Members of condo or homeowners associations (COAs/HOAs) usually don’t manage communal property or handle building projects themselves—this is one of the perks of joining an COA/HOA. Members’ association fees may pay for snow removal, security, maintaining common areas, landscaping and pool upkeep, not to mention high-cost projects, such as replacing the roof and other major building repairs.
As an COA board member, it is your responsibility to hire and manage those who take care of property management, routine services and building projects. Some COAs decide to hire a staff, while others hire third-party contractors or a property management firm to fulfill these responsibilities. Whether you hire employees directly or contract out this work, it’s important to understand the issues that could lead to costly losses for your COA.
Hiring Employees Directly
Depending on the size of your COA, you may want to hire a part- or full-time staff to handle services such as landscaping, security, lifeguarding and housekeeping in common areas.
As with any organization, employing people poses significant risks and the potential for an employment practices lawsuit. It’s unlikely an COA has a human resources department to take care of employee issues, and there is always the risk of discrimination, harassment and retaliation claims.
If you hire a staff directly, thoroughly interview and conduct background checks on all potential employees. Make sure your General Liability and Workers’ Compensation insurance have adequate coverage for all the potential risks that come with hiring employees. Purchasing an Employment Practices Liability policy may be a good idea to protect against a wrongful termination, discrimination or harassment claim.
Risks of Hiring a Contracting Firm
Some COAs contract all services—from large-scale construction projects to property management and routine services—to a third-party contracting firm. The benefit to this option is that most contracting firms have their own insurance to cover problems. Although you may dodge employment liability, hiring contractors is not risk free.
Using a third-party contracting firm always comes with the risk of poor workmanship or an unfinished job. You’ve no doubt heard stories of jobs gone wrong; a contractor repairs a roof, only to have it leak in more places than before, or started a project but ran off with the money before it was completed.
If the contracting firm doesn’t have insurance, this complicates the situation further, especially for major building construction or repair. This can cost your HOA more money than budgeted if you have to find another contracting firm to complete an unfinished job or fix mistakes.
How Do You Find a Reliable Contracting Firm?
Online directories, advertisements and telephone books are several ways to find property management firms and other contractors. However, referrals and networking are a better option, giving you the opportunity to gather feedback about contracting firms people have used in the past. If you’ve hired a property management company, they may also be able to suggest building contracting firms they’ve worked with.
Obtain at least three bids. Hiring the least expensive contracting firm could actually cost you more money than expected if the quality of workmanship also matches the price. It’s a best practice to obtain three or more written bids for each project to find the highest quality contractor for a price that fits your budget. The bids should include materials, labor rates and the time frame to complete the job. Review the bids with the board; in some cases, you may want to ask for homeowners’ feedback as well. Using the same criteria, board members should review all of the bids and select the one that fits the best interest of the association. While the full HOA board reviews contractor bids—and can involve members too—the board president is ultimately responsible for securing and signing the contract.
How to Mitigate Risks When Hiring Contractors for Projects
Hiring the least expensive contracting firm saves money, but it could cost your COA more later on if the contractor does careless work or doesn’t finish the project. If you decide to hire a contractor, keep in mind the following ways to reduce risks:
- Hire only from a licensed contracting firm. Always ask to see the contractor’s license and check with your local State Contractor’s Board to check its validity. Also, hire local contractors if you can, as they are usually more knowledgeable about local codes and permits.
- Review the contracting firm’s service record. Check the contractor’s references and a list of his or her previous customers. Consult the Better Business Bureau or online reviews for any warning flags or negative reviews.
- Make sure the firm has insurance. Ask the contractor to show you his or her certificate of insurance to verify that they have adequate coverage for the project. If your contractor doesn’t have insurance, your COA could be held liable for property damage or bodily injuries that occur on your property during the project. At the very least, the contracting firm should have Workers’ Compensation and General Liability insurance to cover its workers. Depending on the type of job, they may also need a builder’s risk policy.
- Make sure the contract is comprehensive and specific. Get everything about the project in writing, specifically outlining what products or services are needed. The contract should be clear and agreed upon by both sides. Don’t feel pressured to immediately sign a contract before your board thoroughly reviews the terms.
- Avoid conflicts of interest. When a board member receives kickbacks for retaining a certain contracting firm, you could face a fiduciary lawsuit from members. Always secure contracts in the best interest of homeowners, not your own interests or the personal interests of other board members. If you are related in any way to the contractor you may want to hire, it’s best to disclose this relationship to the board and members.
- Pay the contracting firm when the project is completed. Pay for the project in increments or when the project is completed to avoid having the contractor run off with the association’s money before the project is finished. Also, pay by check instead of cash so you have a record of what you paid and when.
- Maintain a record of all files related to the project. Save a paper trail of important documents, such as contracts, correspondence, certificates of insurance, invoices, permits and copies of checks so you can manage the progress of the project. The file could also serve as evidence in the event of a lawsuit.
For more information on the risks of hiring a staff directly—or hiring a property management company or building contractors—contact Valent Group today.
For more information about our condo owners association risk management practice, visit: https://www.valentgroup.com/condo-associations/
This content is adapted from Zywave and is not intended to be exhaustive nor should any samples, discussion or opinions be construed as legal advice. Readers should contact legal counsel for legal advice.