The challenge of delivering Passivhaus projects using standard form construction contracts

Exciting news for Vinci Construction UK in being awarded this high profile and substantial project.  I am currently advising a Scottish local authority on a similar sized community and education campus project, which is also to be designed and constructed to Passivhaus standards and will require to be Passivhaus certified. Part of the Council's funding package for the project is directly linked to the completed works achieving specified energy efficiency and other operational requirements, meaning compliance will have very real commercial and financial considerations attached to it.

Earlier this year, I also advised a housing association client on negotiation of one of the largest Passivhaus construction contracts relating to affordable homes entered into in Scotland to date.  My involvement in that project allowed me to learn a lot about the Passivhaus process, which is proving very valuable in relation to preparing contract documents for the current (even larger) project. Two really significant commercial/legal questions require to be addressed:

• It is  desirable to link issue of the Practical Completion Statement with availability of PH Certification (i.e. the certificate issued by the PH Certifier that the Works comply with all applicable requirements under the PH Criteria).  This is because once the PCS is issued, and 50% of retention released, the employer has much less leverage to encourage the contractor to undertake any remedial actions/works identified at the time of the PH Certifier's final inspections.  Such linkage is, however, far from straightforward, as different parties will normally be responsible for issuing  the PCS and PH Certification.    
• The vexed question of what to do should the completed facilities be found to be non-compliant with energy and other operational efficiency requirements after what may be a post-completion testing period running for a number of years after issue of the PCS?

In relation to the first issue, in the previous project, we settled on an agreed two-week "pause" period after inspections to establish whether the PCS should be issued have been undertaken, to allow for completion of the PH Certification processes. What happened next was dependent upon the outcome of the PH Certifier's enquiries/inspections.  

• If the PH Certifier carried out his inspections/other services on time and the works were found to be non-compliant with  PH Criteria, the Contractor was required to undertake remedial action, and the Employer was permitted to continue to withhold the PCS until such actions were successfully completed.  
• Conversely, if the PH Certifier failed to carry out inspections/other services on time, this was treated as a Relevant Event, and the Contractor was permitted to an extension of time/relief from the obligation to pay delay damages during the period when the assessment of compliance against PH Criteria was ongoing.  

This second approach proved to be necessary, because the PH Certifier was a sole trader, with limited financial resources. Our preferred solution, of having the employer, contractor and PH Certifier enter into an "independent tester" contract, similar to those previously used in Scottish hub DBFM Projects, was impractical as the PH Certifier lacked the resources to be able to stand behind any claim that might be made by the Contractor, to the effect the PH Certificate was being wrongfully withheld, leading to the Contractor continuing to incur delay damages to the Employer. This will be an issue in any future projects where the selected PH Certifier is a small specialist consultancy.

The second issue posed difficult questions about  how to protect the Employer? The completed works may be shown to be non-compliant with contractual energy and other operational efficiency requirements, but this will likely only be known 2 to 3 years after the PCS has been issued. This is much longer than the "traditional" 12 month defects liability/rectification period typically agreed in construction contracts. In addition, even if the Contract Particulars provide for an extended DLP, the balance of the retention fund held on expiry of that period (typically 1.5%) may be nowhere near high enough to pay for the cost of remedial works required in order for the completed facilities to achieve compliance. The Employer will also have legitimate concerns about the  financial losses it will also sustain where non-compliance is established, including potential loss of funding, as well as failure to achieve planned for reductions in energy and other operational costs being incurred at the completed facilities.  Extended bonding periods, payment of a deferred "success fees" and enhanced retention payments are all being actively considered in an attempt to find a fair and balanced solution to this problem and I look forward to reporting on the outcomes achieved on this point in a future post.

The environmental arguments behind procuring much more energy efficient buildings are very clear and well stated, but recent experience suggests such procurements will throw out important commercial and contractual issues that will require creative thinking to resolve.  I look forward to the challenge!