How To Manage Construction Contracts and Minimize Change Orders

All change order requests should be reviewed by the project architect/engineer who will ensure that the following information is included:

Construction contracts must be drafted by the association attorney and specify the steps necessary before additional work or deduction in work is authorized. Construction contracts typically provide that a change in dollar amount or time must be outlined and submitted in writing and must be submitted so many days in advance of the work or so many days after the owner(s) request, signed by a designated officer or agent, and reviewed and approved within so many days of submittal. In addition, if the contractor refuses to show up, a liquidated damage clause should be included in the contract. This would be described as a penalty defined as a sum in which the contractor agrees to pay or forfeit in the event of breach of the contract, which is fixed not as a pre-estimate of the probable actual damages but as punishment, which is the threat designed to prevent the

breach. Your association attorney may recommend that the contract should contain the starting and projected ending dates of the project and liquidated damages amounting up to $1,000 per day for each day of delay beyond the scheduled completion date.

To maximize effectiveness with this process, a streamlined bidding process is a prerequisite and will generate lower, more competitive contractor bids. It is vital to choose an experienced architect or engineer to obtain clear specifications and

construction documents.

Do your homework by establishing a committee, consulting with the Board, and considering what the association really needs, what it wants, and what is possible and feasible. Realize what is reasonable and what is practical. Call on other buildings in the area that have performed similar work and request a site visit to compare notes and take photos to obtain ideas.

• Select professionals who are skilled and experienced in the type of project that you are considering.
• Select a licensed and qualified contractor.
• Negotiate a clear contract.

It is important to verify and review all references and identify other associations that have entered a contract for the same project with the contractor. Inquire whether there were any inconsistencies and ambiguities that were addressed during the project.

References are not all the same. Here are types of references you should examine:

• Associations within the past 12 months, or a current job in progress.
• Associations within the past three years.
• Associations beyond three years.
• Also check with the county records to find if a contractor has been named in any lawsuits.

Request that the contractor bid on all potential options that may be considered later. For instance, if you are entering into a painting project, make sure the specifications include all options that your association may not wish to do now, however, may change their mind later, such as they may wish to paint all metal door frames and windows. This way, you have done your due diligence as a manager in making sure that all potential items are included, and the contractor cannot take advantage of the association.

Schedule a mandatory pre-site/pre-bid inspection and walk through for all bidders to view the property and the scope of work. Contractors will better understand the plans, staging and expectations of the association. Establish timelines and inform that contractor when

the bid must be in. Decide if the association will accept bids by mail, email, and fax or require hand-delivered bids only.

When the board may need to approve a change order, they are also approving an increase and impact on the original budget amount. The change order may impact the timeline and completion date. This information needs to be automatically incorporated into a revised budget (5-10 % in contingencies should be considered when budgeting for the project), revised schedule and amount of money allotted for the project. An addendum to the contract may be required and may be considered to include language in the original contract. Payment and performance bonds should also be included in the contract and budgeting process.

If there is a payment schedule, it should be included in the contract. A payment schedule will detail when payment is due to a contractor and how much money you will pay him. Often, you will pay specified amounts at certain milestones in your contract. To avoid miscommunication and confusion, payments should be made at clearly defined intervals. Often, a contractor will request a deposit when the association signs a contract. Any advance deposit should be equivalent with the risk involved for the contractor. For example, if your contractor needs to special order materials before construction begins, the association may be asked to cover some of the special-order costs in the deposit. Consult with the attorney regarding subcontractors, releases of liens and partial releases of liens.

If a contractor offers a written warranty, it should be referenced in the contract. The warranty should cover materials and workmanship. The names and addresses of the parties honoring the warranties (contractor, distributor, or manufacturer) should be identified. The length of the warranty period and any limitations should also be clearly stated.

If a dispute between the association and the contractor arises, the contract should specify how the dispute will be resolved. The way the dispute clause is referenced in your contract is important. Check with your local building department whether there are any filed complaints against the contractor. Consider that the contract state that the contractor must agree to purchase all applicable permits. A dispute resolution clause should call for mediation or arbitration if a dispute arises between the association and the contractor. Mediation and arbitration are quick and inexpensive resolutions to a dispute.

If your association follows these steps and addresses all issues/ complaints directly to the contractor in writing, disputes and change orders should be kept to a minimum. As a Board Member and as the Manager, you can be reassured that by following these steps, you have performed your job and have done your best in protecting the association. Should the contractor refuse to make corrections and cooperate, the association may wish to file a complaint in writing with the Contractor's State License Board and the local building department. If necessary, consult your association attorney.