Forewarned is forearmed | The greening of construction in Maine carries risks and rewards
Attorney and member of construction and litigation practice groups at Bernstein Shur in Portland, and a frequent lecturer on the construction industry in Maine
Welcome to the brave new world of green construction. Most forecasters in the construction industry predict that green building will increase by leaps and bounds in the next decade, maybe as much as 10 times its current volume. This growth presents a potent economic opportunity for the construction industry. As one of a small number of construction lawyers in Maine, I don’t need to be reminded of how bruising the recession has been for contractors in the state. Unemployment in the construction industry was at Depression-era levels (25%), and is only now starting to rebound. Economic opportunities, however, often come with significant risk. The coming of green construction in Maine raises new challenges that will come in different forms for developers, owners, contractors, subcontractors, insurers and lenders. Sustainable, green construction presents a huge opportunity for nimble, efficient construction firms to remake themselves, but it also presents a new frontier of risks, rewards and in some cases, potential failure and litigation.
The first problem for green builders is definitional. “Building green” means different things to different people. The project participants must place a high degree of importance on harmonizing expectations on the front end of a project to minimize later disputes. Rushing into a project just to break ground and get the work started isn’t going to serve anyone well, especially if there are lenders, insurers and a multitude of subcontractors involved. Instead, spending the time up front to define how green the project is going to be and how sustainability is going to be measured may make all the difference between a successful project and one fraught with problems.
Then the hard work starts. Each party in the project has to identify and assess the potential risks that are allocated to them. On a green project, risks include the failure to achieve a certification and potential loss of tax credits that may be tied to that certification. Additionally, parties may have disappointed expectations regarding how a building will perform in terms of operating costs, and whether a particular building will have the expected occupancy or revered status as a “green” building. These disappointed expectations will express themselves in litigation or whatever form of dispute resolution the parties to the project have chosen. Traditional construction claims such as breach of contract, negligence, negligent misrepresentation and fraud will take on new meaning when they encompass green claims. Complicating any litigation will be insurance that may not cover the particular risk, and a lender who may not be knowledgeable about green construction.
The solution is both simple and complicated. Risks have to be allocated in the construction documents as explicitly as possible. Form contracts have never served construction projects well, and that rings especially true for green projects. While no ironclad contract exists in the marketplace, parties can and should make a conscious allocation of risks to those parties best able to bear, price or insure them. The solution is simple because it is what good Maine contractors already do and will continue to do in the future. The solution is complicated because we are entering uncharted waters and the risks are complicated and in flux.
Take a specific example. A downtown Portland owner of an older building can refinance the building mortgage with a local bank in an effort to renovate it, bring in higher lease payments and create a revered, sustainable building in the downtown that saves money over time, paying back the capital investment. If the designer or the contractor believes that the operating costs of the building, once renovated, can achieve a 10% annual savings for the owner over current costs, how will that risk be allocated and measured? Some contractors will have no obligation, saying they provide best efforts but will not guarantee anything. Others may price the risk, either in terms of a holdback, a penalty or, conversely, a bonus payment. Will the owner purchase some of the new “green reputational” coverage that is starting to appear on the market? It might provide coverage if the project fails to be successful and a fully occupied building turns into a half-empty space. Will the bank have covenants that require the operating costs achieve the 10% savings, or else the loan will default? And do these parties agree on how the operating costs are going to be measured and reported?
Those of us in the construction industry like bricks and mortar: sites cleared, foundations poured and buildings erected. Make no mistake, green construction is coming to a project near you and is going to occupy and eventually engulf the construction marketplace in Maine. Companies that assess their risks upfront and allocate them through contracts, insurance, incentives, bonding, warranties or other mechanisms will be more likely to succeed and thrive. Welcome to the brave new world of green construction.
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