Contracting For Services

Although an association can run into problems even with a well-drafted contract, many problems could be avoided with a well-drafted agreement. Even before entering into a contract for services, community association boards are advised to do their due diligence in investigating the contractor. This could include checking into references, both good and bad, contacting the Better Business Bureau and contacting the state licensing board if the contractor is one who must be licensed. Too many community associations have learned that the cheapest contractor is not necessarily the best contractor for the job.

Once due diligence has been performed, it is not enough to simply accept the agreement prepared by the contractor. One rule of thumb is that if you cannot read the contract without a magnifying glass you should be extra cautious in reviewing said contract. The same applies to warranties which may include serious exclusions and disclaimers which the community association board does not want to find out about once they have a problem with the contract or warranty. This article is not intended to be an exhaustive review of what community association boards should look for in contracts but rather is written for the sole purpose of having community association boards be more diligent in terms of reviewing contracts and to provide a few tips and issues relating to problem areas. Perhaps one of the most thorough contracts are those prepared by the American Institute of Architects (AIA). Although perhaps not appropriate for all types of services, the contracts are very useful in many circumstances. However, boards must keep in mind that even these contracts should be modified as needed to protect the interests of the association.

My personal pet peeve relating to contracts are the so-called self-renewing clauses which some contracts, particularly laundry agreements, contain. Typically, these contracts are written in such a manner that the original contract is for seven to ten years and then renews automatically for another seven to ten years unless the board affirmatively notifies the contractor that they do not wish to renew the agreement. The problem that boards face with this type of contract is that boards change over the years and typically don't have a file indicating when they should give notice to the contractor. One possible solution to this is to simply have the contract end after the initial term and not self renew. Another solution is to provide in the contract that the contractor must give the association notice prior to the expiration of the original term that the contract will self renew unless the association notifies the contractor to the contrary.

Insurance provisions are another area which should be looked at carefully. Ideally, the association should be named as an additional named insured on the contractor's insurance policy. In addition, too often associations receive a certificate of insurance without understanding what insurance is carried by the contractor. Therefore, associations should consider having their insurance advisor review the coverage held by the contractor to make sure that it is adequate in kinds and amounts to protect the association.

Boards may wish to consider an arbitration clause in contracts to provide for a relatively inexpensive manner of resolving disputes without the need to resort to litigation.

For repair and reconstruction contracts the association should be sure to provide for a retainage so that hopefully at no point in the contract has the contractor received sums equal to or exceeding the amount of work which has been performed. Typically, a ten percent retainage is customary. In addition, boards may end up being penny wise and pound foolish if they do not retain the services of an engineer to supervise and review the work being performed by the reconstruction contractor prior to requisitions for services being paid.

Perhaps the most ignored contract is the insurance contract for the community association. This is truly unfortunate since the insurance contract probably provides the single greatest coverage and/or risk to the community association in the event of a major claim. Associations do not want to discover after the claim arises that their insurance carrier specifically excludes that claim. Unfortunately, not many boards, managers or lawyers are all that well versed in the review of insurance coverage. Therefore, community association boards are urged to seek the assistance of an independent insurance advisor to review the coverage prior to the board accepting the coverage.

It should be noted that an independent insurance advisor is different than an insurance agent since the independent insurance advisor's role is solely to review the contract and make recommendations for the association. Although there is a cost for this type of service, in the event of a loss it may be the wisest investment that a community association may make.

Although there is no guaranty that the due diligence taken by a board prior to entering into a contract, with a review of the contract prior to executing it, will prevent all problems, I would expect that these steps will help associations avoid certain problems down the road. Unfortunately, once an association has signed a bad contract it is usually too late.