The Smart Board & Property Manager Legal Guide - Key Elements in a Contract

Condo and Homeowner Associations have substantial leverage for dictating favorable contract terms in major repair and construction contracts. Our panel will highlight key features favorable to associations which should be negotiated into repair contracts to increase the chances the project will be completed on time, within budget and with a minimum of flaws.

Video Transcript:

Alan Tannenbaum, Esq.:

I'm Alan Tannenbaum. I'm here with my partners, Salvatore Scro and Jon Lemole. I think Salvatore's here. We are construction defect lawyers. We take associations through Central Florida. From Tampa Bay down to Naples. Through turnovers handle construction, defect claims, financial claims. We've taken hundreds of groups through turnover. That's a major part of our practice.

Alan Tannenbaum, Esq.:

But we're going to be talking today about the other side of our practice which is advising condominium homeowner associations on major repair and renovation projects. The topic for today is, key elements that a repair contractors can apply to clubhouse renovation too. It's not only repairs but it's also renovations.

Alan Tannenbaum, Esq.:

The reason I mentioned the construction defect side is that when we get a call from a client about to take on a repair project, we take off our construction hat for a moment and put on our construction defect hat and say, "Well, before you jump into this project, are you a property whose buildings or improvements are less than 10 years old?" If so, we will ask the questions about have you considered whether this is an original construction defect and that there may be responsible parties who will pay for at least a portion of the repair costs that you're about to entail. We will ask that question.

Alan Tannenbaum, Esq.:

The other possibility is, you had a repair job done two years ago or three years ago and the reason for your repair today is because that repair job failed. We will then ask questions about whether there's a potential culpability or breach of a warranty coming out of the prior repair project.

Alan Tannenbaum, Esq.:

I want to mention that. That's a question that should be asked before you jump into things because if there are culpable parties, you've got to look to issues like preserving evidence. Putting them on notice. Giving them an opportunity to inspect all of those things in order to protect that type of client. But beyond that, we're going to get into the central issue of this subject matter. I just want to make sure, Salvatore, are you there?

Salvatore Scro, Esq.:

I am here.

Alan Tannenbaum, Esq.:

Okay. Well, the first topic that my partner Salvatore Scro is going to attack are detailed and on target plans with specifications. He's going to tell us why that's a key element if you're about to undertake a repair project. A key element to have in the contract.

Salvatore Scro, Esq.:

All right. Good morning, everyone. My name's Sal Scro. I'm going to take probably a little bit longer on this first part than the rest of the parts that we'll do today and then they'll shorten up as we go through. But this is a pretty important part. I'm going to share a screen with you and you'll see... It's a little PowerPoint that I put together. Let me just start this out.

Salvatore Scro, Esq.:

Can everybody see this slide here that says, why this is important to you. I guess you can nod your heads and that'll be fine. Number one, you want to protect yourself. You also want points of direction for your client and your association.

Salvatore Scro, Esq.:

A lot of responsibility is put on the board members and the managers particular lead the managers [inaudible 00:04:06] from the board to help lead them in the right direction. A lot of the things you're going to hear today, we don't expect you to absolutely know everything about them. But at least you should have some knowledge to say, you need to contact these particular people so that you can show that you're guiding your association and in the right direction.

Salvatore Scro, Esq.:

You don't want to take it on alone either. A lot of times, people will look at one particular manager or board member and say, "Hey, you run with this." Well, running with it, the right thing to do in this situation is look to get help from the right professionals, whether it be engineers, attorneys, whatever, to make sure that you are in the best position possible to take on this task.

Salvatore Scro, Esq.:

You want to protect your client. That's another. You want to protect your client, your association. Whoever you're working for, you want to protect them. You want to give them the benefit of your knowledge of these issues. That's why you're here today so that you can get a working knowledge of these issues. Then ultimately you want to successfully accomplish a task.

Salvatore Scro, Esq.:

Contract. These are some of the different contracts you may want. One is with your design professionals. A lot of this depends on how big your project is. You may need a contract with your design professional. The engineer or the architect, whoever that may be.

Salvatore Scro, Esq.:

The contractor. Obviously you'll need a contract with your contractor. The owner representative. If you are going to be using an owner representative to help guide yourself through this, you may want to have a contract with that owner representative. Then sometimes your community association managers, they don't expect to take on these tasks, but they're saddled with them. You may want to look at, what is in the association manager's contract and what are they going to do? Is this part of their duties or not? You have to address those things. Those are some of the things.

Salvatore Scro, Esq.:

Why do you need a contract? You want to establish the job. What are they going to do? Define in detail the work, which is what we're going to get into. The target plans and specifications and the clarity of those expectations. Also when you have a contract, it's a disincentive to bad behavior. A lot of times you will say, "Hey, you're not supposed to do this, or you're supposed to show up at this particular time, or it was supposed to be done in this way and it wasn't done. Why is that?" You can point to the contract and have a reason why it wasn't.

