Tips for HOA Directors Regarding Contracting on Behalf of the Association
Acting through its board of directors, homeowners associations are responsible for properly maintaining the common areas of a common interest development. Proper maintenance of the common areas necessitates contracting for materials and services that are provided by third party vendors and service providers. Because the ramifications of retaining the wrong vendor or service provider or not properly documenting the terms of a contract for materials and services can be very costly to a homeowners association, association directors must be aware of basic procedures that should be followed in connection with entering into contracts that are binding upon their homeowners association.
Absent a need for emergency repairs to address a condition that requires immediate attention, association directors should anticipate and plan for repairs well in advance of when they are needed. Having an up-to-date reserve study will facilitate such planning by making the directors aware of the common area components that must be maintained and the anticipated costs associated with such maintenance. Advance planning of a major project will minimize the risk of having to impose emergency or special assessments on association members to make needed repairs or replacements of common area components and will enable the association to properly obtain bids, evaluate contractors and enter into appropriately negotiated contracts.
Before retaining a contractor, bids should be obtained from at least three different contractors who are licensed to provide the required services. The bids that are obtained should clearly specify the scope of the services to be provided and the material that will be required. Without a clear specification of the services and the materials it is impossible to compare bids and make intelligent decisions about who to retain. While it is natural for association directors to be motivated to save money and hire companies that provide the lowest bids, a decision that is based solely on the amount of the bid can end up being extremely costly to the association. When evaluating bids, association directors should meet the contractor and obtain information about their experience and credentials that should be investigated and verified.
Association directors must never hire unlicensed service providers to perform services for which a license is required and they must not retain service providers who do not carry insurance that is required, such as liability and workers compensation insurance. Before entering into a contract with a service provider, association directors and/or their duly authorized management personnel must follow simple procedures to verify that the service provider has the required license to perform the work that is contemplated and that the license is current. Contractor licensing information is available and accessible to association personnel through state agency websites (i.e. Contractor License Board). Insurance information should be requested from the contractor and can be verified by requiring the contractor to provide the association with proof of insurance coverage.
In addition to licensing and insurance information, it is critical to know who you are contemplating entering into a contract with. Information should be obtained that clearly states the type of the entity that is providing the services (i.e. sole proprietorship, partnership, corporation, or limited liability company). If the company is a sole proprietorship or a partnership, there are specific individuals who are responsible and liable for the company and it is critical to know their full names and contact information. Business entities, such as corporations and limited liability companies, must be registered and in good standing and have certain specified individuals who are responsible for them and who possess the authority to act on behalf of the business entity. Information concerning the nature of the entity and the responsible individuals behind them should be obtained from the service provider and independently verified through checks of state agency websites (Secretary of State).
It is also a good practice to require proposed contractors to provide at least three references of other parties who have previously used the contractor for similar services and to contact those references for information concerning their level of satisfaction with the contractor. An internet check of the contractor’s name could also provide valuable information regarding a proposed service provider.
Associations should never enter into a contract with a vendor or service provider without the contract being properly reviewed by qualified people acting on behalf of the association. The larger the amount involved in the transaction, the more important to have the contract properly reviewed by legal counsel for the association because vendors and service providers typically have standard form contracts that lack important content and/or have undesirable provisions that have been prepared by attorneys for the vendor or service provider that are slanted in favor of the vendor or service provider. A common mistake made by association directors and management personnel in an effort to save the cost of the legal fees is entering into undesirable contracts that do not properly protect the association’s interest. Before entering into contracts, associations should have their legal counsel review the contract before it is signed and make appropriate modifications or provide a different document that protects the association.
When a homeowners association enters into a contract, the association should be named as the party to the contract and not the individual director(s). The contract should be signed on behalf of the association by one or more individuals in their capacity as an officer or director.