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(Fair Value, Risk Control, and Saving Time)

By Doug Gardner
Fall 2015

Part 1 of a 2 Part Series

When Wilbur Wright invented the airplane, flying was the easy part.  Nobody gets hurt flying around; the risk is in take-off and landing.

Responsible maintenance of association assets is much like an airplane.  It requires:

  1. Getting the money in the bank—that’s the take-off; and
  2. Executing the repairs and replacement—that’s the landing.

Association Directors have a fiduciary duty to maintain Association assets.  Their personal financial value in their own home, and that of the other owners in the community, depends on competent and cost-effective maintenance.  All Community Managers have seen Associations lacking funds for needed repairs and replacement of major components.  They are also aware that a single fraudulent contract spells disaster for the Directors and the Association Owners.

The need for construction repairs will rise as a community ages.  Let’s take a look at how Directors can cope with, and properly manage the level of construction and repairs for which they have responsibility.

As a first step in preparing for the future, an Association should have a Reserve Study conducted, and then act on the recommendations of the Reserve Specialist.  The money must be maintained in a separate reserve account, and used only for that purpose.  This is important!  The Reserve Study will provide the Directors with the information needed to set fees. Unfortunately, all too often, the Board decides to delay implementation of the Reserve contributions in order to keep assessments down, which is not in keeping with their fiduciary duties.  Their thought process is if the roof is not currently leaking and the potholes are not that bad, why should we begin to fund for these items?  It’s “Game Over” for that association, since they now need to consider special assessments, bank loans, and declining resale values. Who will volunteer to serve as a Director?

Reserve Studies are just the beginning.   Management of the community assets requires sharp and competent construction project management—deciding the option to be used, selecting contractors, negotiating contracts, maintaining oversight, and holding contractors accountable.  Annual budgets should take the Reserve Study funding into account.

Selecting a competent, ethical contractor, with a good track record, and adequate financial resources is essential.  Contracts, inspections, code compliance, insurance, and know-how are needed.  Some projects require licensed engineers to set specifications and conduct inspections.  Sound contracts must be relied on to deal with the problems that may arise.

When is the right time to replace or refinish common elements—swimming pools, tennis courts, parking lots, decks, retaining walls, and siding?  The right time is when total costs are lowest. Delaying the roof replacement beyond “economic life” will add to the maintenance cost.  When the roof is leaking, it is too late!  You will be faced with more costly underlayment, water damaged sheeting, and interior finish repairs.

Directors do not just need money… they need the construction to take place now.  It must be done right, at a fair cost, with a well insured contractor, all warranties in effect, and no lawsuits.  What do you do if a contractor is not performing, or does not show up?  What if the contractor is paid and he has not paid the subcontractors?  The association (and maybe the Directors) will be sued.  If you have a well-constructed contract and a lawyer, you will have recourse.

At the Union Bank Conference in Atlanta in March, Ms. Phae Moore, Executive Director of NCPHIF (National Center for the Prevention of Home Improvement Fraud) announced the creation of this non-profit foundation funding services to homeowners to protect against contractor fraud.  If you are not familiar with this organization, you can check their website at www.ncphif.org, or call their office at 855-902-6100. NCPHIF provides case-by-case advice on proposed contracts.

Ms. Moore reported that their national insurance company founders are concerned with the amount of fraud, and the general lack of experience of Association Directors and owners in contracting work. This was prevalent following the Joplin, MO tornado when general contractors descended in the area.  About 50% of the engagements involved defective work or outright fraud, she reported.  Contractor fraud is not common, but the risk is present in every construction job undertaken.

As you are facing construction projects, consider these options for increased oversight of your work:

  1. Self-Management.  Some Directors have personal experience as a general contractor, have a friend who does contracting, or an owner offers to do the contracting.  The Directors rely and trust that individual to perform.  Is the volunteer offering assistance experienced and current on construction practices, codes, insurance?  Much time will be required by Directors to keep communication open, inspect work, invoices, and monitor insurance?.  The volunteer who is handling construction has taken on a very large and important responsibility. Does the volunteer really have the time to contribute?
  2. Management Companies as General Contractor or Construction Administrator. Some management companies provide large-scale construction through licensed general contractors.  They quote and deliver contract services. They have licensed contractors on the company payroll.  Can they handle all the work?  Are they competent?  What are their fees?  If they bid, will other vendors compete against them?  Are their prices competitive?

Some Management Companies provide optional construction management services.  Most set a job limit size on construction that will be provided under the monthly fee charged for financial services and a separate fee for construction.  Financial management and construction management are very separate processes.  Large jobs and some types of work may be beyond their size or competence.
  3. Construction Specialists.  Architects, civil engineers, and contract administrators are available for hire for some construction services. They know and can select qualified contractors;, develop the specifications, and present bids for a contractor decision.  Directors must select the contractor and perform the project management work.  They will be responsible for owner notices, contractor conduct, obtaining permits, contract changes, lien waivers, payments, insurance, and lots more.  Phones and doorbells will be ringing.
  4. Construction Administration Service.  Construction service companies are not contractors; they are project managers with construction expertise. They can determine specifications, obtain bids, provide attorney reviewed contracts, oversee work in process, conduct inspections, negotiate revisions, monitor insurance and expiration, confirm permits posted and closed, notify and instruct owners on work,  parking, and status, require cleanup, obtain lien waivers, document and monitor warranties, approve contractor invoices and payments, provide closing photos and a document file.  Some management companies offer this as a separate service.  Limits and fees may be set for several levels of service.
  5. Internet Contractor Service.  General Contractors may be located using internet sources.  HomeAdvisor (www.homeadvisor.com) and Angie’s List (www.angieslist.com) are best known.  Contractors asserting competence in various categories can be listed based on other user recommendations.  This may be a useful source in a search for additional bidders and can be used on all of the above options.  This can be used under Self-Management to locate alternate bidders.  Caution is suggested as this service is directed at home owners not associations.  There is a difference. NCPHIF urges caution as the services do not provide attorney reviewed contracts, lien waivers, and insurance validation.

End of Part 1

Doug Gardner
Gardner Companies (Capital Management Group; DNI Properties; Asset Guardians, LLC)

Originally published in the Fall 2015 issue of Heartland Chapter Community Associations Institute Quarterly