Mitchell Swann on Green Metrics

Mitchell Swann posted a good comment on measuring the benefits of Green design in response to the post by Suzanne Harness: 

It is inevitable that as sustainability moves (and it HAS to!) from "feel good" to "works good" there will be a push to attach performance outcomes to monies paid for projects. The various organizations involved in the sustainable buildings movement (ASHRAE, USGBC, AIA, etc) have made significant effort to track actual performance over time (LEED 2009's M&V requirement) and quantify sustainability goals (i.e. ASHRAE Std. 189.1). There is also a rapid expansion in the use of mandatory comparative metrics (EPA's Energy Star Portfolio Manager) and comparative analytics and ratings (ASHRAE bEQ Label). ... [A] one year performance measurement time frame is consistent with the typical "one and done" construction warranty and not unreasonable with respect to the building drifting 'out of tune' over time, especially if maintenance is not kept up to snuff. But I suspect that within the deal there are provisoes that protect the design and construction team from the negligent owner. ... [A]t the end of the day, somehow somebody has to show something that proves that an investment in sustainability yields a return.

The Gilded Age of Fellowship

What do an Appalachian guitar maker, George Washington Vanderbilt II, and the Forum have in common?  Fellowship.  

The 2012 ABA Forum on Construction Law annual planning retreat just concluded at the Biltmore Resort in Asheville, North Carolina in the glow of lightning bugs and dancing in the grass to the strains of a bluegrass band next to a fire.  For two days we brainstormed under the capable guidance of Eva Abramowitz (2008 Forum cornerstone recipient) about goals, objectives, and strategies to guide us through the next three years.  Prominent in our discussion was the idea of the Forum as a place of fellowship; a place for friendship and good will; a place for communion with others who share the same passion and creed. 

On the way to the retreat Bobbi and I visited our friends Wayne and Helen in Rugby, Virginia, a world removed from vibrant, youthful, and moneyed Asheville.  Wayne Henderson is a National Heritage award recipient for his building and playing of flattop steel string guitars.  Wayne is also part guru, eccentric, and saint.  He builds among the finest handcrafted flattop guitars in the world and he gives them away almost for free.  There is a book out based on an encounter between Eric Clapton and one of Wayne’s guitars that belonged to a friend of his.  [It seems everyone who owns a Henderson guitar is a friend of Wayne]  The guitar was not for sale, but Clapton was so enamored of it that he offered a price too good to refuse:  $100,000.00.   Wayne’s guitars frequently sell on the secondary market for up to $25,000. Wayne’s daughter recently took up an apprenticeship with him and she sold her first guitar made jointly with Wayne for $25,000.   Yet Wayne continues to sell his guitars for a fraction of this price.  Moreover, he gives away four to five guitars each year to musicians who come to play for his music festival held each June in Grayson Highlands Park.  Wayne plays without charge for every funeral, wedding, dance, and special event that comes along in a hundred mile radius of Rugby.  Each Tuesday he holds court in his shop and gives tips, guidance, and inspiration to fellow guitar makers who flock to his shop, up to thirty or more at any given time. He does all this for free.   Yet Wayne is a rich man.  He is rich with the love and fellowship he receives back from his community.  He is not a stupid man.  He wouldn’t have it any other way. 

George Vanderbilt was on the other extreme of this spectrum.  He is what people think of when they say that, in America, fortunes made in the two generations are squandered by the third.  His grandfather (Cornelius) and father (William Henry) had built a great fortune from New York ferries, shipping, and railroads.  This amounted to about $200 million, by William Henry’s death in 1885.  George is said to have inherited about $12 million of this, although online sources are thin.  He spent most of it on the purchase of 120,000 acres of land in Asheville and construction and maintenance of Biltmore House, a 250 room mansion styled on French Renaissance Chateaus.  Unlike the pretend imitations we would build today, Biltmore House is the real thing, as genuine as Jim Schenck.  Richard Morris Hunt and Frederick Law Olmstead, respectively the architects of the building and grounds (including the forest), did a truly masterful job.  The house is beautifully situated a short distance above the French Broad River and it overlooks the valley and Smokey Mountains to the west.  The entry hall, library, billiard room, breakfast room, many common and private sitting rooms, and great hall are truly stunning.   The bedrooms are on a grand scale and functioned as a luxury hotel.  Guests had ample privacy, areas to congregate in, and a staff of 35 at their disposal to cater to their every need at all times.  In its glory days the Biltmore was like the best five star resort you could imagine, except the guests did not pay, would stay more or less indefinitely, and they were all friends of the Vanderbilts.  George Vanderbilt died in 1914, at which point his widow began to sell off great chunks of the land, and by 1930 Cornelia, the only child, had lost the house to John Cecil (the son in law); the George Vanderbilt money was mostly gone, and the Cecils began to open the house for public tours to raise funds.  What possessed George Vanderbilt to stake his fortune on building a great house and run it as a resort for friends if not a deep seated desire for fellowship.  We may look down on the fact that he valued the fellowship of the rich, famous, and connected, but for valuing fellowship above money in the bank, who can say he was wrong? 

