An In-Depth Look: Federal Green Construction: Assessing Potential Long Term Liabilities
Guest Article by Tom Kelleher, Jr., Senior Partner, Smith, Currie & Hancock LLP
Introduction – Green Is Now
Green construction is not the “Wave of the Future” in federal government construction contracts, it is here now. Whether building a new facility at a military base in Georgia or renovating a federal courthouse in the Pacific Northwest, the federal government is placing a strong emphasis on environmentally conscious (“green”) construction. Motivations for adoption of green construction vary from a desire to conserve resources and avoid adverse impacts to the environment to reducing the cost of operating and maintaining a facility, which can easily have a life span of several decades. Fortunately, environmental considerations and economics do not need to conflict as the long-term operating and maintenance cost of a facility can easily offset the incremental additional cost of designing and building a facility to achieve a specified requirement, standard, or code.
As the single largest property owner in the United States, the federal government has an obvious long-term interest in reducing its cost for operating and maintaining its facilities. The federal government’s emphasis on green construction is also evolving from a requirement to achieve a particular certification e.g., LEED Silver, to detailed requirements specifying expected energy savings or to the consideration of the proposed facility’s total ownership cost (“TOC”) as an award evaluation factor.
This evolution reflects the fact that the federal agencies are required to comply with the Energy Policy Act of 2005, the Energy Independence and Security Act of 2007 as well as the requirements of Executive Order (EO) 13514 – Federal Leadership in Environmental, Energy, and Economic Performance (2009). Among the requirements set by EO 13514 and these statutes, federal agencies must:
- By FY 2015 reduce total energy consumption per gross square foot in the new and existing federal buildings by 30% from a FY 2003 baseline.
- By FY 2020 reduce potable water intensity by 26% as compared to FY 2007.
- Reduce industrial, landscaping, and agricultural water use 2% annually to achieve a 20% reduction comparing FY 2010 usage to FY 2020 usage.
Consistent with the requirements, Section 36.104(b) of the Federal Acquisition Regulation sets forth the following policy, which is applicable to all federal agencies.
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(b) Agencies shall implement high-performance sustainable building design, construction, renovation, repair, commissioning, operation and maintenance, management, and deconstruction practices so as to –
(1) Ensure that all new construction, major renovation, or repair and alteration of Federal buildings complies with the Guiding Principles of Federal Leadership in High-Performance and Sustainable Buildings (available at http://www.wbdg.org/pdfs/hpsb_guidance.pdf);
(2) Pursue cost effective, innovative strategies, such as highly reflective and vegetated roofs, to minimize consumption of energy, water, and materials.
(3) Identify alternatives to renovation that reduce existing assets’ deferred maintenance costs;
(4) Ensure that rehabilitation of Federally-owned historic buildings utilizes best practices and technologies in retrofitting to promote long-term viability of the buildings; and
(5) Ensure pollution prevention and eliminate waste by diverting at least 50 percent of construction and demolition materials and debris by the end of Fiscal Year 2015.
Regardless of budget constraints, it would be incorrect to assume that the federal government will abandon these goals. Rather, it is likely that the agencies will adopt a balanced cost/benefit approach with contract requirements that achieve these long term “green” goals while avoiding excessive front-end investment of funds. Builders seeking the award of contracts for these projects also need to carefully identify and balance the performance risks associated with these “green” goals with the potential opportunity of earning a reasonable return on their investment of resources and capital.
New Project Risk Analysis
Regardless of the type of project or project delivery system, every contractor should perform a systematic analysis of the risks associated with the work involved in a new project. This process involves:
In that context, a contractor should evaluate the following:
Control: Does the contractor’s ability to satisfy its obligations depend upon the actions of third parties with whom the contractor has no contractual relationship?
Performance Risks: If there is an unusual or long-term performance obligation and potential financial risk, does it fall within the coverage of any performance bond?
Duration of Obligations: What is the duration of the contractor’s obligations under the contract? Is it limited in duration to the first year following project acceptance or does it extend for five years, ten years, or more?
Financial Exposure: During the proposal preparation phase, is it possible to realistically estimate the potential monetary exposure if the completed project does not meet a long term performance goal?
