Each year CNYC presents a day-long
housing conference featuring dozens of workshops and seminars
that cover virtually every aspect of managing and operating
housing cooperatives and condominiums. At last year's
conference, Steven Varone, AIA, president of Rand Engineering
& Architecture, conducted a workshop designed to help
participants successfully manage major capital projects.
His report based on the presentation appears below. CNYC’s
24th annual Housing Conference will take place on Sunday,
November 14, 2004, at Hunter College.
Major projects such as replacing a
roof or installing windows involve a number of people, many
decisions, and a lot of money. As a board undertakes a building-wide
project, it should keep in mind several key elements to
ensure that the project runs smoothly.
A Contract Is Essential
The American Institute of Architects has developed a standard
form agreement between an owner and a contractor called
AIA A101. The form is straightforward: In about 15 minutes,
you fill in the contractor name, overall price, unit prices,
specifications, drawings, date, and schedule based on the
specification you have agreed upon. An indispensable companion
document, A201, includes the guts of the agreement-penalties,
payment schedule, and insurance requirements.
Form 101 was developed in 1987, but
it’s recommended that you use the 1997 update, which
is friendlier to owners and eliminates key controversial
clauses. For example, one clause in the 1987 version stipulates
that if the owner fires the contractor for proper cause,
the contractor has a right to lost profit, which could lead
to some ugly contention. How, for example, do you fairly
negotiate “lost profit” with a contractor you
just fired? Therefore, if this item appears in the contract,
it should be crossed out.
Don’t let a contractor tell
you that contract documentation is unnecessary paperwork.
Even if you have only the A101, you are 10 times more protected
than if you let a contractor write a proposal that you blithely
sign at the bottom. Remember, the contractor drafts the
agreement to his advantage and will include terms favorable
to him. It’s not that contractors are corrupt, but
they won’t put in clauses to protect you. Therefore,
you should have your attorney and your engineer review any
contract document before you sign.
Before a contractor begins any work not listed in the base
contract, you should get a written change order. Don’t
rely on a lackadaisical “we’ll figure this all
out in the end” approach. Instead, the contract should
include some kind of contingency that covers unforeseen
If a contractor does work without
a signed change order, it puts you in the awkward situation
of deciding whether you should pay him based on your own
good graces. Before it gets to that point, a field worker
should quickly write up the specific change-e.g.: replace
100 square feet of brick for $5,000 – and have all
parties sign it.
Not only is it essential to clearly spell out payment terms,
you also want to stay “ahead of the contractor.”
That is, if the contractor goes out of business or walks
off the job, you want to make sure you haven’t already
paid him for work he didn’t complete. Pay the contractor
as little as possible-or nothing at all, if you can –
at the start of a job. Most contractors will begin a waterproofing
or roofing project without requiring a down payment because
most of their initial cost is labor.
For other types of projects, however,
such as replacing windows, you won’t be able to get
a zero-down agreement because the contractor has to order
the windows in advance. For a window project, a recommended
payment schedule might be 10% down, 10% when the windows
are delivered, 70% when they are installed, and finally
10% when the project is completed. By holding money to the
end of the project (this is called retainage), you give
the contractor incentive to come back and take care of punch
list items that your engineer compiles of the final details
to be completed.
Bonding and Insurance
The more costly the project, the more important it becomes
to have bonding. A bond guarantees that the work will be
completed at the quoted price. So if the contractor fails
to complete the project, the surety company issuing the
bond will cover the cost of bringing in another contractor
to finish the work. The different kinds of bonds include
a performance bond, a payment bond, and a labor and materials
bond. Bonds typically cost anywhere from one to three percent
of the contract, depending on the size of the project. Ask
your attorney to help you calculate the amount of bond coverage
Make sure your contractor has proper and sufficient insurance
coverage. A typical rule of thumb is that contractors be
insured for at least $2 million for each occurrence and
$5 million aggregate, but you should check with your insurance
broker as to the appropriate limits for your building.
Closely examine the contractor’s
insurance certificate to make sure it lists the cooperative
corporation or condominium association, the property management
firm, and the engineering/architectural firm as additional
insured parties. The contractor’s insurance policy
should be written on an occurrence-made basis, not a claims-made
basis. An occurrence-made policy covers losses that happened
during the policy period, regardless of when the claim is
reported. A claims-made policy covers losses only if the
policy is still in place when the claim is made. For example,
if your building suffers damages during the project and
the board files a claim after the contractor has gone out
of business (and thus is no longer covered by the policy),
you would be covered under an occurrence-made policy but
not under a claims-made one. The contractor will also need
automobile coverage for equipment accidents and to cover
vehicles damaged on the street outside your building.