Salvatore Scro, Esq.:

You have a problem. Whether it be because of age, defect, whatever it is. You want to find out, what is it? You want to find out, where is it? You want to find out, when did it occur? Those are the things you want to know. Why do you want to know, when did it occur? Because you may have a cause of action against the party responsible for the defective condition. If it was a bad installation. If it was a code violation. Whatever that may be.

Salvatore Scro, Esq.:

Who should you contact? If you have a roof problem, you call A, and everybody can say it out loud. I can see your lips. You're going to call a roofer. If you have a window problem, you're calling somebody to take care of windows. If you have a stucco problem, you call stucco. Everybody said the same thing, I'm sure. But I disagree with all that. I don't think those are the people you call because we don't know. Then you're looking at me like this. But you do not know who that problem is. You need to know where the problem comes from.

Salvatore Scro, Esq.:

A stucco problem, could be a stucco poor installation. It could be bad flashing. It could be bad window installation. It could be bad framing. A case Alan had some years ago, they kept trying to repair the stucco. The biggest problem wasn't the stucco, it was the framing. You need to know what to do.

Salvatore Scro, Esq.:

To do a proper investigation, you should probably get the original plans and specifications of your project so that you know what you're looking at. You want to know if you had any prior work contracts so that you know what work had been done to the original work. You do want to invest some money before you start doing work, especially the more detailed the project, the more money you want, you may have to spend. That may be that you need some destructive investigation. Some destructive testing so that you can identify what needs to be done so that you can prepare proper plans and specifications.

Salvatore Scro, Esq.:

I know Alan's used this example sometimes where if you go to the doctor and they say, "We don't know what's wrong with you. We're just going to start... Bring you in for an operation and start cutting you open." Well, that's really not the way to do that. They take tests. They take MRIs. They take x-rays. They do blood work. They want to know what they're doing before they start going after it.

Salvatore Scro, Esq.:

Why do you want to have destructive testing? The benefits of that investigation are this. You identify the extent of the defects. You identify who the responsible parties are. If you're within statute of limitations period which is four years from discovery, not to exceed 10 years from the work, those are your statutes of limitation and repose. You want to look and see in that investigation where the problems are. If somebody was responsible for them, maybe you can have a cause of action against those people to address those issues and have them pay for your repair that you're about to undertake.

Salvatore Scro, Esq.:

You also need to know, if you're going to do that, you're going to go after some parties. You're going to want to know what are these problems? Because under Florida Statute Chapter 558, you need to give them a notice. You need to give them a notice of what those problems are and give it in reasonable detail so that before you commence any action to address that, sometimes you can settle it through that 558 process.

Salvatore Scro, Esq.:

Also, you limit change orders. Why do you want to limit change orders? I showed this to you guys. Some of you may have been with me last time, but there's that big boat that says change order. There is the original contract. You do want to get an idea of what has to be done so that they're not opening up your building and saying, "Geez, we just found this. We need a change order." That's where you're going to spend all your money. That's not part of your budget. You do not want that.

Salvatore Scro, Esq.:

You want to have that investigation so you can know as much as possible. You spend a little money up front, but it's going to save you money in the long run. You limit change orders. You get detailed and on target plans and specifications. You get a repair protocol from those experts. They will tell your contractor exactly what needs to be done.

Salvatore Scro, Esq.:

That protocol will be set forth in plans and specifications that will be incorporated into the contract so that you will have a complete set of instructions. Just like if you buy something that has to be put together for your kids, you're going to have something that says how to put this together and how it's going to be done. What's going to be used. There's not going to be any questions if you have the right expert to provide those specifications.

Salvatore Scro, Esq.:

That's pretty much just a summary, a quick summary about why you would need detailed plans and specifications. There's other things that I'll get into later on that relate to those plans and specifications. But we'll go on to the next topic.

Alan Tannenbaum, Esq.:

All right. Jon, draw schedule. What is a draw schedule and what do you mean on this category about it being balanced? Why is that important?

Jon Lemole, Esq.:

Hang on one second because I think there's something I wanted to put up here. Okay. Time is money and you want your project to get completed on time. Think about a contractor just like any other business owner. They come to work every day. They've got costs. They've got overhead. They've got payroll. They've got subcontractors to pay. What are they in it for? They're in it for whatever it is. The profit that... Whatever percentage of profit on your job that they're making. 15%, 20%, whatever it is.

Jon Lemole, Esq.:

Like a lot of other business owners, a contractor wakes up every morning. A general contractor wakes up every morning and he has to decide if he's got five or six different projects going at once and that's probably the case. Maybe even more. He's got to decide, or she's got to decide, where am I going to put my people today?

