By Stephen Varone, AIA and Peter Varsalona, PE
I’m the president of my co-op building in Upper Manhattan, and we recently selected a contractor to undertake an extensive exterior repair and roof replacement project. The contractor has told us that to save both sides the time and legal fees of drafting and reviewing an official contract for the job, the bid documents could serve as the agreement since they specify the exact scope and cost of work to be done. Does this provide us with sufficient protection, or do we need something more formal? What key items should be included?
Construction documents, i.e., the drawings and specifications that spell out where and how building repairs should be made, are an indispensable part of an exterior renovation contract. But by themselves, drawings and specs do not address many critical issues, such as payment terms, insurance, dispute resolution, subcontractors, safety, and supervision. Therefore, it’s essential that contractors work from a signed formal agreement that specifies key terms and conditions inherent in every exterior repair project. Working without such an agreement puts the building, its residents, and the cooperative’s funds at risk.
Drafting a Contract
The first issue to address is who should draft the contract. Owners should be wary of agreements that contractors present to them because it’s possible they will include terms that override the engineer’s specification standards (which the contractor agreed to when he submitted his bid.) Also, contractors typically do not have legal counsel on staff and often prepare sub-par contracts containing inadvertent mistakes and omissions.
Contracts should be based on a set price, not on time and materials.
A good starting point for drafting a contract, and the industry-accepted standard, is the American Institute of Architects Standard Agreement between Owners and Contractors, A101 and A201. The board’s attorney will usually want to add a rider that modifies existing items or adds clauses not included in the standard AIA agreement to provide greater protection for the owner. The project engineer/architect should also include general conditions in the bid package that specify standard practices and procedures to be followed during the course of the project.
A contract should always be based on a set price, never on a time-and-material basis. While a set-price contract may subsequently need adjustments because of change orders, payment for work completed is easier to quantify and control than an open-ended time-and-material arrangement, in which costs can quickly escalate.
The following are just some of the many items we suggest be specifically addressed in every contract, above and beyond the standard wording in the AIA A101/201 agreement:
Guarantee: Contractors typically offer a one- or two-year guarantee on their work. On most exterior projects, owners should ask that the work be covered for at least four and preferably five years, and roofing replacements should provide a 15- or even 20-year No Dollar Limit manufacturer warranty.
Down Payments: Contractors often ask for a 10 or even 15 percent down payment. On a typical exterior repair project, however, labor is the highest cost by far, so owners should insist that payment be made for completed work only, with no down payment at the start of the job. Similarly, contractors may claim that they incur costs for materials, shipping, and storage, but for most exterior repair jobs, these costs are a small portion of the overall fee and therefore should not require a payment from the owner until the items are installed and functional. The one exception is if the contractor has to buy pre-fabricated specialty items, such as a cornice or railings. In such cases, a down payment on that item is reasonable.
Payment schedule: Contracts may ask to be paid within as little as seven days after the owner receives the approved payment application. A more reasonable timeframe is 20 days from the time the engineer/architect receives it.
Change orders: If a change order increases a particular work item by more than 10 percent of what was originally specified in the bid document, it is a good idea to ask that the unit price be renegotiated. Of course, it must be made abundantly clear that the contractor should not do additional work without a change order signed by all parties.
Liquidated damages: Contractors will finish those jobs for which they have to pay damages for work not completed on schedule before those jobs where they don’t. Owners should therefore ask for liquidated damages in their agreements. A reasonable approach is to have the damages begin to accrue two weeks after the agreed upon completion deadline. Typical liquidated damages would be one percent of the contracted amount per calendar day with a $500 per day maximum on most jobs.
Retainage: The best way to make sure that the owner stays in financial control of the project is to “retain” enough money to be used to pay someone else to complete the work if the contractor defaults or other disputes arise. Typical retainage is 10 percent of the value of the completed work, held for at least 30 days after the project is completed.
Dispute resolution: Many attorneys choose to delete clauses from the AIA agreement that call for the parties to settle disputes through mediation and arbitration. Some boards, however, would rather keep open the option of working things out in a non-binding manner before going straight to a lawsuit. Discuss with your attorney which style best suits your cooperative or condominium.
