Navigating Community Association Construction Agreements with Contractors for Renovation and Remodeling Projects

Construction agreements can often be some of the most costly expenses that condominium associations and homeowner associations (HOAs) will ever review and consider for approval regarding their common element projects. However, many associations neglect to retain legal counsel who has the expertise needed to draft and implement the most effective terms and agreements. Instead, Boards of Directors focus mostly on securing competitive bids, as most associations are required to do so for projects exceeding a certain percentage of their total annual budget. It is important for community organizations to negotiate and resolve every aspect of their agreement with a general contractor so that no surprises occur later.

Without an attorney involved, a hastily written and negotiated construction agreement can have serious ramifications. Having a qualified and experienced attorney draft or review an association’s construction agreement can help avoid risks and expensive disputes. Dealing with the aftermath of a substandard agreement can be far more costly in the long run than hiring a lawyer to handle it correctly in the first place, both to protect an association’s interests and for the agreement to be legally solid.

Experienced attorneys will know the terms that are needed to protect an association’s rights, verify the correct name of the legal entity of the selected contractor, and certify that it is properly licensed to perform the work. They can also search for any complaints that have been filed against the contractor and provide that valuable information to a client who could reveal the types of legal issues that a contractor has currently or in the past.

Here are some of the nuances of contract negotiations that community associations need to consider when implementing common element projects:

• INSURANCE: It is critical that the contractor maintains proper insurance coverage and limits, including workers’ compensation and commercial general liability insurance. The association will need to be named in the original certificates of insurance reflecting that it is an additional insured and not merely a certificate holder. The appropriate professionals can verify that the right insurance provisions are included in the agreement and that the contractor holds the proper coverage. Also, associations should review with legal counsel the possibility of obtaining payment and performance bonds.
• PAYMENT SCHEDULE: The payment schedule provided in the agreement should be equal to the percentage of the work that is completed and should include a retainage of a certain percentage that is held back for each payment. The contractor should provide releases of liens and progress payment affidavits for all partial payments, as well as releases and waivers from all the sub-contractors and suppliers.
• COMPLETION SCHEDULE: Commencement and completion dates should be identified in writing. These dates should account for possible delays with daily penalties spelled out for late completion. The contractor needs to verify that they have enough qualified personnel to assure timely performance.
• INDEMNITY CLAUSES: It is important to verify that indemnity clauses are included in the agreement to protect the association and any property managers from liability.
• LABOR AND MATERIALS: The terms of labor and material warranties should always be clear in any construction agreement and should include the warranty’s duration and covered items. Warranty clauses can help an association determine and assign liability should materials be defective or require repair. Contractor warranties, for example, should specify the period during which coverage is available, what items are covered, and the causes that will trigger coverage. The contractor needs to verify that they have the proper tools and equipment to perform the work and that they are financially capable of fulfilling the agreement.
• PERMITS: Association attorneys should require that the contractor produce the necessary building department permits for the project and confirm the local municipality’s ordinance requirements. Contractors must provide all the materials, supervision, labor, tools, and equipment needed to complete the work, in strict accordance with the contract documents and as required by all applicable ordinances and rules/regulations of any governing authority.
• INSPECTION: It is important that the construction supervisor visit the work site and examine the present project conditions and be familiar with every aspect of the job. All materials incorporated in the work must be conforming to the standards of the agreement. Any work that does not meet these standards be considered defective.
• FINAL PAYMENT: The termination terms should include a clause allowing the association to terminate without cause, as well as for a material breach of contract, which can be hard to prove. Prior to the submission of final payment, the terms should allow for the association’s engineer or design professional to conduct inspections to verify that everything has been completed and all the building permits have been closed. Finally, it is also advisable to include language that permits the association to recover attorney fees and costs, including those for expert witnesses, if the organization prevails in any ensuing litigation.

Attorneys with experience in the construction industry recognize conventional contract terms and will draft an agreement in favor of the association. A contractor’s contract, on the other hand, will be covering its own interests, perhaps at the peril of the association. Simply stated, community association’s entering into a construction agreement need a qualified and experienced attorney who can review it and advise boards on reasonable terms and negotiating strategies that should help save them significant sums of money in the long run.

John D. Gwyn is an attorney in our Livonia office where he focuses his practice on the representation of community associations, management companies and developers with a particular emphasis on real estate and commercial litigation. He has handled many types of community association related matters, including assessment collections, lien foreclosures, bylaw violations, civil rights defense and creditor bankruptcy matters.

Mr. Gwyn has gained experience in community association law over the years through his representation of condominium and homeowners associations, as well as individual homeowners, in matters involving real estate, contract, and construction defect litigation issues. His extensive litigation and transactional background provides him with the experience necessary to handle even the most complex legal issues that neighborhood associations may encounter. He may be reached at (734) 261-2400 or jgwyn@cmda-law.com.