7 Common Mistakes in Approving HOA Contracts

Reviewing and accepting contracts is a regular and important requirement for homeowner associations  boards. However I see many boards that make mistakes in awarding contracts for work on association complexes. This article identifies some of the most common mistakes I see—and believe me, I see these every day.

Failure To Check Out Free Information 

Boards and managers often forego checking out a contractor. For construction contracts, the California State Contractor’s License Board (www.cslb.ca.gov) has a wealth of information on: protections, the vendor’s principals, bonding information, insurability, complaints, claims, laws protecting the consumer, and licenses that are required and are held. And another source of free cross check information is references. Certainly, contractors and vendors will be loathe to give out names of persons who would give poor references; however, this is one way to find out if a contractor has worked for many associations. This information may prove to be very valuable, as you will see further along in the article.

Acceptance of Fuzzy Terms

Boards and managers often respond on the basis of bid or proposal forms provided by the contractor rather than considering a “negotiated” or more balanced contract. Proposals and form contracts provided by contractors or vendors are always favorable to them, not to their association clients. Such documents are often one-page forms with handwritten notes on the front page and a reverse side that has another 20-30 terms printed in light-colored ink using very small, crammed-together type font that is rather hard to read. The bid offered may be vague to non-specific as to time, place, manner, phased work, and protections. What is emphasized is the price. This means the association’s obligation is clear, but the contractor’s is not. And it is always as important to read the back side of such forms as it is the front.

Ignoring Limitations on Authority

Many homeowner association governing documents have limitations on contracts. Entering into a contract that has a term of more than one year is a common prohibition, although laundry equipment, cable, and management contracts are some that are commonly listed in the exceptions to this rule. Some documents also require owner approval for certain contracted work (an example might be for capital improvements that exceed 5 percent of the budgeted gross expenses for the fiscal year or for borrowing that requires collateral). Ignoring the limitations does not automatically void a contract, but it does make a board and its manager look bad and such practices could lead to a claim for breach of fiduciary duty.

No Way Out

Many contracts are very vague or non-committal about termination provisions. In other words, it’s easy to get in but not easy to get out. And if the contract encompasses a lot of work or the term is for a long period of time finding a graceful way out can become very important if the association finds that it is unhappy with the contractor’s work, conduct or reliability. A poor working relationship is hard on all the parties. Specifics on incremental evaluation, assessment of work (such as a phased contract), and/or the ability to terminate the contract with or without cause on reasonable notice can become extremely important.

Failure to Treat Insurance Requirements, Indemnification and Other Protections Properly

Associations need to be concerned about insurance protections; many assume that asking contractors if they have insurance (liability, bonding, workers compensation, etc.) is enough. It’s not. If the HOA contract does not require by its terms that the contractor carry specific types and levels of insurance, does not require that the HOA be named as an additional insured when possible, does not require a contractor to carry workers compensation insurance, and does not require the contractor to carry and provide proof of a proper endorsement that provides protection for working in an HOA (for construction contracts – this is critical), there is little recourse to terminate the contract if the Contractor stops paying for the insurance and it lapses, or they lose their license and it lapses. And, it is critical to understand the indemnification provisions so as to make sure that the HOA cannot be held responsible for the contractor’s mistakes or negligence. (See more on this below under Legal Review.)

Failure to Keep Owners “In The Loop”

HOAs that find themselves under the “microscope” with owners may have failed in these areas: failure to seek multiple bids (to give a fair comparison of what terms, experience, offerings, and contractors are available), failure to keep owners sufficiently informed to garner trust, failure to respond well to those who raise questions, failure to recognize the importance of consensus building. It is especially important with regard to a very large contract that will require owner participation (such as approval of a special assessment) to provide the owners sufficient information as the process moves forward to build trust and confidence so that these things do not happen: (1) Owners demand copies of bids claiming they can find contractors who charge less, (2) Owners actively raise opposition in response to a proposal because they do not have a full understanding of the necessity of the work, the competence of the contractors, the trust in the board in choosing the right “team” geared for successful execution of the contract.

Failure to Seek Legal Review

There are many things an experienced attorney will look for in a contract that a board or management may miss. The points listed in this article are just some of the things that attorneys are trained to spot and get corrected on behalf of the board and association.

Beth Grimm is frequent contributor to the ECHO Journal. She is a Bay Area attorney who authors books, writes articles and newsletters, is active in ECHO and other groups that serve the public who live in CIDS via educational materials and otherwise, who stays active in current legislation and who hosts www.californiacondoguru.com with lots of free information for homeowners, board member ,and managers.