Like the passions of Wayne Henderson and George Vanderbilt, involvement in the Forum does not come cheap.   By writing and editing articles in Under Construction and the Construction Lawyer, writing chapters of books, editing books, cat herding programs, preparing materials and presenting program sessions, chairing programs, serving on Division steering committees, as Division chairs, presenting materials for Division activities, organizing and speaking at breakfast forums, serving on the governing committee, publications committee, SPEC, or division chairs committee, diversity committee, membership committee, finance committee, etc. we volunteer enough hours each year to power a good size law-firm.  By the time we get to a planning retreat everyone has done many of the above, and the officers have done virtually all of these things over a period of 15 or more years.  We do all this without monetary compensation, yet we are rich with the love and fellowship we receive back from this community.  We are not stupid.  We wouldn’t have it any other way.  For us, after a few years of Forum involvement,  it’s a gilded age of fellowship.  

On the More Esoteric Dangers of Foreign Contracting

The construction downturn in the U.S., coupled with healthy growth and infrastructure spending in a number of "Second World" countries has led to a marked increase in foreign contracting by American contractors, including many who have little experience in the particular perils of foreign contracting. While many construction attorneys can rattle off a decent Top Ten list of foreign contracting problems and pitfalls, more esoteric risks do exist, and are realized more often than many of us think.

Submitted for your consideration: a story of radical upheaval, diplomatic about-faces, a thirty-year litigation over less than $3,000,000, and a judgment that may be incapable of being paid. Even the caption is ominous: Ministry of Defense and Support for the Armed Forces of the Islamic Republic of Iran v. Cubic Defense Systems, Inc., 665 F.3d 1091 (9th Cir. 2011). One cannot even get past the first two sentences of the case history without starting to shake one's head, as the reality of what the litigation must have been like sinks in: "In 1977, Cubic...contracted with the Ministry...for sale and service of an air combat maneuvering range for use by Iran's military. The Iranian Revolution resulted in nonperformance of the contracts." The background discloses that, in 1982, the Ministry commenced an arbitration against Cubic. That an award in the Ministry's favor was given in 1987. That the ICC made a final award in 1997, totaling $2,808,519 plus pre-award interest and arbitration costs of $60,000. That the U.S. federal district court in California confirmed the ICC's award in 1998. As hard as many of the other time gaps are to understand, why was 1998 not the end of it? Why was the award still being litigated 14 years later?

"Proceedings were suspended pending litigation over whether certain judgment creditors of Iran could attach the Ministry's judgment." (Id. at 1095.) And that pending litigation went all the way to the U.S. Supreme Court. Well, fine, you might say. If I was Cubic's attorney, I'd be okay with that. It doesn't cost my client anything to sit on the sidelines and watch others fight over who gets my money. Except that the award is subject to both pre- and post-judgment interest. And that interest has now been accruing (although, thankfully, not compounding) since 1977.

Once the question of who got the money was resolved (in 2002), Cubic argued that the judgment could not be confirmed under the New York Convention, because confirming an award in favor of Iran was contrary to the public policy of the United States. Cubic further argued that the judgment could not be confirmed, because U.S. law prohibits payments to Iran. With respect to the first argument, the Ninth Circuit invited the DOJ to submit an amicus brief on the question of whether the confirmation of the judgment would be contrary to the public policy of the United States. The DOJ said it would be just fine. As you might imagine, that was essentially fatal to that argument. As to the second argument, the Ninth Circuit drew a fine (but correct) distinction between the confirmation of an award, and the payment of an award. It also noted that U.S. law created a specific process for getting permission to make payments to Iran, rather than erecting an absolute barrier.

What does all this have to do with foreign contracting? It is a less than gentle reminder that the risk assessment process for foreign contracting, especially in Second and Third World countries, needs to be more detailed than an average project risk assessment. The Iranian revolution in 1978 was not unforeseeable. Iraq had its own revolution in 1968. In 1973, Afghanistan had seen a bloodless coup. The neighborhood was known to be restless. Further, the problem was not merely one of revolution. Cubic's essential problem was that, after the Iranian hostage-taking, Cubic (as an American corporation) was absolutely prohibited from performing military contracting for Iran, even if both Cubic and Iran would otherwise have been amenable to going forward. Cubic's breach of contract, therefore, was inevitable and unavoidable, a victim of global politics.

