By Lindsay Smith, Winzenburg, Leff, Purvis & Payne, LLP
Your reserve account is finally fully-funded and that pool house is looking shabby. It’s time for a refresh! Maybe you can remove that ancient, dead tree while you’re at it. Before you hire a contractor to perform work in your community – be it major or minor – it’s important to make sure that you know what you’re getting, and they know what they’re expected to do.
Some contracts might be for relatively inexpensive work; maybe a slide needs to be replaced at the playground, maybe the pet waste stations are falling over. Other contracts may run the community millions of dollars and require coordination between a general contractor, an architect, an owner’s representative, homeowners, and others. Here are some things to keep in mind as you navigate construction contracts for your communities. Our hypothetical community will have two contracts to consider: the arborist’s contract to remove the dead tree, and the general contractor’s contract to renovate the clubhouse.
Scope
A clear scope of work is the first thing you need to obtain before undertaking capital repairs in the community. For a large-scale project, consider hiring a third party engineer or other expert to prepare a scope of work for contractors to bid. This helps to ensure that everyone is working from the same set of documents, and allows the Board to better compare bids. You can be certain that when two bids are worlds apart, the scope is unclear. The scope should also include the association’s insurance expectations, warranty requirements, and clearly detail what is and what is not included in the price (e.g., building permits).
To renovate the clubhouse, the association will need a scope that includes demolition and disposal; design and planning; rough work for plumbing, electricity, framing, or other building changes; drywall, fixture, and finishes. Use the scope to issue a request for proposals and receive bids for the work. Make sure the request for proposal (“RFP”) includes a due date and anticipated construction schedule.
The tree removal is a much less involved process and the bids you solicit for this project will be much simpler (as will the ultimate contract).
Bids
Speaking of bids, it’s appropriate to seek bids from multiple qualified vendors. Some communities even have policies that specify the number of bids to request. You may not receive responses from everyone you solicit a bid from. A bid should show the vendor understands the scope of the project, provide you with a reasonable construction schedule based on the RFP, and provide you with sufficient financial details to evaluate the response.
When evaluating bids, the lowest bidder is not always the best value. Talk to your management company and others in the industry, and feel free to check with your lawyer. While your lawyer might not be able to tell you details about a particular vendor’s dealings with a client, they might have valuable information for the Board to consider with its bid review.
For the clubhouse project, consider having your engineer or architect review the bid to ensure it complies with the technical requirements of the project. Contracts for large projects should always be reviewed by an attorney. The tree removal project is likely adequately reviewed by the Board and management, but some communities budget to provide attorney review for all contracts over a specified sum. Keep in mind that when you sign a bid document, you are creating a contract – it’s just a contract that might not include all the protections that you’ll want or need when things go wrong.
Project Management
Part of the cost of a large scale project is the cost of project management. Do not expect your community manager to handle rebuilding the clubhouse unless that is clearly within the scope of the management agreement. Consider hiring an outside project manager or owner’s representative to keep the project on track. Factor this cost into the project budget. If your community manager is going to be the project manager, review the contract to determine what fee is payable. If appropriate, negotiate with the management company at the outset to adjust the fee and set clear expectations with respect to work required and time documentation.
Coordinating the tree removal is something your manager should be able to handle in the ordinary course of business with no additional fee.
Timing
The project manager will work with the contractor to set up a construction timeline for the clubhouse renovation. Be honest and realistic with your timeline needs, and recognize that an ambitious timeline can be a red flag for a vendor who might not understand the intricacies of the project. We all know delays occur that are out of the parties’ control, but unreasonable delays need to be addressed in the contract as delays cause damage to the property, increase costs, and upset the community.
Payment
Based on the scope and the bid, you will have a contract that is a fixed price, or a “time and materials” number. Fixed price contracts provide predictability and help the community budget, while a time and materials contract can result in unexpected bills. However, when the scope is unclear (such as when you initially retain the engineering firm to prepare the renovation scope), the vendor may only be able to offer a time and materials contract. If something unexpected comes up with a fixed price contract, the parties will typically execute a change order to reflect that something.
The contract needs to include payment terms. Whether it is fixed price or time and materials, both parties to the contract need to know when what payments will be expected and made. A large scale contract may require regular inspections and certification by the architect that the invoice is supported by the completed work. Lien waivers are a useful protection for community associations, and conditioning payment on the vendor’s promise that all suppliers and others working for the vendor have been paid protects the Association and its members from mechanic’s liens.
Insurance
Insurance is everyone’s favorite topic, I know. While your eyes might glaze over at the thought of reading a policy, those policies are crucial when things go badly. If you have a vendor who doesn’t want to carry worker’s compensation insurance, run! Your contractors need to carry commercial general liability insurance, including bodily injury and property damage, product liability, and completed operations liability. If you’re working with a professional such as an engineer or architect, make sure they have professional liability insurance. Consider whether an umbrella policy would be appropriate in light of the scope of the project.
Your contractors should have no issues naming the association as an additional insured and providing copies of their certificates of insurance.
Consider whether the work to be performed is likely to be excluded from typical insurance policies. Earth movement exclusions have been held by courts to exclude coverage for natural and man-made earth movement. When the arborist removes a huge, dead tree and that causes unexpected subsidence that damages the clubhouse structure, the association might be left holding the bag; particularly where you only signed a bid and did not negotiate additional protections in an addendum to the bid.
Default and Termination
So, your arborist made your clubhouse fall off the side of the mountain and now you’re working with a general contractor to rebuild the structure, when you’d originally just wanted to renovate the interior. After the engineers prepared a revised scope of work and you realized you only have enough money to fix the structure, you executed a new contract with the general contractor to fix things. And things aren’t going well. Despite their initial responsive bid and glowing references, they have missed every contractual deadline and suppliers are calling asking for money. It’s clear that the company that was able to renovate the building interior is completely over its head with the structural project.
It’s time to cut bait before things get worse.
Your contract must have provisions that allow either party to terminate with appropriate notice. You will often have the obligation to allow the defaulting party to cure its default, but sometimes you’ll have a clause that allows for termination automatically (such as when the contractor files for bankruptcy). You don’t want a vendor coming after the community for the balance due on a contract, so talk to your legal counsel to make sure you’re terminating it correctly. Then, if you’re very very lucky, you might find yourself a new vendor who can do the remaining work correctly and maybe only pay a little more than you’d budgeted.
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Lindsay Smith is a partner at Winzenburg, Leff, Purvis & Payne, LLP, where she serves as general counsel to communities throughout the state. She regularly advises clients on governing document interpretation, contracts, enforcement, and Board duties to their communities.
