The Stimulus and Regulation

Law & Regulatory — By Rich Cartlidge on March 6, 2009 at 9:44 pm

The past week Chris Cheatham at Green Building Law Update (GBLU) has produced an excellent series of posts regarding the stimulus and the availability of funds for green construction projects. These posts have caused me to think of a great deal about how the disbursement of Billions of dollars of funds will be managed and regulated. I am curious as to what mechanisms you would suggest!

As has been seen with the use of TARP funds, the government is throwing around Billions of dollars in an effort to stimulate the economy but is often not accounting for the funds and how they have been spent. Under the most recent stimulus, Billions of dollars have been earmarked for projects which either provide for new construction of energy efficient buildings or the retrofitting of existing buildings to increase their energy efficiency. As Chris pointed out some of these projects specify that they will be built to LEED standards. Anyone familiar with LEED will immediately recognize a potential problem with receipt of funds being conditional on building to a specified standard. LEED certification cannot be granted until a project has been completed! If a project fails to reach its required level of certification it is too late to retract the funding! While encouraging building to “green” standards is laudable and something I firmly support, I am concerned with Billions of dollars of taxpayer money being tossed around without the ability to enforce. Perhaps, a performance bond should be a requirement for receipt of government funds (Chris, feel free to shred that idea!).

Tags: LEED, stimulus, TARP

Mark Rabkin

Rich -

if you are looking for some reassurance that there is responsible oversight of stimulus money, I can get you a contact at the GAO. Read their report here:
http://www.gao.gov/new.items/d09453t.pdf
(I haven't read it yet).

Mark Rabkin

Let's get something straight right off the bat. A performance bond is underwritten on several key factors: the contractor's financial stability and experience in the market, the developer's ability to secure financing for the project and the contract itself. For all you attorneys out there, please do not put performance bonds in the same category as insurance. Liability is a two party contract - policy holder and insurance company, where the buyer pays a premium and the company provides the coverage. A bond is a three party contract between the owner (principal), contractor (obligee) and the surety. In the event of a default by the obligee for failure to perform under the contract, the principal receives funds from the surety to complete the work the for which the obligee was contractually responsible. The surety will then attempt to recoup their losses from the defaulting contractor.

Think of it this way - a surety bond is like a mortgage. It is not underwritten on the possibility for a loss or that a creditor will default (please disregard the previous 2 years of mortgage company failures). Surety companies are so risk averse, they provide a product that essentially has no risk! If you were to try and introduce a surety based product to guarantee certification by an independent third party with no governmental oversight, the industry would pucker up tighter than a snare drum and every bond would be 100% collateralized. (That was Surety 101. I hope you enjoyed it.)

I've said this before and I will say it again. Certification is a guide to a better building, not a guarantee of one. Surely you attorneys in the audience can appreciate that. Either find a way to incorporate enforceable language in a contract around the actual performance of a building system or just forget the whole thing altogether.

As I get deeper and deeper into this green building community, I must constantly check myself to remain focused on the PURPOSE of responsible green building. We are not advocating a product or a system to benefit the USGBC or a distinct few developers. We are trying to change the way consumers value their natural resources. All of our efforts should focus on how building policies and enforcement mechanisms will ultimately benefit the people and planet corners of our triple bottom line. The profit side will surely follow.

richcartlidge

Chris,
Thanks for commenting an excellent point! I think that anybody who is confused about performance bonds should check out your blog for more information. There is a common misperception, even within the construction industry that a performance bond is the appropriate means to enforce LEED certification as being "green" is an essential part of the contract and construction documents. A performance bond in that regard is only good so far as it speaks to the procedures for procuring materials and subsequently installing them.
While a new bonding instrument is needed it still raises the same question I originally had: How do we ensure this tax payer money is actually buying what we think it is? The answer is inherently more complex than I originally thought. A building is not an object which is rapidly churned off a production line and quickly capable of being analyzed for compliance. Projected energy savings may in some cases not be realized until the building has gone through several changes of the seasons thus making accountability to the tax payers difficult and the creation of a bonding tool which will protect their interests a very difficult task.

Facebook User

Where's Mark? Someone get Mark on here to comment - around 1100p-ish because that's when Rich will be asleep...

Chris Cheatham

If Mark Rabkin finds this post, he will hunt you down while you sleep.

Quick primer on surety law. Sureties bond contractors with performance bonds and payment bonds. A performance bond guarantees that a contractor will build according the plan and specifications. Thus, a performance bond is an inappropriate instrument to enforce LEED certification. The same issue arose in the DC Green Building Act.

We need an entirely new bonding instrument to insure LEED certification.