Sunday, August 21, 2011

Penny Wise and Dollar Foolish: Vendor Due Diligence

If you want to strike terror in the heart of your association attorney, you need only utter this sentence: "I signed a contract last week and want you to review it to make sure it's alright." Unfortunately, far too many boards underestimate the importance of having their contracts reviewed by legal counsel before signing them.



It is a near certainty that every board will have the opportunity at some point during its tenure to negotiate with at least one community vendor. Whether the project involves simple maintenance or complex reconstruction, the same basic principles apply.



Before spending money on legal fees, it is best for the association to negotiate the Business Terms of the contract. These include: "What am I getting?", "How much is it going to cost us to get it?" and "How long will this project take?". Once these basic Business Terms have been hammered out, it is the job of legal counsel to ensure that the Legal Terms of the contract match the agreed upon Business Terms.



Often an association needs help from other experts to understand what it is or should be getting. Many times, associations enter into contracts for more than what they need. If there is any doubt, it is best to consult with an expert. For example, if an association is modernizing its pool filtration system, it is best to get an expert opinion on what that entails so the association knows what to ask from its vendor(s) rather than having the vendor tell the association what is needed.



Most boards are not experts when it comes to contracts involving painting, concrete restoration, elevators, roofs, management, accounting, security gates, cable or wireless services or any of the myriad of projects associations routinely face. For this reason, experts such as engineers, attorneys, accountants or other consultants should be enlisted to help in the negotiation process. Resist the urge to rely upon the "resident expert" on the board who may not have worked in the subject industry for decades.



Boards must also be aware of their obligations to obtain competitive bids. ALL types of association boards (condominiums, cooperatives and HOA's) must obtain competitive bids for the following types of contracts:



1. Any contract that is not to be fully performed within 1 year after it is executed; and

2. Any contract for the purchase, lease or renting of materials or equipment or for the provision of services which requires payment by the association in the aggregate that exceeds 5% of the total annual association budget.



Boards do NOT have to obtain competitive bids for the following:



1. Contracts with employees of the association;

2. Contracts for an attorney, accountant, architect, community association manager, timeshare management firm, engineer or landscape architect;

3. Contracts with a business entity which is the only source of supply for the services needed within the county serving the association; or

4. Contracts for products and services supplied in an emergency.



Boards are not required to accept the lowest competitive bid received. Although contract price will always be a consideration taken into account when awarding a contract, it should NOT be the only consideration. Additional factors to be considered should include:



-Vendor Identification/Verification: Is the vendor authorized to conduct business in the State where the association is located? Florida associations can check out the validity of the vendor's busines organization with the Division of Corporations at www.sunbiz.org.

-Vendor Licensing: Does the vendor hold a valid license to perform the necessary work? Florida associations can check a vendor's professional licenses with the Florida Department of Business and Professional Regulation at http://www.myfloridalicense.com/dbpr.

-Vendor Referrals: How do the vendor's prior customers feel about their work? The association should always ask to speak with a vendor's most recent customers in order to get honest feedback on that vendor's qualifications and customer satisfaction. If the referral list provided to you contains old projects, it may be a warning sign.

-Length of Service: How long has the vendor been in business? The longer the track record, the better.

-Ability to Perform the Services: What are the vendor's resources? Do they have the correct knowledge, equipment and personnel to perform the services you are requesting or is the vendor going to sub-contract the work to other vendors?

-Insurance: The association should always obtain copies of the vendor's insurance certificates and ensure that the limits are acceptable.

-Bonding: A qualified vendor should not have any issue or problem obtaining the proper payment or performance bonding to complete the job.



In my next blog, we will talk about some common red flags that many boards overlook in the contract negotiation process and specific legal terms you need to know about in the event you choose to go it alone.


3 comments:

  1. Great article, Donna. I would love to re-post this on our monthly newsletter that we send out to California association managers, and list on our website at www.smacalifornia.com. Would that be ok? I'll cite you as the author obviously and include a link back to your page for the full article, but I would like to change the links for Florida to California resources.

    SMA California is a California reserve study provider and an article like this is excellent for our newsletters. I first started in this industry in management and I know the value and the dangers associated with vendor contracts. It is amazing to me with simple repairs like asphalt paving how sneaky vendors can be. My favorite, is "will remove and replace up to 4" of asphalt pavement", what they don't tell you is that if there is only 1" of pavement there then they will remove and replace the 1" inch. Those little words like "up to" significantly change the meaning and value of these contracts.

    Stephen Martin, RS, RSS
    SMA California
    CA Reserve Studies

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  2. Thanks, Stephen. Yes you can repost with attribution and please send me a link to your newsletter as I would love to see it. Very true what you say about how costs can expand or recede based on just a few simple words. We routinely put a clause in our contracts that the contractor will pay for any incidental damages or additional work needed to perform the project. For one community, this provision resulted in a savings to them of almost $20,000 when it came to removing and replacing sunshades as part of a painting project.

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  3. Great Donna:
    Our condo negotiated and signed an "emergency" contract for a new elevator company. No review or discussion was offered to the board. The president signed the contract at a board meeting and stated it did not have to be approved by the board since it was an emergency contract. Isn't the board entitled to a briefing on the contract?

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