Jon Lemole, Esq.:

If it's a bigger project like a big project where there would be a lot of subcontractors involved, a lot of different trades involved, that general contractor has to figure out which subcontractors am I going to have show up on this project today? All of those decisions are going to be impacted by whether or not that opportunity showing up on your job is going to provide that contractor with a profitable day. Whether he's got risk in the project or not.

Jon Lemole, Esq.:

This is an area where we spend a lot of time negotiating with contractors. When we're representing community associations and we're looking at repair contracts, we spend a lot of time looking at the draw schedule. The reason why that's so important is because you never want to be in a situation where the contractor has no risk on your project. Where he's disincentivized to show up because he's already been paid profit that he's going to earn on the job.

Jon Lemole, Esq.:

And so maintaining or coming up with a very balanced draw schedule, a draw schedule that's going to basically delay that contractor getting his profit on the job until the end of the job, it's critically important to getting the job completed on time. And you and your community association board not being those people sitting there in the orange vests waiting and waiting and waiting for the completion of the project.

Jon Lemole, Esq.:

Deposits. A lot of contractors ask for deposits. We try to resist that. A lot of times you'll hear, I've heard many a general contractor that say that their deposit is their profit. Why would you give a general contractor the profit on this project right upfront? We would definitely urge when we're looking at contracts, we would try to negotiate out any deposit upfront for the work.

Jon Lemole, Esq.:

Then finally, retainage at the end. It's always a good idea to hold some money back. At least hold back some portion of this contractor's profits so that they complete the work, including all punch list. Because we've seen a lot of projects where basically the contractor's been paid. There's a lot of punch list things that need to be completed and it just drags on and on and on and on.

Jon Lemole, Esq.:

How it works with every contract is going to be a little bit different. There's no one size fits all draw schedule. But that's an area where we definitely say, if you're doing it yourself, take a really good look at that. Hard look at that. Make sure that you're coming up with something that makes sense. But most times get a lawyer involved. Get us involved or any other construction lawyer that has a lot of experience with dealing with draw schedules and ensuring that the contractor has risk on the project throughout the entirety of the project.

Alan Tannenbaum, Esq.:

Yeah. Push your design professional. They usually create a draw schedule or have a comment on it. But you really have to push them to look carefully at it. What you want to avoid as a bottom line is the contractor having been paid 80% of the contract price and only 60% of the contract having been completed, you're going to be in a lot of trouble getting that contractor back to complete the job.

Alan Tannenbaum, Esq.:

We are also strong believers in retainage. The industry standard is 10% so that 10% of the contract price is withheld until the time it's final payment, which is a very strong incentive because the contractor's profit is going to be tied up in that 10%. We're very strong believers in that.

Alan Tannenbaum, Esq.:

With deposits, they will tell you we need to purchase materials. If you happen to go along with that, just make sure that those are actually materials being purchased for your job and the contractor is not using it to pay their 90 day balance with their supply house for materials used on other jobs while frankly your materials they get somewhere else. Be careful with that.

Alan Tannenbaum, Esq.:

I'm to get into a couple of topics about insurance requirements and damages for delay. A few things. Let's talk about the design professional first. Most design professionals will have a million dollars of professional liability coverage. What they've been providing associations over the last two years are contracts that have limitations of liability. That may say that the design professional is a limited liability to the amount of fees that they're paid on the job or some stated dollar amount significantly less than their insurance coverage.

Alan Tannenbaum, Esq.:

When you get a design professional contract where they're going to be the design professional on a major repair that's maybe costing into the seven figures, you don't want to limit their liability. You want it to at least be the amount of insurance coverage. There's one issue. We've had projects that are five million, six million, $12 million with a liability policies of only a million. You can actually buy those coverages up to a greater level and increase the insurance coverage. That's something that's available.

Alan Tannenbaum, Esq.:

When you want your contractor to have minimum insurance for general liability for automobile, certainly automobile coverage there are standard policy requirements. Really important that you negotiate to be the name insured under the insurance policy. Now, why is that important? It's important because you then have the right, you're now first party under that coverage. If you had to eventually sue to collect damages under that insurance policy, under Florida Statute you're entitled to attorney's fees under first party claim.

Alan Tannenbaum, Esq.:

It's really important to be named insured. It gives you a lot of leverage against the insurance carrier if you get a claim pay. Most of them will agree and negotiate that. Include that in your negotiations when you're looking at the insurance requirements.

Alan Tannenbaum, Esq.:

Damages for delay. Damages for delay typically sets forth a particular deadline for completion by the contractor. They don't complete within that time period, there is a per day penalty for the contractor if it goes beyond the completion date. I think anybody who's contracting for work today, there's some contractors who are signing contracts to say, "Look, we won't even be able to start this job until September." There's even a backup on initiation.

