There is always work to be done on a building, whether it’s a simple lobby repair or a major capital improvement, but finding the right contractor for the job takes some work. If the vetting process is not done properly, the results could be disastrous.
Consider the following hypothetical scenario: wanting to move quickly on a capital improvement project, the board of a fictional building hastily approves a contractor without bothering to do any reference or background checks. Maybe the contractor was mentioned by a friend of a friend, or just appeared toward the top of a cursory Google search. After the project is already underway, the property manager digs around for information and discovers that the contractor’s license is expired—and although there were rave reviews posted on the contractor's website regarding the quality of his previous work for other clients, nobody at this building reached out to those clients to verify that the reviews attributed to them were true. When the property manager visits the contractor’s previous worksites, it's clear that the contractor isn't qualified to do what he's been hired to do for the manager's building.
And the surprises aren't over. The manager also finds out that the contractor doesn't have the proper insurance coverage—which leaves the building open to massive liability if something should go wrong in the course of the project. It’s looking at those small details that could be the difference between hiring a qualified contractor who can complete a job properly and has the right documentation, and hiring an inept, unqualified contractor that could cause significant trouble for the building.
Know Who You're Dealing With?
“We always advise associations to undertake a thorough due diligence period in reviewing bids and proposals from contractors,” says Kelly C. Elmore, principal at the law firm of Kovitz Shifrin Nesbit in Chicago. “Once a contractor is selected by the board, we strongly recommend that an association consult with legal counsel in reviewing the contract. No matter how small an association, a simple review of a contract could ultimately save the association thousands of dollars (or more) as the attorney should ensure that proper termination language is included in those situations where there is a default on the contract, or where the contractor has failed to provide sufficient insurance or licensing documentation.”
In the past, according to Ted Verner, vice president of property management with The Habitat Company in Chicago, the process of vetting a contractor was a tedious one. “Insurance gets updated each month, so if you’re not aware of it and the contractor’s policy lapses we wouldn’t know unless we check each month,” he says. “The board entrusts us to do all of the proper paperwork, so to ensure that we have a good contractor, we partnered with a company, Compliance Depot, which makes sure that anyone working in our building has the right insurance. They also make sure that the contractors have a license and they do other background checks.”
Verner says using a company such as Compliance Depot is becoming more of the industry standard. “It’s about lawsuits and litigations and providing your customers with the best vendors, and it works well for us,” he says.
If the contractor does not have a history of working with the building or with the agent, the manager should still check references and ask if there were any problems on a job. You can ascertain how the issue was resolved and how the contractor was to work with when problems arose. However, Compliance Depot’s responsibilities and checking references are still only a portion of what Verner says that he still has to do before ultimately hiring a contractor.
“For example, we also go through a Request for Proposals (RFP) process,” he explains. “If we already have vendors in our system because we know they meet our standards, we’ll review their bids. However, we would start off a new contractor on a smaller project.”
Hiring a contractor who does not have the proper paperwork, especially insurance, could cause tremendous financial hardship to the building. For example, an uninsured plumber was hired to work on the building. “Unfortunately, you don’t know it, but that plumber’s insurance lapsed while they were on the job and they ruptured a line on the 32nd floor,” says Verner. “It flooded the units below. Could be an enormous problem now, but this could have been avoided if the manager had done the right thing.”
That right thing is making sure that the contractor shows proof of their insurance coverage. The declaration page of the contractor’s insurance policy will explain what type of coverages the contractor has, including such information as the name of the insured or insured party; the location of the property insured; the value and replacement value of property insured; the inception and expiration date of the policy period; amounts and limits of insurance coverage; deductibles; and the premium amount.
Remember, too, that the general contractor may come with a team of subcontractors and the subcontractor should also produce all of their required coverage. It is the responsibility of the general contractor to make sure that any sub hired is properly licensed and insured. “Typically, a general contractor will be liable for the work of the subcontractor and the association can pursue a claim against the general contractor,” says Nesbit. “However, in some cases and depending on the applicable state law, the association may have a direct claim against a subcontractor for certain workmanship or defect issues.”
Generally when associations review bids and proposals from a contractor, the board and management should work together to vet a contractor. “If a contractor is unable to produce the licensing or reference documents during the due diligence period, the board and management may wish to consider selecting a different contractor,” says Nesbit.
In addition to vetting a contractor’s credentials and certifications, it’s also incumbent upon boards and managers to have expert eyes take a look at the contract itself. That’s because generally speaking, contracts are written on behalf of the party who's writing them. “So they're one sided—or lopsided,” says Sima L. Kirsch, a Chicago-based attorney at the Law Office of Sima L. Kirsh PC. “Most people don't realize that at first, contracts are proposals; they're not complete contracts. A proposal is an offer, consideration and meeting of the minds. That meeting of the minds is what sets all the other terms in motion.”
An important tool for boards is to simply compare and contrast different offers. If the initial contract you're given is more realistically a proposal, it helps to have different versions from different vendors to sort out who's really a serious contender for your business. “I think you always have to revert back to the Business Judgment Rule, which in Illinois is the divining rod for whether or not a board is acting consistent with its fiduciary duty,” says David Hartwell, founding partner at the law firm of Penland & Hartwell LLC in Chicago.
One item that legal professionals across the board caution against is the automatic renewal clause that many vendors include in their initial contracts. Automatically renewing contracts are a popular money-making device for consumer-based services like cable TV, laundry rooms and cell phones. When it comes to services for condos however, “We always advise against it,” says Hartwell. “Removing such a clause shouldn't be a problem for the contractor, because if they are doing a good job and the relationship is stable, then typically the association will renew. If they’re not doing a good job, this gives the parties the opportunity to get together to try to resolve things.”
Many boards and managers rankle at the idea of paying to have an attorney review their contracts—especially smaller ones. That’s understandable, perhaps, especially for a building or HOA that's feeling financially pinched—but the pros agree that going it alone when it comes to contracts can lead to trouble later.
“The best way to deal with contract issues is to have good legal representation before you sign the contract,” says Mark Rosenbaum, a principal with the law firm of Fischel & Kahn in Chicago. “Many of the contracts that associations sign with vendors are form documents drawn up by the vendor, and those documents are in some cases egregious in favor of the vendor. If you have a contract going in that spells out each party's duties and rights, it makes the whole process so much easier in dealing with how to terminate the situation. Associations can be penny-wise and pound-foolish. They may not want to spend $250 for an attorney to review a contract, but then what if that contract blows up and then they have to spend thousands of dollars on an attorney?—it’s not good for anybody.”
If management has done the vetting process and thoroughly checked a potential contractor’s documentation, references and examples of their work, the odds of a problem occurring will be much lower.
“However, in those situations where the board has already entered into a contract with a contractor and then determines that proper licensing has not been obtained and/or the contractor cannot produce sufficient evidence of insurance, the association should consult with legal counsel to determine if the contract can be terminated,” says Nesbit.
If it is found at a later point in time that there is an issue with either insurance or licensing, the management and board’s first line of defense would be to halt the process on the job until these items are produced and verified. It’s not worth the risk involved to continue.
However, at the end of the day, it is ultimately the board’s decision as to who gets hired. Management should monitor the work and inspect afterward. And management should also make sure the terms of the contract have been met and that the association is safeguarded from any liability.
Lisa Iannucci is a freelance writer and a frequent contributor to The Chicagoland Cooperator.