. Vyas, Ph. D. , J. D.

Introduction Ø Political context no longer creates barriers to sustainability l l Geo-politics and national security “Conservative” agenda of fiscal responsibility and decreased taxation comport with putting up more efficient public and private buildings “Liberal” agenda of decreasing taxation of natural resources and minimizing human intervention through resource harvesting comports with sustainable building Decreased dependence on fossil fuels common to both sides Ujjval K. Vyas, Ph. D. , J. D.

Law and Economics Ø Legal risk and business risk are inextricably tied together for all members of the building industry Ø New marketplace configurations often present hidden legal or business risks Ø These risks differ depending on the parties or entities involved Ujjval K. Vyas, Ph. D. , J. D.

Owners Ø Sustainability/LEED advantages: l Marketing/market differentiation • This will last only until LEED becomes a common best practice l Reduced costs to maintain and operate • This is the most important economic issue for owners holding the asset for the long term l Increased asset value • Decreased risk for investment trusts or REITs to purchase • Decreased exposure to energy-price volatility l l Decreased litigation associated with construction Possible community or political advantages Tax incentives; other equity or debt sources Permitting incentives Ujjval K. Vyas, Ph. D. , J. D.

Owners Ø Sustainability/LEED risks: l Certification failure • • l Statutory issues Lending issues Marketing or third-party representation of certification issues Surety issues; especially latent defect exposures Performance failure • Contractor scope or design professional l Increased initial costs • Certification or sustainability not always the most economically sustainable option Ujjval K. Vyas, Ph. D. , J. D.

Owners Ø Defraying or transferring risk l Contracts • Make sure RFQ, RFP and subsequent contracts make clear the certification to be obtained • Make sure that the GC or CM, at risk or otherwise, requires the subcontractors to provide necessary documentation in support of certification Ujjval K. Vyas, Ph. D. , J. D.

Owners Ø Defraying or transferring risk l Experienced contractor and designer • LEED accreditation not the most important attribute l Construction delivery method • Design-build with owner’s representative Ujjval K. Vyas, Ph. D. , J. D.

Owners Ø Should owners seek LEED certification or a sustainable building? l l l In terms of economics, the energy reduction and management portion of the LEED certification is the most significant and objectively ascertainable Other attributes of LEED provide less tangible benefits to the owner LEED certification is most advantageous where the intangible benefits play an important role in the overall viability of the project Ujjval K. Vyas, Ph. D. , J. D.

Contractors Ø Sustainability/LEED advantages for contractors: l l l Market differentiation and competitive advantages in a changing marketplace Intangible good will Decreased litigation Ujjval K. Vyas, Ph. D. , J. D.

Contractors Ø Sustainability/LEED risks: l Certification failure • Is contractor responsible for certification by contract? • Incomplete control over necessary documents for certification • Hidden performance specifications arise from LEED letter template signatures by contractors l Performance failures due to other contractors Ujjval K. Vyas, Ph. D. , J. D.

Contractors Ø Defraying or transferring risk l Contracts • Ensure that the contract specifications and the possible performance specifications in LEED documents are either in agreement or require additional compensation for providing performance warranties • Ensure that contracts downstream indemnify for losses resulting from failure to certify or failure to provide required documentation Ujjval K. Vyas, Ph. D. , J. D.

Contractors Ø Defraying or transferring risk l l l Select subcontractors who are experienced and familiar with LEED issues Select alternative project delivery methods that provide greater control over the whole project Pay attention to the construction experience and financial viability of the owner to avoid mismatched expectations, especially with nonprofits Ujjval K. Vyas, Ph. D. , J. D.

Contractors Ø Should contractors develop LEED capabilities? l l l Yes, if they want to be responsive to the changing marketplace Yes, if they want to penetrate new markets No, if their particular niche is generally unaffected— civil engineering works for example Yes, if some segment of their project areas will be affected Maybe not, if they are already have capabilities beyond LEED, such as performance contracting or EPC contracting. Ujjval K. Vyas, Ph. D. , J. D.

Design Professionals Ø Sustainability/LEED advantages: l l May increase role of architect/design professional in the construction process Intangible increase in “self worth, ” especially for the disproportionate number of architects involved in LEED If design professionals accept greater risk, such as architect led design-build, LEED may be an entrée to recapturing a greater share of control over building construction Possible increase in revenues for providing oversight of LEED certification process via AIA B-214 Ujjval K. Vyas, Ph. D. , J. D.

Design professionals Ø Sustainability/LEED risks: l Certification failure • Design defects • AIA B-214 and definition of “professional services” as leading to possible exclusion by carrier • Longer tail for liability since certification may not obtain until long after project is complete l Warranties • Provision of hidden warranties in signing LEED letter templates required for certification • Warranty language vitiates E & O coverage for design professionals l Standard of Care • Voluntary and involuntary increase in standard of care Ujjval K. Vyas, Ph. D. , J. D.

Design Professionals Ø Defraying or transferring risk l l Consider carefully if the design professional should take on any contractual responsibility for certification via AIA B-214 or otherwise Any design professional sub-consultants should indemnify for losses associated with failure of LEED certification Do not voluntarily increase the standard of care through hopeful language; increased standard of care may create coverage and defense issues Do not sign LEED letter templates without adding language to underlying contract which defines the signatures provided on the letter templates as only a professional opinion and disclaim any warranty implications Ujjval K. Vyas, Ph. D. , J. D.

Design Professionals Ø Should design professionals act as the primary entity for acquiring LEED certification? l Unclear • Design professionals do not provide the kinds of warranties of performance that the owner is seeking; only contractors commonly provide this guarantee Ujjval K. Vyas, Ph. D. , J. D.

Project delivery selection Ø Design-build as preferred method l l l The integrated process that is at the core of LEED already mimics the design-build model of decreased adversarial interaction in the construction process Single point responsibility means the owner can get the kinds of warranties desired without fear of complex multiparty litigation Single entity has control of the process and the required documentation through privity chain Insurance issues are no longer bifurcated into CGL and E&O coverage areas Any concerns on the part of the owner for independent oversight can be solved by engaging an owner representative Ujjval K. Vyas, Ph. D. , J. D.

Marketplace Changes Ø Ø Ø Ø Increased presence of contractors in shepherding LEED certification and provision of LEED guidance to owners Competition between Green Globes and USGBC may create instability for owner decision-making Savvy owners may expect sustainability services without a premium from design professionals The transformation of buildings from lowest cost and short-term to high-performance may increase the marginalization of architectural designers Real state bubble may hurt or help sustainability; will have to wait and see Design professional firms not responding to the market demand for sustainability will be at a serious competitive disadvantage On the other hand, firms pursuing sustainability will have a distinct market advantage Ujjval K. Vyas, Ph. D. , J. D.

Final thought Sustainability, in its many guises, is here to stay Ø The firms that manage this opportunity and the attendant risks will increase their share of the market Ø Like the firms that said CAD was a fad, firms ignoring sustainability do so at their peril Ø The risks, like most of the other risks in the building process, can be managed but require active engagement Ø Ujjval K. Vyas, Ph. D. , J. D.