Alan Tannenbaum, Esq.:

It's really important to have that damages for delay as a great incentive for the contractor to assign the subcontractors and personnel in order to get your job done. Just think of a general contracting company. They're taking on five jobs. They've just started five jobs. The question is, which of the jobs are they going to pay the greatest attention to? Assign their better subcontractors to? Assign their better superintendent to? They're going to be the jobs where there's a contract that they enter into that has some disincentives as Sal indicated against bad behavior.

Alan Tannenbaum, Esq.:

If they have five jobs that they're starting and two of the jobs have penalties for late completion and the other three don't, and they have to make some very difficult decisions about assigning subcontractors and assigning personnel, the owner of the company is going to be very aware that this particular contract has things like damages for delay. It's a penalty, but it incentivizes the contractor to actually get out and complete your particular project over projects that they won't.

Alan Tannenbaum, Esq.:

We see contracts every day that say that there's no particular completion time. There's no penalty for delayed completion. I'm always wondering a year and a half later, when a group comes to us and says, "They haven't completed the job." We look at it and say, "Well, there was no requirement that they complete it within a stated period of time." You're going to be in a lot of trouble.

Alan Tannenbaum, Esq.:

With that, Sal's going to cover a couple of topics. Work inspection and rejection rights and the right to reject or replace subcontractors. Sal, you have your speaker off. There you go.

Salvatore Scro, Esq.:

All right. Work inspection and rejection rights. Who's going to inspect? That's what needs to be decided by the association. When you take on this repair project, who's going to inspect? Who can reject? Is that going to be the owner's representative? Is it going to be the engineer? Would it be the architect? Those are some of the things that you need to decide.

Salvatore Scro, Esq.:

A lot of times you put the inspection rights into your engineer. Or sometimes depending on how minor the project might be, your owner's rep. Your architect. But, can they accept as well or should you have some right to do that and should there be some reasonable time? You need to make sure that you have enough time and that you have some control over your representative. Whether that be the engineer or architect, whoever that is so that if there's something that is not suiting what you intended and it's under the contract, that you can direct your representative to say, "No. That is not acceptable. You need to do that."

Salvatore Scro, Esq.:

The other thing is, if there's a problem, what do you do? Especially if you have multiple buildings. I've talked about this in other seminars we've put together. If you have multiple buildings, you may want to open that up to see what the problem is. If you're going building by building and you have some leaking going on, you may need to do some destructive testing.

Salvatore Scro, Esq.:

Again, find out where that problem is so that you can identify, is this just a one-time problem? Is this a systemic problem that is in the plans that is not working out right? What is it? What is that problem? Spend some money having your contract, that if you need to open up something, that if it's their fault, that they're going to pay for all that expense.

Salvatore Scro, Esq.:

If it's something that you've asked them to open up is unreasonable, then maybe you might have to meet that expense, but at least you know it. You do want to have provisions in your contract for that, as far as who's inspecting? Who's rejecting? If there's a problem and you need to investigate, what do you do?

Salvatore Scro, Esq.:

Also when you hire these contractors, you're not just hiring the company, you're hiring whoever shows up that particular day. You want to make sure that if you have a problem with the workers that are there, the superintendents, who are they? The contractor typically decides who the superintendents are. Who the subcontractors are. If you've had experience with other subcontractors in the past that you do not want on your project, you want to let your contractor, your general contractor know that in advance.

Salvatore Scro, Esq.:

You also, if you have the right people reviewing your contracts, they may want to see. For example, we deal with subcontractors every day. We know what subcontractors names we see all the time and depends on how we see them. If we see them in a litigation matter, then we know that we've seen them for these reasons. If we see them as repairs, then we know we've seen them for that reason. You want to have some right to reject or replace your subcontractors and a right to approve and or terminate the superintendent and those subcontractors.

Salvatore Scro, Esq.:

Let me just go back. We're not going to talk about prevailing party attorney's fees right now, but you do want to have the ability to have some control over who's being there. I'm taking a little shorter time on this one because I went longer on the first one. But let's go on to, I think we're going to talk about protection against liens next.

Alan Tannenbaum, Esq.:

Well, before Jon gets started, Sal, the issue that you brought up is really being a proactive owner. It's your property. You want to have knowledge of actually who's walking towards your job every day to do work. Even before the contract is entered into, you could have provisions in the contract that they have to give you the list of who's going to be the superintendent on your job. Who are they going to be the subcontractors. If they choose to have somebody else but that superintendent and those subcontractors, they have to notify you and you have to be able to qualify those people again.

Alan Tannenbaum, Esq.:

Every contracting company that I've dealt with of any magnitude, they have a handful of superintendents who have been with the company for 18, 20 years. They have vast experience. Then they have the guy they hired last week. A journeyman superintendent. They got a lot of work in or one of their key superintendents retired. Now you're dealing with somebody that they don't even him very well who's now assigned to your job. It's a matter of qualifying them and being proactive. You have the right to insert that in the contract to be able to do that. Jon, now you're going to tell us about protection against liens.