Before signing off on insurance, send
the contractor’s policy to your own insurance broker
to make sure if it follows the rules of the building and
adequately protects you. Your broker will also know whether
the policy is with an A-rated company, and whether the terms
of the policy are in your building’s best interest.
Time Is Money
Your contract should set a very specific timeline for the
project. When are they going to be doing brick work? The
roofing? When are they going to deliver the boiler? When
are they going to be manufacturing your windows? All this
information should be laid out in a chart, clearly stating
the start and finish date of each task.
To help ensure that your project stays
on schedule, include a clause in your contract specifying
progress payments for each milestone in the timeline. Make
sure the contractor updates the schedule at each milestone
and payment. If they are getting paid once a month, then
you should get a timeline updated monthly. Even if the schedule
hasn’t changed, you want to have verification of that.
There is no scheduling clause in the standard AIA contract,
so one should be added one to your contract.
To help keep a project from dragging
on and on, include liquidated damages in your contract.
If your project is supposed to be completed in 16 weeks
and goes beyond that time, begin deducting a designated
dollar amount each day until the project is finished. (The
larger the project, the bigger the amount.) You may encounter
some resistance from contractors, who hate having such a
clause hanging over their heads. You can be flexible about
when you start enforcing damages, but it’s recommend
that you set a date when you can finally say enough is enough.
To add incentive for your contractor,
your attorney may recommend having a corresponding bonus
clause. If the contractor finishes in fewer than 12 weeks,
for example, you would pay a specified bonus amount.
Putting weather delays in contracts
should be avoided because everyone on the project becomes
a weatherman. Too much time can be spent trying to remember
how many drops of rain have fallen on a given day. Instead,
make sure the schedule includes a cushion: If the specific
type of project should take 16 weeks of construction and
physical labor including no rain, then put 20 weeks in your
schedule. Then you can state that the building will start
assessing damages at 24 weeks.
Before work begins, make sure you know the role that each
person on the project team will play. A project engineer
or architect hired to make twice weekly site visits, for
example, should not be thought of as a full-time supervisor.
Typically, the engineer/architect visits the site to observe
that the work generally complies with the intent of the
contract. The contractor should designate someone to be
on hand as the project manager to supervise the work on
a regular basis. Too many contractors, however, do not include
full-time supervision in their price, despite their insistence
that they have. The engineer’s/architect’s specifications
should state that the contractor must provide a full-time
supervisor to be on the site to oversee the day-to-day progress
of the contractor.
A working foreman is acceptable as
long as he knows his job inside and out and has the specifications
and drawings with him at the site at all times. But a supervisor
should not be spreading himself around by flitting between
four or five different projects. Popping in to a site and
asking if everything is OK, and then moving on to the next
site is not proper supervision. It’s well worth paying
for a full-time foreman to get the proper level of oversight.
Remember that the prime contractor
is responsible for everything that goes on at your site.
The subcontractor works through the prime, and although
they are separate companies and should each have their own
insurance, you shouldn’t work out problems with the
sub. You should be dealing with the prime and the prime
only. Subcontractor issues should be seamless to you.
Too Many Chiefs
One person from the board should act as the key contact
person for all parties. It only wastes time and causes confusion
to have two, three, four or more board members calling the
engineer or contractor. The more the board maintains a unified
voice, the better.
Don’t forget to notify residents
well in advance about work that will disrupt them or that
will require their cooperation. Usually this is your property
manager’s responsibility. It’s not fair to the
engineer or contractor to bear the brunt of residents’
anger over work in the building that they didn’t know
Before work begins, hold a project initiation conference
where all the parties sit in a room and review the goals
of the project. Discuss details such as 24-hour emergency
numbers and where you’ll be storing materials. Get
the insurance certificates and the permits. Where are notices
going to be posted? What is the security protocol to get
into the building? What materials submissions will you have
on this project? When are they due? The project initiation
conference should nail down all these details so that everyone
is on the same page.
Once every two weeks, hold a project
meeting with the same parties: the same board representative,
property manager, contractor, superintendent, and engineer/architect.
Go over what has happened in the past couple of weeks and
address problems before they fester. If you don’t
set up a formal framework for the project, things can quickly
get out of control.