Green Performance Bonds: The Green-Eyed Monster of Eco-Construction

Green construction focuses on building projects that use less energy, water and materials in the structures themselves. The green principles also apply to the construction techniques utilized in erecting a building by choosing the most efficient and least wasteful processes. While this revolution has already proven to be a great success in promoting eco-construction, it has thrown quite a kink in the traditional construction bonding process.

As more and more contracts arise for green building projects, a similar need for green performance bonds is becoming apparent. In 2006, the D.C. City Council passed a Green Building Act that accidentally required such a bond, despite the fact that nothing of that kind exists. The act wanted contractors to obtain performance bonds for green building projects which would guarantee compliance with Leadership in Energy and Environmental Design (LEED) certification requirements, essentially a green building bond. Just a few months ago, a change was finally made to the act to address the discrepancy.

So, do green building bonds have a viable future? The short answer is no; at least not yet. A green performance bond would require a surety company to guarantee that the work of a contractor would meet all LEED requirements for certification. While there are concrete ways a surety can evaluate the financial standing and historical performance of a contractor, there is little they can do to determine the likelihood of a building meeting LEED standards, especially when a team with dozens of subcontractors is involved. Because of this, the risk assumed by sureties is much higher than for a typical bond.

When a similar situation arose in Vancouver, the local government there simultaneously mandated the use of green roofs and homeowner’s policies covering the roofs. Insurance companies refused to cover the roofs because of a high liability and, therefore, no new construction projects could be started until the law was adjusted. When government institutions and private sureties go head to head, it usually means very bad news for the contractors caught in the middle.

Some experts have suggested that changing the liability of a hypothetical green building bond to shift responsibility directly onto the developer would present a new form of bond capable of settling potential disputes. Despite a lack of green bonds in the current market, the dramatic support behind green building projects suggests that they are here to stay and their needs will have to be met sooner rather than later.

Eric is the Chief Marketing Officer of JW Surety Bonds. With years of experience in the surety industry, he is also a contributing author to the surety bond blog. He has held a range of different roles within the surety industry, from agent assistant to bond issuer, which gives him a unique insider perspective on surety related topics.

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