Risk Mitigation or Shift: The contractor should also evaluate whether it is feasible to shift some or all of the risk to other project participants or to insure against the risk and related financial loss.
Experienced and successful contractors systematically evaluate these questions as they evaluate a new potential opportunity including the project site, the project participants, and the contract terms and conditions. Depending upon this analysis, a prudent contractor can determine if the potential opportunity (profit potential, etc.) warrants the risk. If the risk is unclear or not defined, the contractor must determine if it is possible to address that uncertainty in its proposal and remain in the consideration for the eventual award of the contract.
Risk and Long Term Green Performance Goals
When evaluating the potential risks related to the long term “green” performance goals (energy consumption, water usage, or TOC) set forth in a federal agency’s solicitation, the contractor should evaluate the following:
Design Responsibility Implications: Many, if not most, of these solicitations contemplate that the contractor will be the design-builder. To the extent that the contractor has the responsibility for and control of the eventual design, the contractor must recognize that it may bear the risk for the adequacy of its design for the stated purpose such as the long term energy consumption or TOC.
Performance “Goals” or Contract Requirements: When contemplating the submission of a proposal in response to a solicitation containing long term performance expectations for the federal facility, the design-build contractor must determine if these expectations are aspirational goals or firm contract requirements. Any lack of clarity needs to be resolved by the potential contractor before submitting a proposal. Even if the solicitation appears to state that a proposal submission on TOC is to be used as an evaluation factor in the award process, a prospective builder needs to determine whether the TOC information set forth in its proposal becomes a contract requirement upon award of the contract. If the solicitation is not clear, that uncertainty needs to be addressed pre-contract.
Basis of Design-Build Contractor’s Proposal: Whether the design –builder’s proposal is addressing an agency’s express requirement for energy consumption or stating the expectation of the long term TOC, the contractor needs to carefully evaluate the factual basis for the representations of performance set forth in its proposal, as well as the implications related to the agency’s reliance on information in the proposal such as TOC during the subsequent evaluation process.
Operation and Use of Facility: If the proposal contains commitments related to the long term performance of a facility, the design-builder needs to evaluate its underlying assumptions regarding the operation and maintenance of the facility and determine if those assumptions are consistent with the information in the RFP. If the RFP is not consistent with those assumptions or is silent on these topics, the design-builder needs to evaluate when and how to communicate those assumptions to the federal agency. Since the design-builder will likely have no control over the facility following acceptance, the contractor needs to communicate the expected conditions of maintenance and use for the facility before completion of the project.
Measuring Satisfaction of Long Term Performance Requirements: If the solicitation sets forth the agency’s long term performance goals for that facility, the design-builder must determine whether its compliance with these requirements is measured at acceptance of the facility or is it subject to being evaluated (measured) over a longer term such as the expected design life of the facility.
Consequences If Long Term Performance Requirements Are Not Met: When evaluating the long term performance goals for any facility, the design-builder must determine if the solicitation clearly states the financial consequences or obligations for the contractor if the completed facility fails to achieve a long term performance goal. The range of consequences can run from the payment of a fixed sum at project acceptance (predetermined by the agency as a form of liquidated damages) to an open ended obligation to revise the design and design related construction to meet the contract requirements.
Green Risk Analysis of a Recent Military Construction Project
A recent solicitation for a design-build military construction project contained several provisions that raise concerns about the contractor’s long term liabilities related to “green” construction and are likely to be the subject of vigorous objections from the Miller Act sureties. In addition, a review of these provisions raises questions whether they comply with the policy considerations set forth in FAR §46.706, Warranty Terms and Conditions, as well as the design builder’s ability to obtain E&O (errors and omissions) insurance from its architect/engineer design consultant, or completed operations insurance coverage for some of the potential risks.
Addressing several requirements related to green construction, the project solicitation states that the contractor shall:
Design to achieve energy consumption 40% below the ASHRAE standard 90.1/2007 baseline.
Price an option to achieve energy consumption 50% below the ASHRAE standard 90.1/2007 baseline.
Design to provide at least 30% of building domestic hot water by use of solar hot water system.
Design a facility with a contemplated 25 year useful design life.