The events of the Arab Spring, and the more recent events unfolding in Egypt as this is written, remind us that nations, even well-established nations, can turn on a dime. U.S. foreign policy can move just as quickly. Those doing business at various times in Chile, Venezuela, and throughout Africa can attest that this type of volatility is not limited to Arab countries. Contractors experienced in foreign contracting are already familiar with national stability assessments and reviews of legal tradition in a host country. As more contractors traverse the globe chasing profitable projects, those contractors would do well to take a page from their more experienced competitors, and learn how to assess external project risk than cannot be effectively controlled once the project is underway.

Design-Build Team Guarantees Energy Performance on GSA Project

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.   

[See this article also in the June 2012 ConstructionRisk.com Report at www.constructionrisk.com]

A Look at the Financing Structure of a Major Solar Project

The world's largest solar thermal power plant project, a 392 MW installation developed by BrightSource Energy of Oakland, CA, and built by Bechtel Power, is taking shape in the Mojave desert near Las Vegas.  When complete, the electricity generated will be purchased by Pacific Gas & Electric and Southern California Edison and will be sufficient to power 140,000 homes. 

BrightSource reports that its supply chain is spread over 17 states and that 70% of the $2.2 billion will be spent domestically.

BrightSource benefited from $1.6 billion in federal loan guarantees.  They first applied for a loan guarantee in 2006 and achieved financial close of the loan in April 2011.  Here is how BrightSource explains its financing structure: 

BrightSource was the project sponsor of Ivanpah, but is not the loan recipient. The borrower under the DOE-guaranteed loan is the special purpose project company..., which is owned by NRG, Google, and BrightSource. The project company holds the long-term, fixed price power purchase agreement. For a 20 or 25 year period, so long as the project continues to produce energy, it has purchasers for all of the energy it produces at a price that has already been agreed. The project company also owns the infrastructure that will be producing that energy. The underlying loan is fully secured by all of the project company’s physical assets and contracts, and the borrower pays interest that will earn a return for the lender. In the case of Ivanpah, the project companies own the three power sales contracts, each with a major credit-worthy utility and for a minimum of 20 years, and also own the assets that will produce clean power under those contracts.

Equity owners provide the portion of the project costs that is not served by the loan. An escrow account is established to hold all of the equity funds not used in construction to date, as well as detailed engineering and operational information required to successfully implement and operate the technology, so that the project can continue successfully even if one or more of the equity partners becomes financially insolvent. For Ivanpah, equity investors have committed $598 million to the project, consisting of $300 million from NRG, $168 million from a Google Inc. affiliate, and $130 million from BrightSource Energy. BrightSource maintains an equity share of the project, and as the technology provider, the company is also committed to supporting the project and technology. [Brightsource] will remain an integral partner in ensuring project success and performance.

In April 2011, the Federal Financing Bank extended the Ivanpah project companies a $1.6 billion loan, which was guaranteed by the DOE. Each month, NRG as managing member of the project companies submits a draw request to the DOE, which itemizes the payments to be made for that month. The draw requests are reviewed and approved by an independent engineering firm that was selected by DOE. The funds drawn under the loan are paid directly by the Federal Financing Bank to the intended recipients, which include Bechtel and other suppliers and subcontractors to the project, rather than going first to the project companies. This helps ensure that suppliers are paid in a timely manner, and protects the value of the assets that secure the loan.

Infrastructure 2012: Spotlight on Leadership

The Urban Land Institute in conjunction with Ernst & Young have published their 2012  outlook for infrastructure development in the U.S. and abroad.

“Unfortunately, the United States is one of the few major economic powers lacking a national infrastructure policy direction” they lament.  “ Initiatives are left to percolate from local and state levels, often competing for resources.”  As a result of federal reluctance to think strategically about infrastructure, governors, mayors, state legislators, and others are forced to be creative “in addressing metropolitan congestion, speeding freight movement, and preparing for population growth.”  

In the current environment, they see bottom-up self-help efforts as most likely to attract funding from federal and private sources, especially when they help meet clearly defined economic and strategic objectives.  "In the emerging reformulated world order,” they believe “users probably will be paying for anything new that gets built through some sort of fee or direct tax.”  

“We’ve been living off past prosperity and haven’t had to pay for anything new for 30 or 40 years—but now we do.” When greater needs slam into depleted resources, something has to give. Either you get more creative, pragmatic, and efficient, or you fall further behind with potentially dire consequences—compromised productivity and lowered quality of life in the form of greater congestion and various systemic reakdowns. Simply put, “if we’re working with less than we need, we’ve got to invest it better.”  ... With the onus on states and cities to be smarter, regions would be well served to work together to build the development and infrastructure they need, concentrating on projects that will deliver the greatest economic performance and longterm benefits. “It’s problem solving at the grass roots, figuring it out by ourselves.”

Good luck to us!