Construction Renovation Contracts 101: Six Key Considerations for Proactive Boards and Managers

Date: January 13, 2012

One of the most challenging responsibilities for association board members and the association manager is renovation contracts.  It is a fact of life that community associations must periodically perform small and large construction renovations—everything from lobby updates to balcony repairs and garage resurfacing, from window and roof replacements to new HVAC system installations.  Before signing a construction renovation contract, boards and managers should understand the potential risks and be prepared to minimize them.  Here is a checklist that will help you safeguard the association’s funds:

1.    Due Diligence in Selection of Architect and/or Engineer

An architect or engineer who is experienced in association renovations plays a crucial role in the success of a renovation project.  A competent design professional will assist the board in developing the design concepts, preparing a thorough set of project plans and specifications, selecting good contractors, and overseeing construction.   A proactive board or manager should either have prior successful experience with the design professional or conduct due diligence on the design firm.

2.    Experienced Construction Attorney

Associations should retain the services of a knowledgeable and experienced attorney to help guide the association through the project, in particular reviewing and negotiating the contracts.  This is particularly important for major renovation projects.  Often attorneys representing associations know a lot about condominium governance but little about the complexities of construction law.  It is critical to retain counsel who is knowledgeable about both condominium law and construction law. 

The most important reason to retain an attorney to assist the association with a renovation project is for the attorney to write and negotiate the contracts.  This includes the contracts with both the design professional and the contractor.  For a $2,000 lobby touch-up, the association probably does not need to consult an attorney.  For a renovation contract over $100,000, it makes good sense to consult an attorney.  In the gray areas between those numbers, the board will need to make a reasoned judgment call.

3.    Crucial Bid Process

The bid process is an important step in a successful renovation project.  A good design professional should assist the board in preparing a list of contractors asked to bid on the project.  The board and the manager should ensure that the bid list only has experienced, competent, and professional bidders on the list.  The association should question the design professional closely about his experience working with each bidder and check references.

Associations frequently ask when it is necessary to obtain three or more bids. Obtaining multiple bids is nearly always a good idea because they tend to drive the contract price down.  Comparing bids is a good idea because, if a bid is much higher or lower than the others, that contractor may misunderstand the scope of work or has anticipated different problems on the project.  Or the contractor may just be taking a lower margin.

It is a mistake to think that the lowest bid is always the best bargain for the association. Sometimes contractors bid low in order to be awarded the contract and then they plan to “change-order” the contract to death to increase their margins.  Such contractors usually have poor reputations, and due diligence will often uncover such undesirable entities.

4.    Understand and Negotiate the Construction Contract Terms

It cannot be emphasized enough:  the written contracts between the association and its architect and engineer and between the association and the contractor define the legal agreements and understandings between the parties.  Contracts terms should be reviewed, understood, and negotiated so that the association -- and its funds -- are appropriately protected.   Each project is unique and requires unique contracts; one-size contract forms do not fit all projects.

Contractors often present owners with standard form contracts for major association renovation contracts, which the association might accept without even a minimal review.  These form contracts are often drafted for general use in the construction industry and favor the architect or contractor rather than the owner.  Sometimes the forms presented do not apply properly to the specific project and a contractor who tries to customize it for the particular project may inadvertently create inconsistencies with the fine print.  The upshot for the association is that it is not properly protected.  Your contractor is not your lawyer; your own layer can draft the supplementary terms and conditions in order to protect the association interests. 

A contract between the association and the contractor should address, among other things, the following issues:  names of the parties to the contract; scope of work; start and completion dates, contract amount, and payment terms; retainage; handling of change orders; submission of payment documents; schedule; warranties; insurance and bonds; indemnification; dispute resolution; attorneys’ fees; and termination.  These contract provisions, properly drafted, are critical for helping to protect the association from improper and unanticipated risks.

The long and the short of renovation contracts is that an association must review, understand and negotiate the terms and conditions of such contracts to ensure that the association is reasonably and properly protected.

5.    Performance and Payment Bonds:  What Are They?

The world of performance and payment bonds seems to the uninitiated to be shrouded in mystery.  Both documents provide certain protections to the association.

  • A performance bond guarantees to an owner that the project will be completed, even if the contractor defaults.  A contractor might, for instance, go bankrupt, walk away from the project for some reason, or perform so poorly that the association terminates the contract. 
  • A payment bond guarantees that certain subcontractors and suppliers on a project will be paid.  The general contractor receives payment from the owner and then pays its subcontractors and suppliers.  But what if the general contractor fails to pay them?   They will file liens against the owner.  The payment bond guarantees that those subcontractors and suppliers will be paid for work performed or materials supplied on the project.

Your agreement with the contractor may call for these bonds.  Typically, the contractor obtains the bonds from his surety company through his bonding agent and the owner pays the premium.  The bonds are usually in the amount of 100% of the contract price.  So, if the renovation contract is for $500,000, the bonds will be issued in the amount of $500,000.  The cost of the bonds is between 1-3% of the contract price.

When should an association require performance and payment bonds for a renovation contract?  There are no hard-and-fast rules on this question.  The answer depends largely on the cost and complexity of the renovation project; the higher the cost of and the more complex the project, the stronger the argument to require bonds from the contractor.  The board must weigh the benefits versus the costs of the bonds.  For contracts under $100,000, a board usually does not require bonds.  For contracts over $500,000, the board should seriously consider requiring bonds.  For contracts between those amounts, the board must make a judgment call.  

6.    Association’s Project Representative as Communicator

A clear line of communication between the owner, design professional, and contractor is essential to the smooth progress of a project.  Because the association is run by a board members, few of whom are experts in construction projects, it usual for the board to designate an “owner’s representative.”  The owner’s representative needs to (1) understand the project and the specifications; (2) have the authority to make project decisions on behalf of the association; (3) document and organize a project file—whether hard copies and/or electronic.  In the event of a dispute between the association and the contractor, a well-documented and -organized file can clarify many disputes, with little cost or time expended.  Often, the project representative will be someone from the association’s management company, if it has the on-staff expertise to do the job well.  If not, the association should consider hiring a professional to represent the association’s interests throughout the construction process.

A major renovation project at an association doesn’t happen often.  While it is exciting for owners, it is also fraught with potential risks and ensuing legal disputes.  Take the time to do it right so that the project goes more smoothly to completion, without major disappointments and exhausting construction disputes.