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By Suzanne H. Harness, J.D., AIA

An article published in Engineering New-Record (ENR) on May 14, 2012 under the title “Fee Holdback Raises Eyebrows” has indeed drawn attention.  The article explains that the design-build team on a U.S. General Services Administration (GSA) project being constructed in Seattle agreed that the GSA could withhold 0.5% of the original contract amount, or $330,000, pending the achievement of energy goals. Specifically, the design-builder, architect, MEP consultant, and the mechanical and electrical contractors are all at risk for the achievement of actual energy usage that is 30% less than the ASHRAE 90.1-2007 standard.  Measurement will take place over a 12 month period commencing this September.  The article did not address whether the retention of compensation is the GSA’s sole remedy for the building’s failure to meet the energy goal.  If not waived, other remedies could potentially include recovery from the design-build team of additional energy costs the GSA incurs.

Awarded in October 2009, the project is now 80% complete and the design-build team is optimistic that it will meet the goal, according to comments quoted in the article.  The architect speaks positively of the GSA’s process, calling it a “step in the right direction for the industry.”  Others might more cynically suggest that the GSA took advantage of a bad economy to force the team to guarantee results.  The article notes that competition for the award was fierce, and the design-builder regarded the hold-back as a cost of doing business with the GSA.

The GSA’s approach is diametrically opposed to the recommendations of the American Institute of Architects, which advises both architects and contractors not to guarantee or warrant the achievement of a sustainability goal.  The AIA’s 2011 Sustainability Guide explains the obvious:  contractors and architects can design and construct a building, but the owner operates it, and the owner’s actions are beyond the control of the design and construction team. If the owner operates the building differently from the assumptions used during design, performance goals will likely not be met, even if the building is perfectly constructed.

The design-builder accepted the risk, and allocated it to the applicable design and construction team members—a sound risk management approach. The design firm typically expects to share its risks with a professional liability insurance carrier, but that coverage may not be available where the team has essentially guaranteed with its expected fee that certain building performance will be attained. Professional liability insurance covers a design firm only for its professional negligence and specifically excludes from coverage damages that arise solely from guarantees and warranties.  If the design firm was not negligent in failing to meet the performance standard, it could still be held legally liable for breaching the contractual promise, and damages associated with that breach would not be covered.

Sophisticated building owners understand that when the construction contractor is required to absorb a risk it cannot control, the construction price goes up, because the contractor will have no choice but to add a contingency to cover its potential loss.  A design team that has agreed to meet a performance guarantee may be wise to take a similar approach by over-designing the building systems to increase the likelihood that the operating building will meet the required performance.  Such “over design” will benefit the owner, but will come at a price that not every owner would be willing to pay.  The ENR article explains that according to the team’s energy modeling, the GSA building will use 40% less energy than ASHRAE 90.1’s benchmark, providing a 10% cushion over the 30% less energy usage required by the contract.  The GSA’s Seattle building is chock-full of energy saving systems, some of which were included in a $1.3 million dollar change order.

The GSA chose not to execute an agreement with an Award Fee for the achievement of goals, as some other federal agencies have done (recall, for example, the Pentagon Renovation).  Instead, it imposed a penalty:  meet the goal or forfeit your money.  According to the article, the GSA calls this an “integrated process” requiring “tremendous collaboration.” The GSA’s penalty-based process should not be confused with the collaborative and integrated process others have in mind when they enter into multi-party Integrated Project Delivery (IPD) agreements.  IPD contracts may not be painless, because the design and construction team puts its profit at risk to cover the costs of its mistakes, but the IPD contracts performed to date have incentivized outstanding performance by offering increased profits, not by denying compensation, for the achievement of project goals.

Design teams are making significant progress in showing that good design can affect outcomes for building users. Evidence-based design, where design decisions are based on quantifiable research, is making great strides in healthcare, and it has applications in retail and other industries.  Certainly, building owners benefit from designs that are based on delivering predictable outcomes, whether derived from prior research or from computer-generated energy models.  Such design is here to stay and will only help the industry, but owners, designers, and contractors alike should consider carefully whether a contractual performance guarantee is the optimal way to achieve the desired result, given the potential uninsurable risks, and increased costs to the project.

About the author:  Suzanne Harness is president of Harness Project Solutions, LLC and a consultant to Construction Risk, LLC, providing risk management services for design professionals, contractors and project owners.  The services include reviewing contracts, presenting risk management workshops and seminars, providing webinars and distance continuing education programs, as well as assisting professional liability insureds with risk management issues on a variety of matters.  A licensed architect and construction lawyer, Suzanne has worked in the design and construction industry for over thirty years, serving both the public and the private sectors.  This article is published in ConstructionRisk.com Report, Vol. 14, No. 6 (June 2012).

Copyright 2012, ConstructionRisk.com, LLC