Far too many homeowners associations fall into the trap of signing biased HOA construction contracts. Avoid becoming one of them by familiarizing yourself with these contract must-haves.
The Unfortunate Reality of HOA Construction Contracts
Construction work is one of the major things that HOAs can’t accomplish in-house, whether it is for capital improvements or other projects. HOA boards always need to look for contractors to perform the job. And, with every agreement comes a contract.
Unfortunately, simply having a written contract isn’t enough. You must also make sure you have a fair contract that expressly outlines the specifications of the project. Many contracts, though, contain biased language. HOA construction contracts, in particular, are known to be very one-sided.
Most HOA construction contracts contain language that is partial to the side of the contractor or company. More often than not, such contracts don’t detail the scope of work and time frame of the project. There are also clauses that state the contract is “subject to all of the contractor’s additional terms and conditions.” They are almost always wholly in favor of the contractor.
Still, many HOA boards fall victim to unfair contracts. This usually happens as a result of the board’s ineptitude when it comes to legal matters. After all, not everyone can understand legal jargon. But, several contractors do this on purpose. They tell their lawyers to create a contract using language that an average person can’t comprehend. They also use specialized forms that are often too confusing.
Other times, HOA boards end up signing one-sided contracts because they simply “want to get it over with.” These boards are usually made up of members who don’t care about the association as much and just want the job done, whatever that may entail. There may also be a conflict of interest present, where the contractor is related in some way to a board member. In this case, the board member may be intentionally signing a biased contract because they will get something out of the deal.
What to Look for in HOA Construction Contracts
When negotiating a contract with a vendor or contractor, make sure to look for the following items:
1. Parties Involved
Every construction contract should include the names of the parties involved — the construction company and your homeowners association. This way, you can make it clear that the contractor has an obligation towards your HOA and vice versa.
2. Scope of Work
The scope of work is one of the most important yet neglected parts of HOA construction contracts. It is essential to clearly detail what the contractor must do.
There are times when a contractor will tell you one thing but then bring up another issue that they claim they were not aware of — all after the signing of the contract. They will then bill you for the additional cost of materials or labor.
This is a common occurrence among contractors and HOAs. But, it is the contractor’s job to inspect everything and let you know what needs to be done. The contract should clearly spell this out, leaving no room for so-called “additional fees” or the hiring of a subcontractor.
Additionally, construction contracts should indicate the standard by which the work will be accepted. What counts as having fulfilled the work? What if the contractor does a poor job and it does not meet the expectations of the HOA?
This is another essential part of any construction contract. When you omit the timeframe from the agreement, you are giving the contractor far too much freedom when it comes to deadlines. Make sure your contract clearly indicates how long the project is going to take, including start and end dates for the project. You should also establish a timeline for obtaining permits and the like.
Aside from the timeframe itself, see to it that your contract allows for penalties should the contractor fail to meet the deadline. Charging a penalty for each day following the deadline is a good way to encourage the timely completion of the construction project.
4. Pricing Terms
Contractors may promise to charge you one sum for the work and then surprise you with hidden fees. To avoid this, make sure your contract defines in clear terms how much your HOA should pay for the construction work. In general, there are two kinds of payment terms:
- Lump-Sum. With a lump-sum setup, your HOA will pay a fixed price to the contractor for the work completed. This price is set during negotiations and written within the contract. Using this approach, the HOA should only pay the amount indicated, no more and no less, regardless of the actual costs the contractor paid to accomplish the job. Of course, this type of setup is more beneficial to the HOA, which is why contractors tend not to like it.
- Cost-Plus. With a cost-plus setup, the contractor will charge the HOA for the cost of labor and materials along with a markup. This is typically more favorable to the contractor because the price is not fixed. To avoid incurring heavy costs using this approach, your HOA should negotiate for a GMP (guaranteed maximum price). This way, you can only expect to pay up to a certain amount.
This portion of the agreement should also state how your HOA should make the payments and when. Most contractors will require a downpayment, with the balance due either upon completion of the work or after every set period of time.
5. Insurance and Indemnification
It is imperative to choose a licensed contractor with appropriate insurance. Your construction contract should also indicate that their insurance covers your HOA. Construction work can involve a lot of mess and damages, so you definitely want to have some protection.
Many contracts also have indemnification clauses but for the benefit of the contractor. Thus, you should make sure your HOA has similar protections within the contract. See to it that you negotiate for indemnification and a hold harmless clause. If the contractor refuses, stand your ground or go with someone else.
6. Remedy Clause
Contract breaches happen more often than you think. As such, your HOA should know what to do when such events occur. Every construction contract should include a force majeure clause that directs what parties must do in case of unexpected situations such as acts of God, war, a pandemic, or even a shortage of materials.
Warranties on materials as provided by the manufacturer are common. But, warranties on the contractor’s work, which are equally crucial, are not. Let’s face it — the warranty on materials is basically useless if your contractor does a poor job with execution and labor. Far too many associations overlook this part because they take the contractor’s word on manufacturer warranties as a warranty on the work itself, only to find out later on that they were wrong.
Your construction contract should give your HOA the ability to withhold payment if the work is incomplete or does not meet satisfactory standards. Typically, holdbacks only give you the ability to withhold a portion of the payment and not the entire sum.
But, when negotiating the percentage, make sure it is small enough for the contractor to agree to but large enough for them to simply dismiss. If it is too small, the contractor may not care at all. They will just take the amount they are already entitled to and leave, having completed shoddy work.
Contractors and subcontractors can assert a lien against the HOA’s common elements as well as individual units. This will put homeowners at risk of liability, too. It is possible to reduce the chances of a contractor asserting a lien successfully, though, by inserting certain language and provisions within the contract. An HOA attorney can help with this.
Some contracts seem simple enough, only to include a statement referring to “additional documents and exhibits.” Watch out for contracts with such language, as they can betray you in the end if you are not careful. If you see any listed documents or exhibits, ask the contractor to include or attach them all to the contract. This way, you are not blindsided by surprise costs, clauses, or obligations.
11. Signatures and Dates
It might seem basic, but every contract should come with the signature of both parties involved as well as the date signed. If your contractor won’t agree to sign the contract, that is a huge red flag. Never let the HOA be the only party required to sign.
The Moral of the Story
HOA construction contracts are normally partial to the contractor, leaving the association with more problems than solutions. To prevent such headaches, it is absolutely essential to review every contract before signing. You should also make it a habit to negotiate contracts. Of course, this is often easier said than done, especially if you lack legal expertise.
This is where an HOA management company comes in. Elite Management Services offers legal assistance in addition to a wide range of other services. Call us today at (855) 238-8488 or contact us online to learn more.
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