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With the passage of the American Recovery and Reinvestment Act of 2009 (ARRA), the federal government invested approximately $25 billion in green building, and became a key market driver in the construction industry. State and local governments have also adopted new green building regulations. But green building projects raise new risks and liabilities. For example:

  • What are the risks and liabilities for failing to achieve green building certification?
  • What will green building defects look like?
  • How can contractors manage their green building contracts to minimize potential liability? 

On Wednesday, June 2, 2010, from 2:00 p.m. – 3:00 p.m. EDT, please join George Ruttinger, Stephen McBrady and Christopher Cheatham from Crowell & Moring LLP’s Government Contracts group for an in-depth discussion of green building regulatory developments, certification liability issues and contract risk management.

Click Here to Register

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In October 2009, President Barack Obama signed Executive Order 13514, which sets numerous green requirements for the federal government. The EO will certainly impact construction contracts with the federal government. According to the White House’s Press Release, the Executive Order requires agencies to meet a number of energy, water and waste reduction goals:
  • 26% improvement in water efficiency by 2020;
  • 50% of construction, recycling and waste materials will be diverted from landfills by 2015;
  • 95% of all applicable contracts will meet sustainability requirements;
  • Implementation of the 2030 net-zero-energy building requirement;
  • Implementation of the stormwater provisions of the Energy Independence and Security Act of 2007, section 438; and
  • Development of guidance for sustainable Federal building locations in alignment with the Livability Principles put forward by the Department of Housing and Urban Development, the Department of Transportation, and the Environmental Protection Agency.
Agencies will be required to go through the rulemaking process to implement EO 13514. There are a number of steps to the rulemaking process:
  • agencies must inform the public of proposed rules before they take effect;
  • the public can comment on the proposed rules and provide additional data to the agency;
  • the public can access the rulemaking record and analyze the data and analysis behind a proposed rule;
  • the agency analyzes and responds to the public’s comments;
  • the agency creates a permanent record of its analysis and the process;
It will be very interesting to see the initial rules proposed by the various agencies and how various players weigh in during this green building rulemaking process.
How do you think interested parties are going to react?
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If you are working on a construction project funded by the American Recovery and Reinvestment Act (or you have any hint that you are), you need to be aware of your responsibility to pay Davis-Bacon wages.
Section 1606 of the American Recovery and Reinvestment Act (ARRA) sets out the Davis-Bacon wage requirements:

Notwithstanding any other provision of law and in a manner consistent with other provisions in this Act, all laborers and mechanics employed by contractors and sub contractors on projects funded directly by or assisted in whole or in part by and through the Federal Government pursuant to this Act shall be paid wages at rates not less than those prevailing on projects of a character similar in the locality as determined by the Secretary of Labor in accordance with subchapter IV of chapter 31 of title 40, United States Code.

The Department of Labor (DOL) has broadly interpreted Section 1606 (pdf) of American Recovery and Reinvestment Act (ARRA):
Section 1606 of ARRA plainly indicates that the Davis-Bacon prevailing wage requirement broadly applies to ARRA-appropriated construction projects. . . . [The ARRA] also extends the prevailing wage requirements to projects ‘assisted in whole or in part by and through the Federal Government pursuant to this Act’ thus encompassing any assistance provided for ARRA projects through grants, loans, guarantees, and insurance.

In short, if any ARRA dollars are funding your construction project, Davis-Bacon wages are required (barring very limited exceptions). If you are working on a construction project in 2010, particularly one funded by a governmental entity, it is important that you ask if the project is being funded in any amount by ARRA funds.  If ARRA funds find their way into your project and you have not accounted for Davis-Bacon wage requirements, a change order may be necessary. 

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My last post warned that subcontractors on Federal construction projects should be alert to whether the Government designated the prime contract as a “commercial items’ contract, rather than a construction contract.  Agencies often assume that in a “commercial items” contract — even if the contract is for purchase of construction-related services — the prime contractor is not required to obtain a payment bond.

