With any type of construction project it is important to hire knowledgeable contractors. During the interview process, the following questions should be asked of any contractor bidding on the repair project:
- What other major repair projects have they done? What was the dollar value of the project?
- What references can they provide, preferably from other condominium or homeowner associations that had work done at least a year ago? Are they still satisfied with the work?
- Have any complaints been registered against this contractor, or have they been involved in any litigation?
- How long have they been in business using their current business name?
- What is the level of training and skill of the trades persons.
- Are they licensed, bonded and insured?
The selection of contractors should be based on reputation, qualifications and experience first. Price should be a secondary consideration.
An Association has a multitude of options for funding major repair projects including:
- Replacement Reserve Funds. The Replacement Reserve Fund is a financial account that the Association has set aside for the replacement of major assets of the facility per the Reserve Study. CAI recommends that your Reserve Funds follow three characteristics: safety, liquidity, and return on investment, in that order of importance.
- Special Assessment. With a special assessment, the project cost is generally divided among the unit ownership on a percentage of interest basis. Those payments could be of considerable size and are frequently spread over several months depending on the nature of the work. At times, a single lump sum payment may be possible but politically difficult for the Board to present and collect smoothly.
- Association Loan. An alternative to short term special assessments can be the utilization of a bank loan, which provide associations with the flexibility of paying for these major repairs or renovations in monthly installments.
- Insurance Funds. An association should consult with an attorney to review its insurance policies for possible coverage.
- Funds recovered from the Developer/Converter. Under the Washington Condominium Act, there is a statutory warranty by the Declarant that its newly constructed condominium project has been properly designed and constructed. Warranty rights are somewhat different for conversion projects. An association should consult with an attorney to evaluate whether or not a claim exists against the Declarant.
- Any combination of the above.
Whichever type of funding is utilized, management of the construction funds is crucial. A construction manager can help an association determine the association’s projected cash flow needs and determine an appropriate strategy for funding. A construction manager can also help an association identify the amount of money required and the time at which it will be needed.
For a major repair project, many associations go through a three-bid process. The board reviews the bids and will typically award a contract based on the overall cost, quality of materials, availability to start, contractor’s reputation, or simply the interviewee’s personality! By following this process, there is a higher risk that the project may not be successfully completed. How many times have you heard people say they thought there was a warranty, only later to find out that the manufacturer would not honor it because the installation was not completed in accordance with the manufacturer’s guidelines? Here are some other reasons a project may go wrong:
- Contractor may not be licensed, bonded and insured.
- Lack of appropriate bidding specifications and/or contract documents.
- Inability of contractor to meet schedule.
- Contractor lacks experience and/or technical expertise required.
- Unexpected cost over-runs.
- Contractor, sub-contractor, or material supplier files a lien on the property.
- No permit/Code violations.
- Lack of communication with owners
- Board or owner expectations differ from the agreed upon scope of work.
When considering a major project, the construction manager should be the first person the board hires. With an Agency Construction Management Agreement, the construction manager is retained directly by the Association and, therefore, is not affected by conflict of interest. The construction manager coordinates permitting, design and construction issues, and interfaces on behalf of the Board, directly with the contractor.
Construction Managers can provide the board with sound guidance and assistance through all phases of the construction process. They can provide assistance with the development of accurate cost of construction estimates that are within the association’s budget; control the scope of work; obtain and negotiate bids; consider optimum use of funds throughout the project; schedule and coordinate work; offer assistance in avoiding delays, changes, disputes, and cost over-runs; communicate directly with resident owners; and document compliance with the project specifications.
All projects have challenges, but by hiring a professional construction manager, you will have a representative who will bring control to the process and minimize risks.
Evidence of problems with a property may be revealed in a variety of ways, including:
- Reports by Owners. Owners will generally report big or emergency problems promptly. Reports should be made in writing to the Board or property manager. The Board should also encourage owners to report “smaller” problems.
- Maintenance Inspection Reports. Regular maintenance inspections can lead to the identification of problems. It is important to have a proper inspection and maintenance program in place. There are often “early warning signs” that a professional will see.
- Emergency Situations. When an owner experiences a problem that makes their living conditions unsafe or uninhabitable, it needs to be reported immediately. In all cases, once the Board has knowledge of a problem, or possible problem, they are obligated to make reasonable inquiry to determine the cause and find a lasting solution.
