Vendor Contracts: How HOA’s Can Protect Themselves
Summary from our Facebook Live conversation with Joel Kriger
The easiest way that HOA’s can protect themselves from the issues with vendor contracts is to start by examining the contract during its formation. Before entering into a contract with a vendor, whether it is for a one-time project or a long-term service, boards should make sure the following points are covered:
- License – HOA boards should verify that the contractor is licensed with the state licensing board.
- Insurance – HOA boards should make sure the contractor is fully insured and that their insurance coverage does not contain a multi-family or condo exclusion. Insurance should include workers’ compensation if there is more than one contractor on site and liability insurance for injury or fire. HOA is held responsible for damage or injury if contractor does not hold proper insurance.
- Governing Documents – HOA boards should consult their CC&R’s and other governing documents to make sure that contracts do not violate any limitations. Often, limitations include limits of one year and a dollar amount threshold before needing board approval. Check the governing documents for a description of what is considered capital improvements as these expenses often need board approval.
- Legal Review – Always have legal counsel review all contracts, regardless of size, with attention to particular contract clauses.
Contract Clauses for Review
Parties – The contract should never name any of the board members as a party. Instead you HOA boards should use the HOA corporate name as the contracting party. This protects the directors from being named in any litigation that might result from a breach in contract.
Scope of Work – The scope of work must be clearly defined and outlined. Any ambiguity or incomplete description of the project gives rise to disagreements and makes it difficult to hold the vendor accountable for his work. This also saves the HOA from costly change orders to the contract.
Payment Schedule – Define the payment schedule. Generally, payments should be phased so that contractors are paid as work is completed. Lump sums are not advisable because up front payment exposes the HOA to risk or loss if the contractor does not complete work. Normally a percentage is paid up front so the contractor can purchase materials and begin work. A percentage, usually 10%, is retained by the association at the conclusion until work is completed and everything is signed off/inspected.
Insurance – Define the types of insurance and minimum limits the vendor must carry and whether the association is named as additionally insured on their policy.
Indemnity Provision – HOA is not liable if the vendor get sued due to some act of negligence or omission by the vendor/contractor.
Completion Date – If performance dates and times are important, they should be put in the contract. Additionally, it may be good practice to place penalties on vendor if not done on due date.
Permits and Licenses – Vendors must be licensed and pull permits whenever appropriate and provide the association with copies of both. Contracts should clearly outline who will be responsible for the cost of permits. If the cost of permits are not included in the cost given by the vendor the association will be responsible for the cost.
Warranties – This should be a two step process as labor warranties and manufacturer warranties are in play. If the vendor promises to stand behind his/her work, be sure to put it in the contract. For manufacturer warranties make sure you get work signed off by the manufacturer as properly installed so that the warranty becomes valid.
Mechanics Liens Releases – Mechanics lien release provisions should protect the association in the event the vendor fails to pay his subcontractors or material suppliers. The mechanics liens release will allow you to know that the subcontractor has been taken care of.
Termination – A termination clause is a good point to include as they allow the HOA to terminate the agreement if the job being performed is not satisfactory. Although, these will release you from the agreement monies for work already completed should be paid.
Evergreen – These contracts are lifetime agreements; evergreen contracts automatically renew if notice is not given to the vendor of the association’s intentions to not renew the agreement. Be careful with these clauses; if they are in your contract, make sure the duration for the automatic renewal is not more than a year maximum.
Escalator – The association’s payments to the vendor automatically increase in a given time, usually annually. The increase in payments may be predetermined or may be linked to the CPI.
Alternative Dispute Resolution – An ADR provision is often included in contracts so as to keep litigation costs to a minimum and to speed resolution of any disputes.
Attorney’s Fees – Without an attorney’s fee provision, typically each side bears their own fees and costs.
RECOMMENDATION: Boards of HOAs should have the association’s legal counsel review all contracts before they are signed by the board. Contact us for assistance in preparing and enforcing contracts.