Effective Vendor and Construction Contracts

Associations enter into all sorts of contracts for many types of projects – landscaping, roof repair, pool maintenance and repair, and siding, to name just a few.   Many of these contracts involve large sums of money and a major amount of work.  In order to protect the Association and its investment, the Association should ensure that it has an effective contract with the service provider.  These contracts should always be in writing (parties tend to differ on the actual terms of an oral agreement), incorporate all the material terms and conditions of the transaction, and contemplate how the parties want to handle foreseeable events that may occur during the performance of the contract.  This outline is designed to guide associations in choosing a contractor and in negotiating a contract.  Although an association does not necessarily need an attorney to negotiate the entire contract, it is always a good idea to have an attorney review the contract before signing to ensure the association is protected.

The following is an overview of typical provisions and concerns which an association, through its Board of Directors and manager, should consider when entering into vendor and construction contracts:

BOARD OF DIRECTOR’S RESPONSIBILITY

1. Finding a Contractor.  Once it has been determined that the association needs some work done, how does it go about finding a reputable contractor?
   1. Get recommendations from your property manager, other associations, other contractors you have hired, and trade organizations.
   2. Get bids.  The bids should be fairly detailed and set forth the work to be completed.
   3. Get references from the contractors and call the references.
   4. Get to know the contractors who have submitted bids.  A personal conversation can tell you a lot that the written bid cannot and may indicate how comfortable the Board will be with a particular contractor.
2. Always verify that the Board of Directors has the authority under the governing documents and Colorado law to enter into the contract under consideration.  If the Board is uncertain whether it has the authority to enter into a contract, consult the Association’s attorney prior to signing a contract.  Specifically, look at the governing documents for provisions relating to the following:
   1. Term of Contract.  Many governing documents limit the term of a contract of one year.  Therefore, the Association may only be able to enter into a one year management agreement or landscaping agreement.  The term of the contract should always be included in the contract.
   2. Capital Improvements and/or Limitations on Expenditure of Funds.  Some governing documents limit the association’s ability to expend funds for capital improvements and/or limit expenditures.
   3. Borrowing Funds and/or Using a Line of Credit.  The governing documents often require a vote of the homeowners before borrowing money or pledging collateral.
3. The association may be better served by a customized contract than by a form contract, such as AIA contracts.  Form contracts tend to benefit the contractor while offering little protection for the association.

SPECIFIC CONTRACT PROVISIONS

1. Formal Names of Parties to the Contract.  Make sure the formal names of the association and the contractor are used in the contract.  Also, the signature page should note in what capacity the signatories are acting.  For instance, if the president of the association signs for the association, the signature block should read “John Doe, President.”  Including the title of the person signing for each party implies that each party has authority to enter into the contract on behalf of their respective organizations.
2. Scope of Work.  The contract should always include a description of the work that is to be completed so that both parties know exactly what to expect.   This is often attached to the contract as an exhibit.  Often, it may be a good idea to include a description of work that will not be done for the contract price (the “extra work”).  For instance, an association and an engineer enter into a contract to retrofit the building to bring it into compliance with the fire codes.  It should be clear to all parties that the engineer is designing the retrofit plans, but not physically bringing the building into compliance.
   1. Performance of the Services.  This is related to the Scope of Work.  There should always be a requirement that the vendor perform the work in accordance with the Scope of Work and that the work will be completed in a workmanlike manner, furnishing such labor, materials, tools and equipment required to do so.  Any recommendations or representations made by the vendor should be included, also.
   2. Definition of “Completion”.  “Completion” should be defined.  The work under a landscaping contract may be “complete” upon the first snowfall.  A roofing contract may be complete when a leakproof and watertight roof system has been constructed in accordance with the manufacturers’ specifications and the roof has been inspected and approved by the contractor, the association, and any local government authorities.  In addition, if anything is contingent upon “Substantial Completion” of the work, that term should also be defined.
3. Contract Documents and their Priority.  In many cases, the bid specifications become part of the contract.  Other times, the scope of work in the contract will differ somewhat from the bid documentation.  The contract should include a provision defining which documents, if any, are part of the contract.  If there are multiple documents that become incorporated into the contract, this provision must also give the priority of documents in case of conflict.  Generally, the contract should control over any bid documents since the contract contains the indemnifications and insurance provisions.
4. Dates, Contract Sum, and Payment Terms.  The contract should contain the commencement and completion dates for the work, as well as the contract sum and any payment terms.  Many contracts provide that payments are made in installments as the work is completed.  However, the association should make sure it can withhold payment or setoff if the work is defective or a lien has been filed until the situation is corrected.
5. Independent Contractor.  Every contract should confirm that the vendor acts as an independent contractor and shall not be deemed to be a partner, joint venture agent, associate or employee of the association.  This provision should also state that all personnel or subcontractors of the vendor are employees of the vendor and the vendor is responsible for its personnel and subcontractors.
6. Change Orders.  It is almost inevitable that the work will have to be somewhat modified once the actual field conditions are discovered.  For this reason, the contract should contain a provision as to what constitutes “extra work” in addition to the Scope of Work.  The contract should require that change orders be requested by the contractor in writing that details the proposed change, the maximum price, and the completion date.  It should also require that the association sign the change order for it to be effective.  The contract should also provide how work performed under a change order is billed.
   1. The contract sum and completion date should only be altered by a change order.
   2. If there is a performance bond, the change order may necessitate an increase in the bond amount.
7. Inspection of the Premises.  Depending on the type of service to be performed under the contract, it may be important to include that the contractor has examined:
   1. the nature and location of the property;
   2. the character, quality and quantity of the materials, equipment, and facilities necessary under the contract; and
   3. all other matters which in any way can affect the performance under the contract.

