Thank You Mr. Fedrizzi
To start this post, I want to thank Rick Fedrizzi , CEO of the United States Green Building Council. On February 12, I attended a breakfast hosted by Bisnow at which Mr. Fedrizzi was the guest speaker. I really appreciated his speech - he did not ignore the current economic climate but talked about the opportunities that will emerge from the green building industry.
Even more important, at least for me, was the positive tone of his presentation. Right after attending the breakfast, I was scheduled to speak to members of the Metropolitan Washington Council of Governments regarding suretyship. You can see the slideshow presentation I used below. After I left Mr. Fedrizzi's presentation, I thought about how I wanted to sound as positive as he did about the green building industry.
Instead of focusing on problematic language in the D.C. Green Building Act surrounding the use of the word "performance bond" (a type of surety bond), I instead tried to emphasize how the Act could be corrected.
Guess what? It worked. One of the members thanked me for providing a positive presentation instead of harping on the problematic language. Another member told me that I had made learning about suretyship fun (or at least bearable).
So Mr. Fedrizzi, thank you.
But wait, there is a post-script for all of the Green Building Law Update readers. You all have the opportunity to help draft new language for the D.C. Green Building Act. I am seeking input on what enforcement mechanism should be used instead of a "performance bond." I have ideas, but I want to hear what you think.
What do you think? Here are some resources to get started:
- D.C. Green Building Act
- SFAA and SBP Letter Regarding "Performance Bond" Requirement
- Related GBLU "Bond" Posts
My presentation:
Good stuff! Wish I could have been there to feed you some "loaded" questions. I didn't realize the Arlington law required the "bond" to be posted when the project was 75% complete. That is a bit better by not tying up capital for too long, but I would be interested to see copies of the bonds used that guarantee certification.
As we discussed previously related to the DC Green Building Act, no surety will bond certification by the USGBC or any other third party. The bond is a guarantee that a project will be completed as per a contract. If a surety sees language in a contract that states a contractor will guarantee certification by the USGBC, they will most likely refuse to bond the contract. This will leave the contractor to put up their own funds through either money in escrow or an ILOC from their bank.
Should these laws become more popular, more projects will be required to apply for certification by the USGBC. This will force the USGBC into creating paperwork efficiencies to speed the registration and certification process so as to not tie up capital.
My advice - stay away from sureties. Avoid contractual guarantees but find some way for a governing body to offer an incentive that can be taken away for failure to comply with the terms of the law (like the Maryland Energy Admin Green Bldg Tax Credit). Another measure that I like is Arlington's enforcement of its density bonus. This includes a denial of any further above ground work permits for failing to comply with the predetermined green building plan.
Also, I would discourage certification as a requirement to earn the incentive. Certification is a nice bonus, but giving up control to an independent organization, though altruistic in nature, is not a good risk management practice.
Also, stress operating efficiency post construction. Make the owner responsible for maintaining the building as the design professionals and contractors were responsible for its construction. Ideas?
Good luck!
Mark, thanks for continuing the discussion. You state "no surety will bond certification by the USGBC or any other third party." I have to disagree. I would wager a large sum of money that there is a contract out there in which the contractor guarnateed certification and the contractor obtained a bond. Additionally, I am not sure if it matters that the contract guarantees certification. If a project fails to achieve certification, the owner can blame the contractor, and sue the surety, whether or not the contractor has guaranteed certification.
We are going to start seeing municipalities and states move from mandating public project certification to mandating private project certification. These municipalities need to come up with some type of enforcement mechanism. So far, "bonds" seem to be the prevailing solution.
As we discussed, I think the ship has already sailed on mandates for green building certification. Municipalities aren't going to just stop mandating certification in lieu of incentivizing green building. So now we, the surety industry and attorneys, need to come up with an enforcement mechanism that municipalities can use for these green building mandates.
I am leaning towards compliance or license bonds, as suggested by the SFAA in its letter.
How about liquidated damages, even on a sliding scale? I admit to being new at this, but a good LD clause could ease the minds of sureties and ensure some sort of compliance.
Welcome to a brave new world.
Chris -
In your presentation on surety, you state that in the event of a breach of contract regarding performance, the surety must either 1) complete the project or 2) allow the owner to complete it and the surety pays the costs. In the event that the project fails to achieve certification to a specified level, the surety would then (hypothetically) compensate the owner for the costs associated to achieve certification as originally required. The building will be substantially completed by this point and could require massive renovation to earn the points towards certification. However, in studying the USGBC's LEED checklist, any number of parties could be responsible for the failure to achieve the points necessary for certification. Are we saying that all parties involved in the construction should post a bond for their particular role in the certification process? As indicated earlier, sureties are hesitant to guarantee performance (the key word being GUARANTEE). They don't expect to pay out on claims, and making such guarantees towards a contractor's responsibilities of certification will make them very nervous.
Maybe at this point, we should involve a surety to explain their position on providing financial assurance through a performance bond regarding a contractor or design professional's role in certification of a green building project.
Mark