At some point, the Board will most likely recognize that there is a serious problem. It may be through an emergency of a magnitude that leaves no doubt that there is a serious problem; an accumulation of small problems; or recognition of a pattern of problems, indicating a major problem.
Projects such as roofing, siding, deck restoration, plumbing, asphalt paving, even exterior painting require proper planning to ensure a successful outcome. During the planning phase critical decisions need to be made, including:
- Hire a Construction Manager. The construction manager can provide sound guidance and assistance through all phases of the construction process.
- Develop a clearly defined scope of repair. Typically, an investigation, whether visual or intrusive, will occur to determine the extent of the damages as well as the cause. The construction professionals can then aid in determining the repair options, the expected life span of each option, an estimate of repair costs, the expected annual maintenance costs of the repairs, and a schedule for the repairs.
- Create a budget. The budget for the major repairs needs to include all expenses associated with the major repair, including such things as legal costs, construction professional fees, construction costs, and miscellaneous expenses such as owner elected upgrades.
- Determine how the association will finance the project. This may include, obtaining a loan from a financial institution, utilizing replacement reserve funds, specially assessing the homeowner, insurance settlement funds, recovery from the developer, or a combination of the afore mentioned.
- Obtain contractor bids and hire a qualified contractor. Interview several qualified registered contractors and solicit written bids. Evaluate all aspects of the bids, including the scope of work, warranties, references, time frames, and price.
- Conduct an informational meeting with homeowners. This meeting is to allow the homeowners to meet the construction professionals, detail how the association has reached the point of repair, and what can be expected once the project begins.
- Commence the project.
Following these steps can help in ensuring a successful project.
In order for the Reserve Study to be as accurate as possible, the Board of Directors should plan on the following:
- Review the Reserve Component List compiled by the Reserve Study provider to ensure all major components are included. For Condominiums, RCW 64.34.382(a) provides a list of components which are to be included. Any of these required items that are not included need to be listed and a basis for their exclusion needs to be provided.
- Provide information on the condition of major components, including maintenance records.
- Direct the Reserve Study provider as to any desired changes or additions (i.e., new items) in the Reserve Component List.
- Provide a copy of as-built construction drawings, if they exist.
- Provide maintenance records, component warranties, or other documentation.
- Provide the current year’s starting reserve account balance.
- Provide the current monthly contribution to reserves.
- Provide the rate of return on the invested reserve funds.
- Provide information on whether any special assessments are in place or anticipated for that year.
- Provide what reserve expenditures are anticipated for the current year.
For both Condominium and Homeowner Associations, effective January 1, 2012, per RCW 64.34.308 and 64.38.025, there is a new requirement that Reserve Study information be disclosed along with the summary of the budget. Specifically, as part of the summary of the budget provided to all unit owners, the Board of Directors shall disclose to the unit owners:
- Current amount of regular assessments budgeted for contribution to the reserve account, the recommended contribution rate from the Reserve Study, and the funding plan upon which the recommended contribution rate is based;
- If additional regular or special assessments are scheduled to be imposed, the date the assessments are due, the amount of the assessments per each unit per month or year, and the purpose of the assessments;
- Based upon the most recent Reserve Study and other information, whether currently projected reserve account balances will be sufficient at the end of each year to meet the association’s obligation for major maintenance, repair, or replacement of reserve components during the next thirty years;
- If reserve account balances are not projected to be sufficient, what additional assessments may be necessary to ensure that sufficient reserve account funds will be available each year during the next thirty years, the approximate dates assessments may be due, and the amount of the assessments per unit per month or year;
- The estimated amount recommended in the reserve account at the end of the current fiscal year based on the most recent reserve study, the projected reserve account cash balance at the end of the current fiscal year, and the percent funded at the date of the latest reserve study;
- The estimated amount recommended in the reserve account based upon the most recent reserve study at the end of each of the next five budget years, the projected reserve account cash balance in each of those years, and the projected percent funded for each of those years; and
- If the funding plan approved by the association is implemented, the projected reserve account cash balance in each of the next five budget years and the percent funded for each of those years.
Due to these new requirements, associations will need to assemble more information before the budget delivery deadlines outlined in the governing documents. Because of this, we would recommend associations have their Reserve Studies prepared earlier than they would in years past so there is plenty of time to assemble everything for the annual meeting.