Jon Lemole, Esq.:

Well, I got to tell you how unenthused I was when I drew this topic. Because folks, I'm going to be honest with you. Even for lawyers, lien law is confusing. And so for managers, for boards, I can't stress enough how important it is to take the topic of protection against liens seriously.

Jon Lemole, Esq.:

Here's a practical piece of advice before we get into some more details about liens. The practical piece of advice is that, have somebody on your project. Whether it's the engineer, if you've got an engineer who did the design work, or you've got a construction consultant. But it always makes sense to have somebody who is tasked with ensuring that any potential liens are avoided. Released. Protect your property from problems down the road with contractors and subcontractors, potential liens from that project.

Jon Lemole, Esq.:

Your engineer, if you've got an engineer, if they provide that kind of construction management or services that you can pay them to do, then it makes every bit of sense in the world to do that. But let's talk about liens for a second in general.

Jon Lemole, Esq.:

It's really a question of a very dedicated management of the projects' paperwork. Okay. Because you want to make sure that there's a lot of different things that get... For example, you start a project, you need to absolutely make sure that you file a note or record a Notice of Commencement. You want to put the world on notice that there's a project and protect yourself. That's the way that you protect yourself from potentially having to pay twice for the work.

Jon Lemole, Esq.:

It also is a notice to any subcontractors on the job that if they want to have any lien rights, they've got to file Notices to Owner or serve you the owner with Notices to Owner. They've got to do that within 45 days of starting the work or providing the supplies.

Jon Lemole, Esq.:

Filing, I'm sorry. Qualifying according to Notice of Commencement is the first step that you as the owner should do on any repair project. If you've got a bigger project and there's a lot of subs on that project, tell the contractor, ask the contract, the general contractor, you want a list. You want to know who are the subcontractors and suppliers that they're going to be using because you want to be able to anticipate who may have potential liens. You want to keep track of whether those people have filed Notices to Owner or served you with Notices to Owner.

Jon Lemole, Esq.:

In a contract, if you're negotiating the contract, things like that like providing a list of the subcontractors and suppliers, are all things that could be put into the contract. Could be requirements that you can negotiate into the contract.

Jon Lemole, Esq.:

As the project goes forward, here's a mistake a lot of people make. It's just a common thing. I don't have to worry about liens if I pay. I pay. I paid what I was told to pay. As long as I paid, I'm good. Remember, you're paying a general contractor. You're not paying the five, 10, 15 subcontractors who you have no contractual privity with. You're relying on that general contractor to pay those subcontractors and ensure that by you paying the general contractor, that you're not going to be exposed to liens from subcontractors.

Jon Lemole, Esq.:

And so that's why it's critical to manage all of this paperwork. It can be confusing. That's why you should always consider having somebody do that for you. Somebody who's got a lot of experience doing that. Whether it's the engineer, like I said, or some other consultant or project manager that's working just for you to do that.

Jon Lemole, Esq.:

But every time you make a payment, you should be ensuring that you're getting a release or a partial release for that work. That release should be specifying the work that is being paid for and being released. It should specify what subcontractors are being paid for or what subcontracted work is being paid for. You should be insisting on getting partial lien releases from those subcontractors or completely releases from those subcontractors.

Jon Lemole, Esq.:

You should be knowing every time that you make a payment, what work you're excluding from the potential of being liened. That's just a day-to-day recordkeeping type of thing that has to go on, on a project. Smaller projects, it's a little bit easier to do. But if you've got a big project [inaudible 00:33:29] a lot of subcontractors, that can be a very confusing thing to do.

Jon Lemole, Esq.:

All of these things, all of these requirements need to be specified in the contract. Because if you don't, then you're just relying on the good faith of the contractor to do things that are going to potentially help you ensure that you don't have liens on the project. But they have really no obligation to do. You want to make sure that when you're negotiating this contract, you're anticipating all of those things that you want from that contractor to ensure that your project is paid for, not liened by him or any of his subcontractors or suppliers.

Jon Lemole, Esq.:

Then as you go forward in the project, you've got to keep meticulously on top of that record keeping and all that paperwork. That's it. There's really no trick to it. It's just being really, really proactive about organizing and maintaining those best practices.

Alan Tannenbaum, Esq.:

If you want to really be proactive as an owner, within that 45 day timeframe of a contractor, subcontractor providing work on the project or material supplier supplying materials, you get this Notice to Owner. I don't see any problem unless it's prohibited by the contract with making contact with the contractor who submitted that Notice to Owner or the material supplier and saying, "I got your notice and I'm very interested in your being paid everything you do on your contract. Please let us know if you're having any payment difficulties during the progress of the job because we want to avoid the potential of you enforcing a lien against our property."

