Green building is booming. Energy Star homes and LEED-certified building projects are gaining a greater foothold in communities across the country.
But the movement might stall before it truly gets off the ground unless developers, elected officials and the surety industry can find some common ground.
The problem lies with performance bonds. These are essential risk-mitigation tools that are a part of most building projects nationwide. In short, these bonds guarantee that a contractor completes the job as specified by the contract and all applicable code.
Surety bonds protect project owners and taxpayer dollars in the unlikely event that a contractor defaults, does shoddy work or somehow fails to live up to its duties. Before they issue a performance bond, surety underwriters scour a contractor’s financial standing, background and their likelihood of success. They also closely examine the prospective contract, looking for specific, tangible goals the contractor is obliged to meet. And that’s where the green building issue is becoming a major sticking point.
Hitting green building requirements isn’t an easy task. National certifying organizations like the U.S. Green Building Council have to verify that a building has achieved documented levels of efficiency and other green building milestones.
But that puts surety companies in an untenable position. What happens, for example, if the contractor reduces the building’s carbon dioxide emissions by 24 percent but the contract mandates 25 percent?
Surety companies have no interest in being on the hook financially in a case like that. Instead, most sureties refuse to bond a contractor when a contract demands specific energy efficiencies or requires an outside party to certify progress. “It’s not always the party that has to post the bond that’s responsible for that element of LEED certification,” Bob Duke, director of underwriting and assistant counsel for the District-based Surety and Fidelity Association, told the Washington Business Journal. “Maybe the party posting the bond doesn’t have control of the total obligation.”
Clarity may be coming in the next few months. Officials in Washington, D.C., are working toward a solution to the issue. The District of Columbia enacted a strict Green Building regulation in 2006 for some private and public building projects. Unsurprisingly, the new regulations call for a performance bond that provides guarantees for green efficiencies and standards. Surety officials are less than pleased with the legislation, which takes effect in 2012. A group of stakeholders from the surety and building industries and the D.C. political scene are currently working on an updated interpretation that provides greater protection for those all parties.
The rest of the country is watching, and waiting, to see how the issue gets resolved. The future of green building could hinge on the developments.
This article was written as a guest post by Chris Birk with SuretyBonds.com