Scheduling for adverse weather: The agreement should not allow the contractor to extend the project schedule because of adverse weather conditions, except for winter shutdowns. Rather than trying to keep track of every incident of rain or high winds over the course of the project, a reasonable allowance for inclement days should be figured into the schedule in advance.
Insurance
Protective liability: Many board members and property managers are unaware that the latest (1997) version of the AIA agreement stipulates that the owner does not require the contractor to include the owner and engineer/architect as additional insureds on the contractor’s liability insurance. It is recommended that this clause be stricken, as well as the requirement that the owner must reimburse the contractor for providing the additional insured protection.
Consult with an attorney when drafting an agreement with a contractor.
Types and amounts: 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.
Rand typically suggests 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.
Bonds: The need for a performance bond, which covers the cost of hiring a new contractor if the contractor fails to perform the work, is reduced if the owner has not made a down payment on the project. Still, for large projects (several million dollars or more), the owner may want a performance bond as well as a labor-and-material bond, which covers the owner against claims that workers, subcontractors, and suppliers may file against the property. Owners can expect to pay anywhere from 1½ to 3 percent of the project cost for these bonds. Keep in mind, though, that if the contractor doesn’t finish the job, the bonding company—not the owner—selects another contractor to complete the work.
Supervision and Safety
On a typical exterior repair project, the contractor is solely responsible for supervising the job, for the means and methods used, and for site safety. The contractor should also be required to have a full-time superintendent at the site. (For a smaller project, a working foreman will suffice).
Project superintendent: The project superintendent is responsible for the entire project and must speak fluent English, keep the construction documents on hand at all times, and maintain a daily log indicating the date, the number of workers at the site, and the specific portions and location of the work completed on that day. On very large projects, it may be beneficial for the owner to hire a construction manager at additional expense. In such cases, the role and responsibilities of each party must be clearly spelled out in the contract.
Site visits: The AIA agreement states that the engineer/architect will visit the site at “appropriate” times, but does not specify what “appropriate” is. You need to decide upon the level of involvement your project will require. On most Rand projects, we typically visit the site two to three times a week during construction. Remember, the typical contract does not establish a “supervisory” role for the engineer or architect, so if you’re looking for this level of involvement you may need to modify your agreement.
Site safety: The contractor must follow all Occupational Safety and Health Administration guidelines to protect workers, residents, and pedestrians. According to New York City DOB regulations, the contractor must also engage a licensed professional engineer to design and approve the sidewalk shed and scaffold installation. If the building is more than 100 feet high, the sidewalk shed must extend 20 feet beyond the building on both sides, even if it extends onto your neighbor’s property. As a general safety practice, the contractor should use motorized electric scaffolds, not scaffolds hoisted by rope.
Owners, property managers, residents, architects, and engineers must be careful about giving safety instructions in the field because workers may assume that person is responsible for site safety, even if the contract states that the contractor is solely responsible. Only general observations should be given about any perceived hazards that happen to be observed, not specific safety directives on how to correct the situation.
Subcontractors: To stay competitive in the building industry, the use of subcontractors by repair and restoration contractors is sometimes unavoidable. Yet, many contractors are reluctant to acknowledge that they often must rely on subcontractors, so they would rather not address the issue in the agreement with the owner. Instead of ignoring the issue, it’s best that both sides be upfront about subcontractors and stipulate acceptable conditions for their use. One such provision is that contractors must request approval in advance from the owner and engineer/architect before using subcontractors, and the owner should not have to pay for the cost of replacing a subcontractor deemed unsatisfactory.
There may be other items particular to your building that the board may want to include in the contract. That’s why it’s best if you consult your attorney when drafting the agreement to make sure that all key concerns are addressed and adequate protection is ensured.
Stephen Varone, AIA is president and Peter Varsalona, PE is principal of RAND Engineering & Architecture, DPC. This column was originally published in the May 2004 issue of Habitat Magazine.