Alan Tannenbaum, Esq.:

A lot of general contractors will tell you, "We don't want you talking to our service suppliers." A standard response that I give is that, "Well, that's fine because they just sent me a note and I'm a very... I have good manners and somebody sends me a communication, I acknowledge the communication and say thank you for sending this." And that line of communication has started.

Alan Tannenbaum, Esq.:

Again, at the end of the project, you need final releases of lien from all the parties who filed Notices to Owner and you get something also called the contractor's final affidavit, which you must get before you issue the final payment to the contractor. Which is an additional protection against liens. Okay. I'm going to talk about payment-

Salvatore Scro, Esq.:

I just want to just say two things because Jon reminded me of it and you did also. One of the things that would be nice to see in a contract when you're negotiating it is if you have your general contractor, if he's going to hire subs, if you can require in your contract that any contract that the general contractor signs with a subcontractor, that you're identified as the associations identified as a third party beneficiary.

Salvatore Scro, Esq.:

Sometimes they'll do it, sometimes they won't. But it adds an added layer of protection because now that subcontractor is contractually liable to you as well. Also in the insurance that the general contractor has, I've seen it in some of them, but it's nice if their insurance policy ensures the work of their subcontractors. Most of the time it will not ensure the work, but if it does ensure the work of the subcontractors, you have another added layer of protection there.

Alan Tannenbaum, Esq.:

Thank you, Sal. Payment and performance bonds. Payment bond is a bond that protects the owner when the general contractor doesn't pay its subcontractors and materials suppliers. That surety will come in under those circumstances and cover that bond. The subcontractors only, and the material suppliers only have rights against the bond rather than your property. That's the advantage of having a payment bond is that it removes the prospect of your property being lien.

Alan Tannenbaum, Esq.:

Performance bond. The surety agrees either to pay for the completion of the job or to provide you with another contractor who completes the job at the surety's cost. It guarantees a performance of the contractor. On a major repair project, we definitely recommend payment in performance bonds. There is a price to it. Roughly speaking, it's going to add 1% to the contract cost depending on the particular contractor involved. On a major project, if you have a three and a half million dollar project, you're talking about 30 odd thousand dollars of additional cost. But it's great to have the protection.

Alan Tannenbaum, Esq.:

But there's a underlying reason why there's a preference for payment in performance bonds. The reason is, the general contractor will never want you to have any communication with the surety and make any claim against that bond because it not only affects your ability and their level of bonding capacity the next year, but also the premiums that they would have to charge an owner because part of the premium cost of a bond is based upon the amount of claims ever made against that particular contractor.

Alan Tannenbaum, Esq.:

What I said before about delayed damages, same holds true about having payment in performance bond as being a disincentive to bad behavior. Because if I'm a general contractor and I'm starting five projects, and again, two of them have a performance bond in particular, the other three don't, as the owner I'm going to show up on the jobs that have bonds more. I'm going to by nature assign my best people to those jobs. Because the last thing I want is that job to fall into default, the surety be contacted and it affects their bond ability on jobs going into the next year.

Alan Tannenbaum, Esq.:

That's an end reason why a bonded job, you're apt to actually get better performance. They're not going to risk not paying their subcontractors and have the surety contacted, which is going to affect their future ability to get work. Jon, with that, spend a few moments on dispute resolution procedures. Why is that important? What does that mean?

Jon Lemole, Esq.:

Well, you hope that your job goes well and that there's no problems and you don't need to access the dispute resolution procedures, but that doesn't always happen. There can be problems that occurred during... Disputes or disagreements about how the work is being done that arise during the project. Then there are the big disagreements or disputes that arise after a project's completed and perhaps you find out that it wasn't done quite the way that it should have been done.

Jon Lemole, Esq.:

And so it's really important that when you negotiate these contracts, you look at what do you need to do or what are you going to be required to do in order to ultimately resolve a dispute with this contractor if it comes to that. Now, there are three things that you need to be looking for because we see them in a lot of general contractors contracts.

Jon Lemole, Esq.:

The first is, where can I bring a claim if I have to bring a claim. Let's suppose we haven't resolved this thing and I've got to bring a claim against the contractor or vice versa. Let's assume you pay the contractor and it's really a question about defects in the work that was done or defects in how it was designed or the scope or whatever.

Jon Lemole, Esq.:

What you'll see a lot is a preference in the contract for avoiding Circuit Court and requiring you to arbitrate your dispute. A lot of people have this mistaken idea that arbitration is better, faster, cheaper. And so, yeah. That sounds like a good idea. Why do I want to go to court? I'd rather go to an arbitrator.

Jon Lemole, Esq.:

I have to say that we typically don't like and recommend arbitration for construction disputes. It's not always cheaper. In fact, it rarely is cheaper. Sometimes just the filing fees at the American Arbitration Association alone could be 5,000, $7,500, $10,000, depending upon the size of your claim. You pay a filing fee of $400 in Circuit Court.