Leaving aside whether this assumption is justified, it is almost certainly an unintended — and ironic — consequence of the “commercial items” contracting rules.  “Commercial items” contracting was supposed to make Federal contracting simpler and more like commercial contracts, for use when the Government was purchasing items available in the commercial marketplace.  The thought was, for instance, if the Government buys pencils, why load up the contract with a lot of complicated specialized requirements?  So, when a contract is designated as one for the purchase of “commercial items,” few of the standard Government clauses apply.  It is the Federal equivalent of ordering from Staples.

Ironically, bonds in Federal construction contracts are also supposed to mimic certain aspects of construction contracts in the commercial marketplace.  In commercial construction contracts, an unpaid subcontractor may lien the property to secure payment from a nonpaying prime.  That protection is unavailable in many public construction projects, because state laws typically prohibit liens on public property.  Congress therefore enacted the Miller Act to require Federal prime construction (and other) contractors to obtain payment bonds to protect their subcontractors.  The bond performs the same function as a lien in the private sector.

Therein lies the rub: if a “commercial items” contract does not require a payment bond, it looks less like — not more like — a private sector construction contract.  This may be well and good when the Government buys pencils, but what if it buys construction?  The FAR defines “commercial item” to include “services of a type offered and sold competitively in substantial quantities in the commercial marketplace.”  Could construction be a “service of a type offered and sold competitively in substantial quantities in the commercial marketplace?”  It would be fair to say that if there were no wiggle room in that definition, agencies would not have needed the 2003 OFPP guidance warning them against overbroad designation of contracts as “commercial items” contracts.

Thus, on the knife edge of a hair-splitting definitional choice hangs the subcontractor’s rights.  If the agency designates a contract as a “commercial items” contract — even though it may look like a construction contract, walk like construction contract, and quack like one — the unwary subcontractor could be left without a payment bond to protect itself from deadbeat primes.

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Federal agencies love green building certification.  According to the United States Green Building Council, 14 federal agencies have implemented initiatives supporting LEED certification, a type of green building rating system.

I had never quite understood why federal agencies were so focused on green building certification for new construction projects. That was, until I read this:

U.S. agencies are required to have 15 percent of their existing building inventory incorporate sustainable elements by 2015 under Executive Order 13423, signed by George W. Bush in 2007.

To comply with the order, the Department of Veterans Affairs aims to have 21 facilities reviewed and rated by third-party green building systems by the close of this year.

“Reaching the goal of 21 third-party certifications in 2010 will make VA a leading example of green achievement,” said Secretary of Veterans Affairs Eric K. Shinseki in a prepared statement. “We will proudly reach and surpass the 15 percent requirement before 2015.”

In order to demonstrate sustainable elements in its existing building stock and satisfy Executive Order 13423, Veterans Affairs is obtaining Green Globes certification for existing buildings. As we move closer to 2015, obtaining green building certification for a federal building will be an important step towards an agency’s compliance with Executive Order 13423.

The consequences are growing for failing to achieve green building certification. Simultaneously, the importance of negotiating a balanced green building contract is also growing.

Related Links:

15 Veterans Affairs Medical Centers Attain Green Globes Certification (GreenerBuildings)

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Subcontractors seeking a piece of the Federal construction spending (pdf) boom beware: you can find yourself with no easy options to collect from a nonpaying prime, if the prime contract — the one you thought was a construction contract — is actually a “commercial items” contract, and the prime contractor did not get a payment bond.

The current wave of Federal construction spending, coinciding as it does with a drop in private construction spending (pdf) attracts many contractors new to, or at least inexperienced with, Federal contracting.  Many try subcontracting at first, instead of prime contracts, thinking that through subcontracts, they avoid some of the requirements, traps, and risks inherent in doing business with the Federal Government.

