Published in the ECHO Journal, June 2010
An Overview of the Unexpected
The Big Surprise
Every community association will face a major reconstruction project several times in the life of the development. This may occur because of clearly anticipated problems, such as reroofing or repainting, but it also will occur because of completely unanticipated (and unreserved-for) problems such as dry rot repair, soil subsidence and leaks in windows, siding, and foundations. The Davis-Stirling Act only requires that a community association reserve for those components that visual inspections into accessible areas reveal have a useful life of 30 years or less.
But what about components in areas that are not visible or accessible? What about areas under staircases that sponsor dry rot due to long-term intrusion of water? Framing components under siding that have allowed water to enter slowly for years without any way to get it out except evaporation? Deteriorating concrete walkways or driveways due to the invasion of roots or soil subsidence due to unconsolidated fill? Or, balcony railings rotting off at their interior supports? Three people in Antioch were severely injured recently when such a railing collapsed.
None of these building components would be included in the usual reserve or maintenance budget; yet the association in a typical condominium, and in many planned developments, is nevertheless responsible for necessary repairs. This scenario has played out in many associations—unexpected repairs for which there was no reserve funding.
So now you have a collapsed balcony or maybe a lot of rotted siding and no funds to repair any of it. What to do?
Finding the Right Expert
The first thing to do is to retain the services of someone who can advise the association on the proper means of repair. General contractor, architect, engineer, or construction manager? Which expert will you need? A lot depends on the complexity and extent of the problem. If, for example, you have a failed balcony support beam—something that has rotted due to years of water intrusion—just replacing the failed beam may not be enough. You don’t want it to happen again.
The first thing would be to retain someone who is a pro with waterproofing. Would you choose a building consultant or an architect? Architects are more expensive, but for a very complex waterproofing issue you want someone who has enough skill and understanding to redesign the system to make it watertight.
On the other hand, if the basic design is sound, but the materials have failed to do their job, a materials consultant who specializes in waterproof membranes may be the right choice. In our practice, we would start with the architect or an engineer because this particular balcony railing example involves a life-safety issue and because a redesign and/or strength calculations may be necessary.
If their opinion is that the problem is relatively simple to solve such that a redesign of the waterproofing system or a recalculation of the strength of the system is not required, and the project simply requires a rebuild of the original design, then a building consultant or a general contractor might provide the specifications.
But if the basic structure has proven inadequate for other reasons, such as deflection over time or failed joists or columns, a structural engineer might be necessary to do the proper calculations and provide a redesign of the structural components. A few hours of an architect’s time will usually be enough to determine the level of expertise required for the project; so if in doubt, hire an architect first.
Bidding the Job
Once the problem has been analyzed and the plans and specifications for repair have been drawn, the bidding process can start. Normally a list of preferred bidders is prepared. This preference usually comes from past experience or specialty. For political, as well as economic, reasons several bids should be obtained. Even if the board or management favors a particular contractor—perhaps because of a successful project performed earlier—it is advisable to obtain at least three bids to demonstrate due diligence in the bidding process.
When the bids are opened, it is up to the board, with management’s recommendations, to choose the right contractor. Price may not be everything. Past performance, specialty, and availability may also have important roles to play. All of those factors should be considered before the final choice is made.
Drafting the Contract
Your attorney can assist in reviewing and negotiating the contract. There are a lot of considerations, and good contract drafting is a topic all of its own. But here are some of the considerations:
- Is this a cost-plus or a lump sum contract?
- Does the owner furnish all plans and specifications (and accept responsibility for them) or is there an element of “design-build” in the contract?
- Are there unconscionable provisions—a provision buried in fine print, or a disclaimer of all express or implied warranties? Courts will often not enforce such provisions.
- What are the payment provisions? Will there be progress payments or a lump sum at the end of the job? Will the owner hold back (retain) a portion of the payment to be sure that all mechanics liens are cleared? What if the project is delayed? Should there be penalties for that? What about incentives for bringing in the job sooner?
- How are we to deal with changes?
- Who bears the responsibility for misleading drawings or specifications? [See second bullet, above.]
- What insurance will the contractor be required to carry?
- What warranties or indemnity will the contractor be required to provide?
- What licenses must the contractor have?
- Will the owner have the right to stop work and under what circumstances?
We could go on, but you get the idea. There are many questions that must be asked, and they can only be answered in the context of a particular job. Your attorney, working with your architect or engineer, can fashion a contract that is appropriate for the job.
Funding the Project
How will the association pay for all of this, especially if it is a job that no one expected to have to do? Generally speaking there are only a few options. If the job is contemplated and funded in the reserve fund, then there is no problem. But what about those surprise projects?
The association can borrow the money—either from a bank or from itself. It can go to its reserves, but generally funds borrowed from reserves must be repaid within a year. Or it can go to the members for a special, or increased monthly, assessment to pay for it. If the proposed special assessment is no more than 5 percent of the existing budgeted expenses, or the job requires no more than a 20 percent increase in the regular monthly assessment, the board can simply impose it; otherwise it will have to go to a vote of the members, not usually an easy thing to win. But a big job can quickly outdistance those statutory maximums and if the member vote does not approve the new assessment, recourse to a bank may be the only option.
If all goes well and the job is completed on time and on budget, terrific! But if the contractor defaults, either because he does not complete the job or is proceeding so slowly that it will not be completed on time, or because work has been rejected by the inspectors, it may be time to consider termination of the contract. But before that happens, consult with the association’s attorney to be sure that the contract provisions are followed so that the association will not itself be in breach.
A big, unexpected construction job is probably one of the most disruptive events in an association’s life. Some associations never recover. This can be avoided with early inspections of all building components, whether visible and accessible or not, so that failure can be anticipated in enough time to reserve adequately for the costs. Like cancer, early detection offers the best chance for a cure.
Tyler Berding is a founding partner of Berding & Weil, LLC, a community association law firm located in Alamo, CA. He has taught real estate and community association law at California State University East Bay and is the immediate past president of ECHO. Questions or comments can be directed to Dr. Berding at www.berding-weil.com or www.condoissues.com.