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Condominium and Homeowners Associations’ Careful Review of Construction Contracts Can Help Mitigate Risk

May 13th, 2016

Posted in Condominium & Homeowner Association Law,Real Estate Law

Whether your community is considering the repair of an amenity building, pavement resurfacing, or installing a new roof, the importance of carefully reviewing and understanding the proposed contract cannot be overstated.  Reviewing the proposed contract is not simply a matter of determining whether all of the work included in the request for proposal appears in the contract and whether the price is reasonable (although that is also important); there are other aspects of the contract that are equally, if not more important and overlooking them may be costly.

One of the primary aspects of a construction contact is risk allocation.  In other words, if something goes wrong, property is damaged, or someone is injured incident to the work, the contract should clearly specify the party responsible for compensating the damaged party and bearing the financial burden of defending any lawsuits.  There are several ways to allocate the risks involved, which may include requiring each party (the Association and the Contractor) to carry certain insurance policies and through indemnification, defend, and “hold harmless” provisions.  These types of risk allocation measures may be omitted from contracts presented to the Association by contractors, and if they are included, they are often intended to protect the contractor rather than fairly apportioning the risks between the parties.  Overlooking or omitting these important risk allocation provisions could expose your Association to risks of liability that far exceed the price of the work.

Another important aspect involves protecting the Association from paying twice for the same work.  Generally, if a contractor fails to pay a subcontractor, laborer, or material provider for work or materials that benefitted the Association, those parties may claim a lien against the benefitted property to secure payment under certain circumstances, even if the Association paid the contractor!  To avoid being required to pay twice, it is important to include provisions in the contract that require the contractor to provide progress payment affidavits and a final payment affidavit as conditions to receiving any payment.  Further, the person who will be administering the contract on the Association’s behalf should understand the purpose and contents of the affidavits to avoid making an improper payment and the possibility of being required to pay twice.  Having the Association’s attorney carefully draft contract revisions will not protect the Association to the degree possible if the person administering the contract on the Association’s behalf does not understand when payments may be properly made and how the contract is supposed to operate.

There are many other important aspects of a construction contract that are not identified in this short article.  However, it is important to understand that price and the scope of the work are only two aspects of a contract and the potential liability could far exceed the price of the contract. Accordingly, community associations should contact an attorney who has experience in construction contract analysis and drafting to ensure the contract adequately protects the association and fairly allocates the risks involved.  The best time for protecting the Association is prior to signing the contract, and to reiterate a quote that has been attributed to Benjamin Franklin: an ounce of prevention is worth a pound of cure.

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