Green paper: Eco-ratings in contracts

As more and more employers require their buildings to meet published sustainability criteria, a big issue for contractors is how this plays out in their building contracts. Before the recession, achieving such criteria could readily justify an increase in the market value of a development. Now the spin is different: developments can’t afford to be without high ratings if they wish to optimise marketability.

One of the most recognised rating systems is that of BRE, known as BREEAM. This was significantly updated in August 2008, although it has been around since the nineties. Credits are awarded in eight areas, including energy, water, materials and waste, according to performance. These, with weightings applied, produce one of five BREEAM ratings, ranging from a “pass” to “outstanding”.

The rating and the award of the certificate is confirmed post-construction by a BREEAM assessor to ensure not only that these issues have been dealt with in the design but that they have been followed through to implementation.

So how is the desire for such recognised ratings expressed in a building contract?

Standard forms that are said to embrace these concepts include the JCT framework and Constructing Excellence agreements. They use value engineering provisions and performance indicators as a means of bringing sustainability concepts to the fore. The JCT guidance note on sustainability and most recent amendment to the standard JCT contract recognise the importance of extending the concept of sustainability beyond the design stage to construction. Their proposed clauses are general and encouraging rather than prescriptive.

Employers, however, are typically one step ahead – imposing express contract requirements by means of amendment to the standard form. They are doing this by including what BREEAM rating they require within the employers’ requirements or specification.

Losses because the breeam rating is lower than expected are likely to be difficult to link sufficiently to the contractor’s failure such that liability can be established

So what if, at the-post construction review when the BREEAM rating is confirmed, it falls short of the contractual requirement? What liabilities might the contractor face? As the achievement of such a rating is dependent principally on design decisions, this may be outside the contractor’s control. Even in design-and-build contracts certain decisions may have been taken in the employers’ requirements that may result in a lower BREEAM rating. Similarly, decisions taken during construction either for value engineering or practical reasons may prevent the originally desired rating being achieved.

Whether a failure to achieve a contractually expressed BREEAM rating will result in the contractor being in breach of contract depends on the way that the requirement has been expressed in the contract.

If expressed as a target or aim with reference to “reasonable endeavours” or other levels of effort, it may be easy to argue that a breach has not occurred. If expressed more strongly, as a condition of certifying practical completion, the issue might well then be whether the ability to achieve the rating has been put beyond the control of the contractor and therefore failure is not his responsibility.

If the employer has an enforceable provision and the contractor is found to be in breach of it, what does that mean for the contractor? Will they be able to do anything to improve the rating? That may be next to impossible, so will contractors find themselves faced with claims for loss of value or marketability or increased life-cycle costs? In fact, such losses are likely to be difficult to link sufficiently to the contractor’s failure such that liability can be established. This is particularly so in the current market.

The challenges presented by criteria such as BREEAM will not disappear. Indeed, one only needs to look at the government’s recent and prospective environmental initiatives affecting commercial real estate, such as energy performance certificates and the carbon reduction commitment, to know that this is the case. BREEAM remains a voluntary tool, so it will be for the industry as a whole to determine how it should be played out within building contracts. Perhaps a middle ground can be found between an expressed target and an absolute contractual requirement, recognising that working towards achieving such criteria is very much a team effort.