Unexpected damage may be discovered during the repair work. When and if this does occur, it is important to have a procedure in place to authorize work and ensure costs are controlled. The construction contract will detail one of two ways to pay for the unexpected work:
Unit Pricing: A price to remove and replace each unit of “unexpected work” is agreed upon by the parties. Examples of units are a square foot of stucco, a linear foot of lumber. The number of damaged units is multiplied by the unit price.
Time and Materials: The unexpected work is charged at the cost of materials plus the time to remove the damaged materials and install the new material.
To ensure that the association has control over the work, the construction contract should have a procedure in place that requires authorization by the association. This procedure may be:
- The contractor submits an estimate to the construction manager.
- The construction manager reviews the estimate and passes it on to the Board.
- The Board reviews the estimate, and if they agree that the work is necessary, will authorize the request.
At the time the construction contract is being prepared, the association needs to review the provisions for approving unexpected work, and the pricing method. This is an area where some associations have gone way over budget. A 20% to 30% contingency in the budget is not uncommon for major projects and should be included.
For many associations, repair costs are often in excess of $1 million. Therefore, extra care needs to be taken in handling the accounting of these funds. An Association should not assume that the money is safe because it is in a “trust account.” The safety of the money is largely dependent on the withdrawal procedures that are set up. The following tips may be helpful:
- The funds should be held in a separate account and not combined in an account with other association funds.
- Two board members should be required to sign every check.
- Guidelines for signing the checks should be established by the board. For example, there should be documentation such as invoices approved by the construction manager, which are then forwarded for payment. The two board members should then review the invoice before signing the check.
- The funds should be kept in an account at a major financial institution.
- It is wise to maximize interest earned from the funds, but the interest-bearing vehicle should be low risk. Large financial institutions have commercial account, and in some instances association account advisors who can assist in placing the funds where they are safe, accessible when required and interest is optimal for a low level of risk.
- The funds should be audited annually, and a final audit performed at the end of the major repair. It is important to be able to precisely account for all the funds and provide a report to the association.
Typically, winter is the time many associations plan for a major construction project to begin in the spring. These steps may include, among other things: hiring a construction manager; developing a clearly defined scope of repair; creating a realistic budget for the project; determining how the association will finance the project; obtaining contractor bids and hiring a qualified contractor; and conducting an information meeting with the homeowners. For many associations, a major repair project will be individual members’ first encounter with a construction project. The following are the key participants in a major repair project:
Architect: Responsible for design work, preparing the scope of work and plans, and bidding documents.
General Contractor: Provides the materials, labor, and other resources to perform the repairs.
Construction Manager: Acts as the owner’s agent and coordinates design and construction issues with the architect and general contractor. Controls the scope of work, considers optimum use of funds throughout the project, offers assistance in avoiding delays, changes, disputes, and cost over-runs, communicates directly with owners, and documents compliance with project specifications.