Man signing contract

What Is a Construction Contract?

When your property manager reports to a board that one portion or a significant element of the common area is in need of repair, the first question that usually arises is whether or not the board of directors should itself (without reliance on legal counsel) contemplate negotiating the two contracts that are usually needed before work can start. There are the contracts with the architect/construction manager on the one hand, and the contract with the general contractor or trade contractor (such as a roofer) on the other.

Seeking Legal Counsel

Without a written agreement prepared by association counsel, and if an association goes ahead and hires a contractor for a simple re-roof (or starts a major reconstruction project), the HOA is taking significant risks and creating opportunity for a number of negative impacts to occur while the repair work is underway. Choosing legal counsel is the safest route, though the counsel selected should be knowledgeable homeowners association legal issues and construction laws in general.

Board members should also consider the legal environment they operate under, such as the safe harbor protection a board receives if an expert, in this case an attorney, is hired to assist the board before the repair process starts. The fiduciary obligations of board members and statutory “standard of care” provided in Corporations Code Section 7231 should be factored into the board’s decision on this issue as well.

Definition of a Contract

When contemplating repair work of any sort, the document that starts the process following negotiations is a good contract. As board members (“board” and or “board members” and “owner” are used interchangeably), having a general understanding of what a contract is, and its major pieces, will help you understand the process, ask better questions posed to the association’s legal counsel, and reduce the risk of board and contractor misunderstandings over contract issues later as the repair work starts.

Contracts are signed by someone called a “party” to an agreement. A simple explanation of its function is that it should record the terms of the agreement between the parties. A contract protects both “sides” to an agreement if negotiated properly.  It will spell out the scope of the work, who does what, how much the project will cost, and how long it is supposed to take.

Different Types of Contracts

There are a few different types of contracts and a number of different documents that should be included in a contract (Check out the essential clauses to include in every constuction contract). The association may contract with both an architect, and or a construction manager, and a general contractor, or depending upon the complexity of the scope of work, with just a general contractor. However, even with simple repair scopes, such as replacement of gutters or a re-roof, a board should strongly consider the retention of a construction manager to help give the board the “safe harbor” it deserves.

Renovation and Repair Contracts and Their Classifications

Generally, a very simple definition of a renovation/repair contract is that it will state the services/products that will be provided and the delivery approach and terms for those service(s), the agreed upon price, and the fact that both parties have agreed on everything (usually with a signature on the signature block when the contract is written).

However, contracts used for major reconstruction work at a common interest development are usually more complicated and contain several lengthy component parts than what this simple definition contemplates.  For that reason there are standardized forms that are quite often used. Typically, a major reconstruction project will require the services of multiple contractors and possibly designers, and the contract duties of each should be spelled out in separate agreements with all participants.

Renovation/repair contracts have several classifications. One classification relates to how the contract is “priced,” as opposed to how the services/products will be “delivered.”

3 different approaches to pricing

  1. Lump sum
  2. Cost plus
  3. Cost plus with maximum price

Each of these “pricing approaches” have pluses and minuses, depending upon the owner’s risk tolerance for price increases.

3 different approaches to delivery

No matter what type of “price approach” that is agreed upon, there are generally three “delivery” methods a contractor can offer to an owner. These approaches have come to be known as:

Design-bid-build: The owner enters into a separate contract with both an architect and a general contractor after the contractor supplies a bid;

Design build: One firm, such as a general contractor, provides all services including design;

Construction manager at risk: The owner enters into a contract with a single entity who then manages other contractors and designers. Another subpart of this approach is where the owner can hire one entity to act as the owner’s agent but the owner remains “at risk.” This variation is called construction manager “as agent.”

Standard Contract Forms and Industry Organizations

Most contracts are offered to an owner using a “standard form” that are created by industry organizations and, while they generally reflect certain recognized standards, they do tend to reflect the bias of that industry. Standard contract forms have several advantages, including their ease of use, attorney time for review is reduced, and they are usually easier to interpret by the parties and or courts, if necessary.

However, these standard/generic contracts do tend to reflect industry bias. This is a another major reason why a board/owner should consider the assistance of legal counsel, since a series of addendum paragraphs and revisions to the electronic version of industry forms can somewhat deflect the industry bias in whatever form that is used.

American Institute of Architects (AIA) Generic Contract

The generic contract form provided by the AIA, or some variation, appears to be the one used most often. Most construction contracts, including the AIA forms, consist of several subparts, including the main agreement, a form called general conditions (which attempts to list the rules and procedures during the work), special conditions (usually prepared by the architect), and finally, the building plans and specifications.

When using the AIA forms, where a series of agreements are intended to be used together, there are two main contract labels, or the “A” and “B” series. The “A” series reflects the contracts between an owner and contractor and the “B” series reflects the contracts between architect and owner. A third series, or the “G” series, is a group of documents that are generated while the work is in progress, such as change orders and clarification requests.

Other Types of Contracts

An association will usually encounter other types of contracts with either the architect, and or the construction manager. Essentially, the architect develops the project design, and typically in the case of common interest developments serves as a team member with the owner’s construction manager during the design process and answers questions that may arise during the work.

Creating a Safe Harbor

Adopting “safe harbor” considerations, the board should consider obtaining an agreement with the construction manager requiring it to be the owner’s agent, if the “construction manager as agent” approach is used. The construction manager can then be considered an independent resource to assist the owner in supervising the work, ensuring compliance with contract documents for a successful project delivered on time and within budget. Both of these agreements typically involve major safe harbor considerations for board members and should be reviewed by association legal counsel.

Whether a board should start with an architect or construction manager is beyond the scope of this article, but in either case the agreement between owner and architect/construction manager should be thought of as the first agreement to consider before repair work associated with a major reconstruction project starts. 

Adapted from an article by Robert P. Hall, Esq., Senior Cousel with Flynn Riley Bailey &Pasek, LLP. Hall has been an active member of ECHO and speaker at ECHO events for many years.