Multiple Warranty Provisions
The solicitation contained the standard FAR 52.246-21 Warranty of Construction clause, which sets forth a one (1) year warranty period to correct defects in equipment, workmanship, materials, or design. However, that clause provides that it is “In addition to any other warranties…” in the contract. In that regard, the RFP also set forth a separate provision entitled WARRANTY OF DESIGN (FIRM-FIXED PRICE DESIGN-BUILD CONTRACT) (MAY 02) (“WARRANTY OF DESIGN clause”). That provision provided, in part:
(a) The Contractor warrants that the design shall be performed in accordance with the Contract requirements. Design and design related construction not conforming to the contract requirements shall be corrected at no additional cost to the Government. The standard of care for design is defined in paragraph (b) of Special Contract Requirement RESPONSIBILITY OF THE CONTRACTOR FOR DESIGN.
Stating that the design warranty commenced upon acceptance or beneficial occupancy, the paragraph (c) of WARRANTY OF DESIGN clause defined the duration of the design warranty as follows:
This design warranty shall be effective from the above event (beneficial occupancy or acceptance) through the Statute of Limitations and the Statute of Repose, as applicable to to the state that the project is located in.
Paragraph (b) of the clause entitled REPSONSIBILITY OF THE CONTRACTOR FOR DESIGN (MAY 02) detailed the standard of care for the design as follows:
The standard of care for all design services performed under this agreement shall be the care and skill ordinarily used by members of the architectural or engineering professions practicing under similar conditions at the same time and locality. Notwithstanding the above, in the event that the contract specifies that portions of the Work be performed in accordance with a performance standard, the design services shall be performed so as to achieve such standards. (Emphasis added.)
Long Term Risk Considerations for the Contractor
A design-build contractor’s pre-proposal risk analysis of this design warranty should consider:
Does the WARRANTY OF DESIGN clause encompass the requirements to achieve specified reductions in the consumption of energy and water? If so, does the using agency have the right to assert a claim against that warranty anytime during its duration if the facility fails to achieve the stated efficiencies?
What is the duration of the design warranty? For example, if the project were located in Georgia, the statute of limitations under Georgia law for a breach of contract is six (6) years from discovery of the breach. Georgia’s statute of repose runs for eight (8) years from substantial completion, subject to a two (2) year extension if injury or death occurred in years 7 or 8. Consequently under Georgia law, the statute of repose limits the contractor’s period of exposure to a maximum of ten years. A contractor and its surety need to consider whether this design warranty provision is adopting the state law of the site of the project on the relationship of statutes of limitations and repose? That will vary from state to state.
Is length of the design warranty intended to be the sum of these two statutes? For example, in Georgia, that might be 14 years subject to a potential two year extension.
How does this definition of the length of the design warranty relate to the six (6) statute of limitations set forth in the Contract Disputes Act (“CDA”)? Does the CDA statute of limitations on a claim by the government begin to run when a claim accrues under the WARRANTY OF DESIGN?
- If the WARRANTY OF DESIGN extends for many years, when and how does the contractor address the considerations of use and maintenance of the facility by the government agency?
How does the WARRANTY OF DESIGN relate to the 25 year stated design life?
How does the duration of the WARRANTY OF DESIGN relate to the statute of limitations on state causes of action against a design-builder’s subcontractors and design consultants? Similar questions relate to any bonds or insurance provided by subcontractors and consultants. These questions need to be clearly addressed in the subcontracts and agreements with the design consultants.
To Avoid Unreasonable Risks and Contingencies Performance Warranties Should Have Reasonable Durations & Conditions
Warranty Duration Risk: Tying performance goals for a facility to long term warranties introduces significant potential risks for the contractor and its Miller Act surety. If the drafter of the WARRANTY OF DESIGN provision intended to make the time durations for the statute of limitations and statute of repose additive, the total period of potential exposure including the CDA statute of limitations could be as much as 20+ years for a project in Georgia. This is an extremely long, if not unreasonable warranty period, particularly if it encompasses the performance requirements (energy reduction, etc.) for the facility over a long term.