But one of the persistent risks for a subcontractor — a prime that does not pay its bills — can loom even larger for the unwary subcontractor working on Federal construction projects.  Under the Miller Act and the FAR, in most construction contracts the Government requires the prime contractor to obtain a payment bond, or other protections for subcontractors and suppliers.  The payment bond is supposed to protect subcontractors and suppliers by providing a means of collecting, if the prime refuses to pay.  The Government generally accomplishes this by including a standard clause, e.g. FAR 52.228-15, in the prime contract, requiring the prime to obtain a bond (or take other measures) to protect subcontractors.

However, if the prime contract is designated by the Government as a “commercial items” contract, agencies have taken the position that they are not required to include FAR 52.228-15 — or any other protections for subcontractors — in the prime contract.

Well, one may think, so what?  A construction contract is a construction contract, not a commercial items contract.  If I have a construction contract, the rules for construction contracting apply, and so do the Miller Act and and standard clause FAR 52.228-15.

Not necessarily.  The distinction between “construction” and “commercial items” contracts can be as fine as frog’s hair — a matter of hair-splitting over definitional details.

The FAR defines “commercial item” to include “services of a type offered and sole competitively in substantial quantities in the commercial marketplace.”  Might this definition include projects that one normally thinks of as “construction”?   Don’t bet that an agency has not tried to fit the “construction” square peg into the “commercial items”  round hole.

Indeed, the Federal Government’s chief procurement policy-maker, the Office of Federal Procurement Policy, thought the line was fuzzy enough to confuse agencies.  OFPP encouraged agencies not to overuse commercial items contracting practices for construction work.  In 2003, OFPP issued a memorandum (pdf) warning agency officials that the commercial items rules (FAR Part 12)

“should rarely, if ever, be used for new construction acquisitions or non-routine alteration and repair services.”

Instead, OFPP said, officials should use the rules for construction contracting (FAR Part 36) in those situations.

This is not a new problem, but with the significant increase in Federal spending on construction, there are signs it continues to confuse and surprise unsuspecting subcontractors on Federal construction projects.  In the next post, I will look at the implications for subcontractors suffering under a nonpaying prime.

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On Monday, I discussed conflicts between military construction and green building certification.  Green building certification was originally created for commercial office buildings, which can create some odd applications in military construction.  While we have have already discussed energy efficiency, bicycle racks and HVAC systems, there is one component of military construction that conflicts directly with many green building components:  anti-terrorism.

I never imagined someone had completed a study of these conflicts:

“The LEED®-DoD Antiterrorism Standards Tool addresses the security implications of strategies used to achieve each LEED credit with regard to their inter-relationship (i.e., potential conflicts and synergies), from the Department of Defense (DoD) perspective. Information is presented within a color-coded matrix based on the U.S. Green Building Council’s Leadership in Energy and Environmental Design Green Building Rating System (LEED-NC Version 2.1) cross-referenced with the applicable standards in Unified Facilities Criteria (UFC) 4-010-01, DoD Minimum Antiterrorism Standards for Buildings. As such, critical areas are easily identified, prompting the project team to work collaboratively, using a ‘whole building’ approach, to develop successful, efficient solutions for a high performance, secure building.”

For a government contracts attorney focused on green building legal and regulatory developments, the Standards Tool is a remarkable discovery.  My eye was immediately drawn to the “conflicting requirements” in the Standards Tool.  According to the Standards Tool, the following LEED credits are in direct conflict with Anti-terrorism Standards:

  •    SS-2 Development Density
  •    SS-5.2 Reduced Site Disturbance, Development Footprint
  •    SS-6.1 Stormwater Management, Rate and Quantity

In future posts, I will be exploring the conflicts between these LEED credits and the Anti-terrorism Standards Tool.  Have any of you worked with a building trying to comply with both LEED certification and the Department of Defense Anti-Terrorism Standards?

Related Links:

LEED DoD Antiterrorism Standards Tool (WBDG)

Conflicts Arise Between Military Construction and Green Building (GBLU)