Jon Lemole, Esq.:

Don't ever forget that your project has not just you and the general contractor, but there may be other parties that are involved as well. There's a lot of subcontractors and maybe you want to bring a claim against the subcontractor for their defective work, but you're not in contract with them. You can't force them into arbitration. If you want to bring a claim against the GC, you've got to go in arbitration. But if you want to bring claims against subcontractor too, you've got to have a separate action in Circuit Court. All of a sudden your expenses are exploding.

Jon Lemole, Esq.:

Maybe the general contractor does have in his subcontracts arbitration. Maybe they bring those subs into the arbitration, but maybe they don't. You don't have necessarily any control over that. Circuit Court is always preferable because you can always claim, bring your claims against everybody and anybody that's involved in that project in Circuit Court. You can't always do that if you're forced to go into arbitration.

Jon Lemole, Esq.:

Arbitration is not always cheaper. Definitely not as efficient and a lot of times, just as slow as Circuit Court. The other drawback of arbitration is that you don't get the same type of discovery that you get in Circuit Court. You have no set right to take depositions, get documents, asking a rogatory and all of those things that lawyers typically do in order to find out what the facts are and make the best case that they can for their client. In this case, you, the association.

Jon Lemole, Esq.:

The other thing to look for and what we typically find with general contracting contracts is a preference for, if we do go to Circuit Court, you're waiving a jury. Jury waivers, that's a case-by-case thing. But don't make that decision right at the front.

Jon Lemole, Esq.:

Look, there may come a time if we're representing a client, we may say, "Hey, maybe we should not try this in front of a jury. Maybe it makes more sense to try this in front of a judge." But if you've already waived in the contract the right to try it in front of a jury, you don't get to make that decision. A jury may be the best place or your lawyer may think that's the best fact finder for this case. You'd rather be in front of a jury.

Jon Lemole, Esq.:

The other thing that we see and that you need to be aware of, and this can work to both parties advantage is prevailing party's attorney's fees. In America, under our system of law, unlike in some other parts of the country, the loser doesn't necessarily pay the winner's legal fees. It can happen if you're contract to do that. Or if there's some statute which requires you to do that. Lien law might be one area.

Jon Lemole, Esq.:

But if you're just suing your contractor, if your contractor's done a really bad job and has done the work with all kinds of building code violations and other problems, if you don't have a contractual provision for prevailing party's attorney's fees, you're not necessarily going to get attorney's fees if you win. It cuts both ways, but we always recommend that you put a prevailing party attorney's fee provision in your contracts. [crosstalk 00:46:32]-

Alan Tannenbaum, Esq.:

Understand the standard industry form contracts do not have a prevailing party attorney's fees incorporated in them. If somebody had joined AAA or a AGC a form contract, you actually have to add the provision of prevailing party attorney's fees.

Jon Lemole, Esq.:

That's correct. The AIA contract has this built in preference for arbitration so be careful with that. We see the AIA contract being used more and more by contractors. It's got very, very confusing and frankly onerous during the job dispute resolution procedures. What do you have to do? Who do you have to bring it to? Who has to make a decision? Engineers, architects, everybody has to get involved in that. Those provisions aren't always conducive to getting the work done quickly.

Jon Lemole, Esq.:

Dispute resolution procedures, we can spend a lot of time on this. But the point is, if you see those things in your contract, think about them. Run them by an attorney and make sure you spend a lot of time in determining and negotiating how are we going to deal with situations that arise where we just can't agree and we've got a problem that needs to be resolved?

Alan Tannenbaum, Esq.:

Sal, do you have anything else to offer on that topic because I want to answer a few questions?

Salvatore Scro, Esq.:

Yeah. I just wanted to touch on a few things that I think are important in any contract that sometimes are overlooked. I'll go through these real quick. Again, the prevailing party attorney's fees Jon touched on, but that is an incentive to do well because of the risk of paying the fees. But it's a double-edged sword too. If you're not holding up your end of the bargain, you have that risk as well.

Salvatore Scro, Esq.:

Also it's an incentive to settle a weak case. But there are things that... I'm not going to go into documenting the job or project close out. But other terms that I think may be important in any contract would be hours of work. A lot of times, oh, you hire them. You give them the deposit. They don't show up. Those are things that you may want to discuss. Have in your contract. What days of work are they supposed to show up?

Salvatore Scro, Esq.:

The entrance and the use of the premises. How many people are going to show up on your project to work every day is an important thing to consider. Staging and storage areas. Who's going to maintain the materials? Where are they going to be staged, stored? How are they going to be protected? What happens if there's a storm? You need to address those things as well.

Salvatore Scro, Esq.:

Clean-up. That's an important thing as well. The clean-up, you want to make sure sometimes that they'll sweep the area for nails and things you don't want. You want a magnetic sweep every day so your people aren't blowing tires, running over nails, things like that.