As there is little uniformity among the states on the length of the statutes of .imitations and repose, the calculation is likely to be different in every state. The adoption of the laws of the state in which the project is located only creates the opportunity for confusion. The duration of the warranty should be clearly defined and consistently applied without regard to the law of the state in which the project happens to be located.
Risk Related to Use of Facility: If the WARRANTY OF DESIGN includes the stated requirement for energy savings during the use of the project, contractors need to consider their lack of control over the use of the facility, its maintenance, etc. Since the contractor will not be able to directly control the operation or maintenance of the work once it is turned over to the using agency. Contractor needs to consider how to address its expectations regarding the operational use of the project, maintenance, etc., in its proposal. Even if addressed in its proposal, these expectations need to be affirmed and detailed during the performance of the contract and at project turn-over to the using agency.
Documentation Issues and Related Risks: If the contractor must accept a long term risk of warranty claims by the agency, the contractor needs to consider whether it would have records available to them as well as the availability of key witnesses to respond to a claim that the contractor has breached the WARRANTY OF DESIGN years after project acceptance. Few firms retain complete contract files for a project for decades after completion. Even if people are still employed, memories fade over the years. Effectively managing this adds to the potential cost of doing business.
Insurance Coverage Risks for Contractors: Contractors should also consider whether the E&O insurance provided by their design professional cover performance warranties. While the first sentence of the clause entitled adopts the commonly accepted standards of care for design professionals, the subsequent sentence could be read to add an additional requirement to meet specified performance standards. Can the design professional provide E&O insurance for that obligation? What is the cost and available limits? Again, how long a period must that insurance cover – the duration of the design warranty?
Completed operations insurance may not provide much protection for the design-builder as most subcontractors do not routinely provide coverage for multi-year periods following completion of the project. Even if the design-builder has its coverage, it needs to determine whether that policy excludes coverage for contractually assumed obligations such as warranties of performance.
Potential for Reduced Competition: A warranty that requires correction of the design and design related construction for an extended period of time (multiple years) could create a high dollar contingency for the design-builder and the Miller Act performance bond surety. This correction would likely be very costly. In addition, the WARRANTY OF DESIGN clause does not expressly preclude a claim by the government for damages in addition to the cost of correction.
Few contractors will have the resources to accept such risks. It is likely that the government would assert that the Miller Act performance bond encompasses any guaranty including a long term performance warrant related to the design. If the Miller Act sureties undertake to bond such projects, these sureties may bond only those contractors that are highly capitalized firms. The result could be reduced competition and increased bid prices for these projects due to the inclusion of risk contingencies in the proposal price.
Conclusion: Additional Industry & Government Communication Is Needed
The combination of long term, broadly written design warranties and “green” performance standards as described above, may create substantial performance contingencies for the construction industry and their sureties likely resulting in reduced competition and increased contract prices. In addition to the potential risk and uncertainty if the length of the design warranty relates to varying state laws, defining a warranty duration in this manner may not be consistent with policy on warranty duration set forth in FAR § 46.706. Paragraph (a) of that provision provides:
a) To facilitate the pricing and enforcement of warranties, the contracting officer shall ensure that warranties clearly state the—
(1) Exact nature of the item and its components and characteristics that the contractor warrants;
(2) Extent of the contractor's warranty including all of the contractor's obligations to the Government for breach of warranty;
(3) Specific remedies available to the Government; and
(4) Scope and duration of the warranty.
If the government’s intent is that the contractor shall achieve certain performance requirements related to energy efficiency, etc., the construction industry has demonstrated that it is willing to meet those requirements. While the construction industry is not risk adverse, contractors and their sureties must evaluate risks at the time of bid preparation, not years later. Moreover, achievement of these types of requirements should be determined near the time of project acceptance, not years later. The remedies available to the government should be clearly defined and capable of being reasonably estimated (priced). That is the policy underlying FAR § 46.706. Warranties with extremely long duration and open ended liabilities do not appear to reflect that underlying policy.
Litigation and the claims process is an inefficient mechanism to test policy. Rather, an open exchange between the federal agencies, the construction industry, insurers, and sureties is needed in order that the resulting contract terms and conditions promote the goals of “green” construction, provide a realistic allocation of responsibilities and risk, and result in a reasonable cost for the work.
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