“Greening” Your Contracts (Properties Magazine)

Sonja C. Rice, Jeffrey A. Yeager

Allocating the Risks and Benefits of Green Construction

Sustainable (or “green”) construction practices and the trend toward green buildings are here to stay, driven not only by federal, state, and local legislation, tax credits, and incentives, but also by consumer, corporate, and shareholder demand.  If they haven’t already, owners, architects, developers, and construction companies will be required to make use of new technologies, new materials, and new practices to keep pace with increasing demand for green construction – and to reap the economic and reputational benefits of green construction.  It is estimated that residential and commercial buildings account for approximately 40% of U.S. carbon dioxide emissions, and that figure does not include other building-related emissions, such as those from the manufacture, transport, and assembly of building materials such as wood, concrete, and steel. 

Simply put, climate change strategies must and will continue to involve finding ways to reward green construction practices and green buildings and discourage or penalize environmentally inefficient practices and features

A variety of incentives are already in place to encourage green construction, such as tax credits and carbon offsets.  Who receives the benefits of these types of incentives is a matter that often can – and will – be subject to contract negotiation.  Similarly, certain types of risks that are common to all construction contracts may be increased when certain standards are required, or when new materials or practices are being used. 

Risk and reward travel together.  It is critical, therefore, when dealing with all these new and continually evolving issues, to make sure you carefully consider and negotiate your construction contracts to ensure that the risks and benefits of green construction are properly allocated amongst the parties.

  • Who gets the incentives?

At the federal level, billions of dollars in incentives are being made available to encourage and reward projects and buildings that meet recognized green building standards.  For example, the Inflation Reduction Act of 2022 created new tax incentives for energy efficiency and clean energy investments for both residential and commercial buildings.  It also made available tens of billions of dollars in grants, rebates, and various forms of financing. 

Other programs allow the purchase of carbon credits or offsets to permit companies to exceed otherwise applicable caps on carbon dioxide emissions.  And the incentives to go green do not stop with the federal programs.  An array of incentives are being offered at state and local levels. And the positive publicity that comes with meeting green building standards continues to increase.  

This wide array of incentives and benefits raises the issue of who gets to claim them, particularly where, as in the case of carbon offsets, the benefits can be bought and sold, or otherwise allocated by contract.  Carefully considering who should get the benefit of a subsidy, offset, or other benefit is both a matter that requires an understanding of the applicable law and regulations, and should, where more than one party to a transaction might claim a right to the benefit, be clearly spelled out during the contracting process.

  • Be mindful of the supply chain.

One lesson learned from the COVID-19 pandemic, the invasion of Ukraine, and ongoing instability in the United States’ relationship with China, is that allocating the risk of cost and availability of building materials is of paramount concern.  This point is particularly relevant for green construction, where domestic production may not presently be able to meet the supply demands. 

Solar panels are a prime example.  China controls more than 80% of the solar panel supply chain, and while there is much discussion about increasing production in the U.S., current domestic production simply cannot keep up with demand.  This can result in limited supply, and at times, gridlock, like those experienced recently in connection with the implementation of the Uyghur Forced Labor Protection Act (UFLPA), banning the importation of goods made with forced labor.

The problems that supply chain issues can cause are well known and cannot be ignored when entering into construction contracts.  Who bears the risk of delays, unforeseen circumstances, and price escalation, must be carefully negotiated with an understanding of the particular materials and technologies that must be used to complete a project.  Failing to plan is planning to fail when it comes to supply chain instability.

  • Defining the scope and reach of certifications and warranties.

Supply chain concerns may be further complicated if a contract requires a building to meet certain certification standards.  Examples of common certification standards applicable to construction projects and building products include Energy Star certification (appliances), FSC Certification (lumber), GreenGuard Certification (building products and indoor fixtures), and GreenSeal Certification (building products and materials).  Procuring building materials that meet specified certification requirements, and ensuring that a structure is designed to satisfy certification standards, requires careful coordination and planning amongst all parties to a construction project.

Additionally, all parties to a construction contract need to carefully review the warranties being offered, or demanded, before signing a contract.  For green construction, that may include defining – and understanding – the scope of the warranties for new and emerging technologies.  It is critical to define the consequences of breaching a warranty, what actions will void a warranty, which party has the right to enforce the warranty, and the consequences if a warrantee attempts to self-repair. 

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These are just a few examples of issues to consider when entering into contracts for green construction. The key point is that when implementing new technologies, new practices, and new standards, it is important to carefully review your contracts and make sure that the terms of your standard forms account for the risks and rewards of green construction.  Good contracting practices do not stop with good forms, however, so it is also important that those who are responsible for negotiating and implementing your contracts are trained and understand how to use and when to revise those forms to meet the particular needs and demands of each project. 

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