Salvatore Scro, Esq.:

Notice of work areas to your owners and the owner's access. If they have to shut down portions of access to the buildings, where will that be and how is that going to be done? How much notice are your owners going to have if they can't use a portion of their building and what is their access and who's going to provide that access and the protective area for them?

Salvatore Scro, Esq.:

Those are just some of the things. If you do have a litigation matter that may come up, you do not want to destroy evidence. You want to make sure that you notify your attorneys in advance so that they can make sure that parties are there to view what needs to be viewed. Stored evidence, categorized evidence, things like that. Photograph evidence. Those were just some of the things I wanted to touch on before we go to questions.

Alan Tannenbaum, Esq.:

Let me raise the issue of assignability. I've seen this in some roofing contracts that have come across my desk. Make sure you have a provision of the contract that it can't be assigned. Because there are companies out there, they're more like roofing marketing companies. They have fancy brochures. They have a big online presence. They sell roofing jobs and then they assign them to other roofers to actually perform them. You don't even know who's showing up on your job.

Alan Tannenbaum, Esq.:

Really important that you have a provision of the contract that says it's not assignable without your permission. I want to cover a couple of questions. We have a short amount of time and I know Michelle wants to do a poll. One of the questions is, what's the difference between a surety and a payment in performance bond?

Alan Tannenbaum, Esq.:

The surety is actually the entity that issues the payment in performance bonds. The surety, it's not an insurance policy. They're not an insurance company. They're a guarantor. It's a guarantor agreement where they agree to come back behind the contractor and either agree to pay money that the contractor is obligated to pay its contractors and subcontractors and material suppliers. Or come in and end up performing the project.

Alan Tannenbaum, Esq.:

I have a question about attorney's fees. How much does it cost for us to be involved in the contracting process? The first thing that we will do is usually you'll be handed a proposed contract from the contractor for a fairly nominal charge, depending on the size of the contract. Maybe between $500 and $750. We can go through what the contractor has provided and tell you what's in there that's going to come back to bite you. Or what should be in there that should be there to protect you.

Alan Tannenbaum, Esq.:

Then you can come back to us and say, "We want to revise this contract. We want some suggested language." Which we can come back and do. But a lot of times, even on a relative, let's say a contract of a $100,000, for a relatively modest amount of money, we can offer some suggestions that can greatly improve that contract from the aspect of protecting you as an owner.

Alan Tannenbaum, Esq.:

All right. We're going to send the poll out because apparently that's not working. Are there any other questions because I want to respect everybody's time. If you have a particular question, you can unmute yourself. Paul asked a question about a 110,000 to $120,000 pool resurfacing contract.

Alan Tannenbaum, Esq.:

We do think a contract at that level justifies some level of attorney review to make sure you're protected. Should we consult with an engineer on a project like that? I think that's certainly enough of an expenditure to justify it.

Alan Tannenbaum, Esq.:

In the area of contracting, I would have to say and I hope I don't insult any former pool contractors who may be on the call, but it's not the highest level of achievement in the pool contracting industry. It's probably an area where you should have somebody knowledgeable out inspecting there.

Alan Tannenbaum, Esq.:

It doesn't have to be an engineer. It could be somebody whose head was in the pool business for 40 years, who now is a consultant. They're going to maybe cost less than an engineer, but at least it's somebody to have their eyes on the project.

Alan Tannenbaum, Esq.:

Again, when you talk about this, it's set up to bad behavior. A contractor who knows that somebody knowledgeable is going to be observing their work, and at the time of the first draw is going to have the ability to reject it, is really the greatest incentive for that contractor to get the best people on it and look carefully at the work that's going to be done.

Alan Tannenbaum, Esq.:

Yeah. The key is, and I'll conclude with this. I use this in my presentations. When you're contracting with a contracting company, pretend that you've just hired a group of 17 year old boys to come to your project and do work. Think about the type of disincentives you would want in a contract to make sure those 17 year old boys behave properly and use that as a psychological basis for approaching the contract work.

Alan Tannenbaum, Esq.:

One of the things, everybody, at least the 99 people who got on, because I see that we had 99 participants. Then I think because of the Zoom problems today, everybody above the 99 didn't get out of the call or didn't get on the Zoom. We'll be dealing with all the managers on your certificates for today's session.

Alan Tannenbaum, Esq.:

Anybody have any other questions, you can provide us an email, I'll get your questions answered. For most major projects, we offer free one hour consultation. A lot of what we end up doing is educating your [inaudible 00:56:47] for your managers. It's educating your boards on spending the money and time in order to protect themselves. It saves them a lot of money in the long run if they approach the job properly, have a good contract and so forth.

Alan Tannenbaum, Esq.:

Thank you everybody for your participation. Hope you heard some things that were valuable for you today. Make sure in your engineering contracts then, you want to look for those general conditions that limit liability and get rid of those. I've seen too many of those lately. See everybody hopefully next month.

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