Green Performance Bonds Necessary But Risky
Ever since I read the D.C. Green Building Act and its "performance bond" requirement, I have been morbidly interested in the idea of LEED bonds. When Kristen Bradley, at SuretyBonds.com, offered to write an article on the topic, I couldn't help but say yes. SuretyBonds.com, a nationwide surety bond producer, works with a number of construction companies and distributes information to help keep the industry's professionals updated on developing regulations.
As the concern for environmentalism continues to grow, so, too, do the regulations and systems involved with green building. Entrepreneurs continue to develop new building practices and products, and keeping up with new green building regulations can be challenging for some contractors. The growing concern for protection related to green building practices has only increased as new green products and regulations are pushed onto the construction industry. One possible solution for guaranteeing a contractor's compliance is the use of green performance bonds. However, concern regarding their implementation and enforceability continues to be heavily debated among stakeholders throughout the industry.
Confusion surrounding the 2006 Green Building Act
In 2006 the D.C. City Council passed legislation that would require green performance bonds to be used on construction projects beginning in 2012. However, no such bond actually existed when the legislation was passed. Although some advocates think the legislation's enactment will be crucial for the green building industry, contractors and government agencies alike have been struggling to clarify what the act actually means. As the deadline approaches, many construction professionals in the area are still confused as to what exactly will be expected of them.
How green performance bonds would work
Green performance bonds are a specific type of surety bond. Although there are thousands of surety bond types available, they all function similarly to guarantee a certain level of performance. Government agencies typically mandate the use of surety bonds to protect public funds as well as consumer interest. Most contractors who work on public projects are probably familiar with how other forms of contractor bonding work. Green performance bonds work in the same way, but they are specific to green building practices. Each surety bond that's executed acts as a legally binding contract between three entities.
- The government agency or project owner that requires the bond acts as the obligee.
- The contractor required to purchase the bond acts as the principal.
- The agency that executes the bond acts as the surety.
When it comes to green performance bonds, the bond would offer a financial guarantee that the principal will adhere to certain green building regulations. If the contractor should fail to do so, the surety would be accountable for making sure the principal resolves the problem, which usually requires monetary compensation.
The likelihood of green performance bond implementation
There's no way to predict how exactly green performance bonds will be used in the future. For now, though, there's no question that project owners need a guaranteed way to collect recompense on problems resulting from negligent green building contractors. Likewise, contractors need a financial guarantee to protect themselves from personal liability if such problems were to arise. Unfortunately, this pushes a great deal of burden onto surety providers who might be skeptical to execute bonds on risky projects. This is, in fact, what most surety agencies try to avoid. Ultimately, government agencies' decisions regarding the use of green performance bonds will require an evaluative process. Once Washington D.C. clarifies its expectations and contractors there begin securing green performance bonds, the rest of the nation can begin analyzing just how effective the bonds are.
It seems the green bond thing focuses only on the contractor but the performance of a gren building depends on design and operations as well. How do you intend to parse out the various "fingerprints on the knife" that do in the expected performance?
In the last paragraph, it mentions that Green Performance Bonds act as a financial guarantee to protect contractors from personal liability that may exist if their project doesn't meet the LEED requirements in the contract--this is fundamentally incorrect. The bonds provide the owner with the additional assurance and financial backing of the surety, the contractor however, through an indemnity agreement, is required to reimburse the surety for all losses paid on a bond claim. Therefore Green bonds, or any type of bond, don't limit a contractor's liability in themselves.
Does not the DC Green Building Law also state that the performance bond is only required IF you wish to take advantage of DC government's incentives? At this time, I can only identify 1 incentive and that is the expedited review (30 days).
Performance Bonds guarantee that the principal will perform all work for the obligee as stated in the contract. This type of bond must be submitted to an obligee by the principal with the winning bid once they have been awarded the contract. More often than not, performance bonds are issued to an obligee along with a "Payment Bond" (labor and materials), which is where the term "Performance and Payment Bond" comes from.