Check Your Documents, State Laws
Your state or your governing documents may have provisions covering when your HOA must request bids on projects. Be sure to include any such requirements in your bidding guidelines. “In Florida, the laws generally require condominium associations to obtain bids if the project will cost more than 5 percent of the annual budget,” says Lisa A. Mcgill, a shareholder and association attorney at Becker & Poliakoff PA in Fort Lauderdale, Fla. “That threshold is 10 percent for homeowners associations.” Of course, she adds, those provisions shouldn’t discourage your board from obtaining bids for services excluded from the statute or below the threshold.
In Michigan, the state’s nonprofit act governs. “The guiding light for HOAs in Michigan is the Non Profit Corporation Act and Michigan’s best business judgment rule,” explains Nathaniel Abbate Jr., a partner at Makower Abbate & Associates PLLC in Farmington Hills, Mich., who represents associations. “The act requires board members to discharge their fiduciary duties in the manner of the reasonably prudent director, and wherever prudence dictates that work not be performed without first soliciting bids, the board should get bids.”
What to Ask Bidders
Start by including in your guidelines a timeline for how often you’ll bid out work. “I ask my association clients: ‘Does your association rebid the work of existing vendors?'” explains James Mcormick., a partner at Peters & Freedman LLP in Encinitas, Calif., who represents associations. “We have some associations that do that every three or four years. That helps to ensure you’re getting the best value and price. And if you have a vender with whom you’re very happy, keep that vendor, but also keep it on its toes by asking it to submit a bid as part of a review process every few years.”
Also address the required qualifications of potential bidders. “I typically recommend at least three bids,” explains Kristen Rosenbeck, a partner at the Mulcahy Law Firm PC in Phoenix, which represents associations. “I also want to see licensed and bonded contractors to make sure the HOA’s contractors are qualified.”
Also include guidance on how you’ll deal with potential conflicts, which may be governed by your state’s law. “In Arizona, there’s a statute stating that if there’s a conflict between the bidder and someone on the board, it has to be disclosed and discussed before the vote is taken,” says Rosenbeck. “Board members must disclose that there are conflicts. The conflicted board member can vote, but I recommend he recuse himself from the vote.”
Abbate concurs. “Common sense dictates that the board avoids the appearance of impropriety whenever a prospective contractor has a family or financial tie with a board member,” he says. “In that case, of course, the board member should abstain from the decision to hire the contractor, and soliciting bids will help establish that the remaining board members made their decision on the basis of legitimate considerations, as opposed to self-interest.”
Guidelines about conflicts should apply to your HOA management company, too. “If your HOA manager is selecting which vendors are permitted to bid, be sure to ask whether there’s any relationship—legal, financial, or otherwise—between the manager or management company and the vendors,” advises Magill. “Sometimes management companies have made arrangements for special pricing or services from vendors since they have tremendous buying power. In other cases, a manager may solicit bids from poor-quality vendors to make the vendor with whom the manager has an advantageous relationship stand out from the competition.”
Crafting Your Request for Proposal
In your guidelines, include a pre-bidding process that requires board members to craft your request for proposal (RFP) carefully to ensure that bidders are bidding on the same work. “Have the project identified clearly,” suggests Rosenbeck. “You should be clarifying the scope of work to be done.”
Magill agrees. “Compare the bids on as much as an ‘apple to apple’ basis as possible,” she says. “One roofer may recommend a tar and gravel roof and bid on that basis. Another may recommend patchwork and bid on that basis. Another may recommend a foam system and bid on that basis.”
That makes comparing bids very difficult, so in your guidelines, give as much detail as possible to determine when your board should hire a consulting expert to help it evaluate the options and compare bids. “Include in your guidelines commonsense things people would do if they were buying a car,” says Robin Galvin, a partner at Davis, Malm & D’Agostine PC in Boston who specializes in representing condos and co-ops. “Consider using a consultant for things that are usually beyond the capability of the normal person. If you’re bidding on a complex matter like replacing elevators, sometimes the board will hire an independent consultant who’s responsible to and paid by the board to oversee the project. A normal lay person doesn’t have the specialized knowledgeable to know whether, if a contractor says you need this, you really do need it, whether you need something else, or even if a contractor is installing your elevator correctly. But if it’s a question of mowing the lawn or shoveling the snow, any board member can make a judgment on whether the contractor will do a good or a bad job.”
Whether you hire a consultant or not, make sure one step in your bid evaluation process is attempting to identify what’s being excluded from bids that may end up costing your HOA extra. “One vendor may include bringing a dumpster on to the property and disposing of debris on a monthly basis,” explains Magill, “while another vendor expects to use the association’s garbage dumpster or will add on the cost of waste removal.”
Call in the Legal Eagles
Finally, include a step in your bidding guidelines for attorney review. “Our best association clients never sign a contract of any value without running it by us first,” says Abbate. “And we never recommend accepting a bid from an unlicensed contractor for all but the most trivial of jobs. We also insist that the prospective contractor first establish that it has adequate workers’ compensation insurance and a general liability insurance policy in an amount of at least $1 million. The contract should also require the contractor to hold the association harmless for any liability visited upon the association as the result of the negligence of the contractor or its employees, agents or subcontractors. And finally, the best contracts will also include provisions that call for withholding a significant portion of the agreed upon payment until the work is completed to the association’s satisfaction.”
Your attorney can also protect your HOA from liens. “Check with your attorney about compliance with construction lien laws,” advises Magill. “Many states have laws that enable subcontractors and suppliers to collect money from the owner—your HOA—even if your HOA has paid the prime contractor in full. You may not have any clue there are subcontractors on the job or materials supplied by others until it’s too late.”
Finally, though it’s tempting in these economic times to gravitate toward the lowest bid, your board isn’t obligated to do that under any law or governing document. In fact, your guidelines should include a caution against choosing a bidder on that basis alone. “The fact that there’s a bid procedure in place doesn’t militate in favor of awarding the work to the lowest bidder every time,” says Abbate. “You can use your best judgment as board members to award a contract to a higher bidder if you determine in your sound discretion that a particular contractor will do a better job, provide better value in the long run, or otherwise merit selection.”