This provision should include that the contractor represents that it entered into the contract as a result of its own examination, and not because of any representations made by the association, unless set forth in writing in the contract.  This provision will prevent the contractor from saying it relied on representations made by a third party (i.e. the association or the manager) in making its bid.

• Submission of Documents Prior to Commencement of Work.  Most contracts require that certain documents be submitted prior to the commencement of the work.  Depending on the type of contract, these documents may include building permits, governmental licenses, manufacturers data sheets, insurance certificates, receipt of additional insured endorsements, and payment or insurance bonds.
• Submission of Documents Prior to Payment.  Many contracts require progress payments, while some simply require the payment of a lump sum upon completion of the work.  The contract should set forth what documents are to be submitted prior to a progress or final payment.  These documents may include written confirmation from a manufacturer that the product has been installed in accordance with the manufacturer’s specifications, written notification that the manufacturer’s warranty is in place, copies of all approvals by governmental agencies, and documents that unconditional releases have been provided for labor and materials and that all labor and equipment are free and clear of all liens, claims, and encumbrances.
• Schedule.  For large projects with multiple facets, the contract should specify completion dates for the various components.  In addition, any provisions relating to delay, such as the causes of the delay, the consequences of delays on the schedule, damages for delay caused by the contractor or by the owner, and rewards for completing a project early, should be carefully reviewed.
• Warranties.  There should always be a warranty for work and materials.  The length of the warranty will depend upon the particular industry, but a one year warranty for work and materials is the most common.  In addition, any manufacturers’ warranties should be signed over to the association upon completion of the project.
• Insurance.  Contracts and vendors should always have insurance and the contract should specify the types of insurance that are required.  A construction contract will usually require builder’s all-risk coverage, commercial general liability insurance, automobile insurance, contractual liability coverage for indemnity obligations, workers’ compensation and employer’s liability.  Vendors will need many of the same types of insurance, depending on the nature of their business.  For any vendor that has access to association funds (i.e. management company or accounting firm), the association should require fidelity insurance.  The association should consult with its attorney or insurance advisor to determine what types and amounts of insurance are needed for a particular project.
• Indemnification.  There should always be an indemnification clause requiring the contractor or vendor to indemnify the Association against claims of damage or injury.
• Dispute Resolution.  Contracts can contain a provision allowing for or requiring disputes to be resolved by mediation or arbitration rather than by litigation.  Alternative dispute resolution has many advantages over litigation – it is usually quicker and less expensive.  Dispute resolution provisions should be reviewed to determine whether mediation or arbitration is discretionary or mandatory, whether certain rules must be followed, and where the mediation or arbitration would occur.
• Attorneys Fees.  In the event of a dispute, does the contract provide for an award of attorneys fees to the prevailing party.
• Termination.  Termination provisions should be fair to both parties and allow either party to terminate for default.  Since a default by the association normally takes the form of nonpayment, the association should include a right to cure the default before a contractor or vendor can terminate the contract.  There is often a provision allowing for termination due to default upon a certain number of days notice, although contracts with a quick completion date often do not have this provision.