Our building is planning a major renovation—how do we create a construction contract?
“The project will inevitably involve a significant amount of money so it is a very good idea to have contractors competitively bid for the work based on detailed plans and specifications you’ve prepared in advance,” says Steven Wagner, a real estate attorney and partner at Wagner, Berkow & Brandt, who represents co-op and condo boards.
The plans and specifications should be drawn up by an architect and break down the proposed work according to the different elements, such as demolition, roof repair, lintel replacement or facade work.
“The more detailed the plans and specifications, the safer you are as a board in obtaining apples-to-apples bids and making sure that all the work to be performed is included in the contract. It also helps to avoid change orders,” Wagner says.
Sealed bids supplied by a deadline
The bidding process will provide you with your best opportunity to negotiate with your contractor. Wagner recommends getting a minimum of three bids on substantial contracts and arranging for them to be sealed and given to the board by a specified deadline.
“This allows you to properly evaluate the bids and gives you an effective negotiating tool,” Wagner says.
It’s best to create a spreadsheet listing all the component parts of the work and the prices each contractor is quoting. “Typically you’ll notice one contractor is allocating more money to a particular item than others,” says Wagner. This creates an opportunity to negotiate.
If you believe a contractor is overpaying a supplier or subcontractor—and you can demonstrate this by comparing the cost with other bids—you may be able to reduce the cost with your preferred bidder.
”Contractors do not want to lose a prospective profitable construction contract and will usually go back to a vendor or subcontractor to renegotiate pricing in order to reflect a lower overall cost for you, the client,” Wagner says.
Further details on the bid sheet
On the bid sheet, you will want to identify any exceptions the contractor makes to the proposed work. For example, a contractor may identify additional work that needs to be done and isn’t yet in the scope of the work or they may believe there’s work that isn’t necessary, Wagner says.
“The contracts will require the bidders to say they have inspected the premises and are familiar with the conditions,” Wagner says. This is important in order to know the bids you are getting are accurate.
Contractors may want to make exploratory holes in walls or in the roof area to identify the condition of the building. This should reassure you that everything is being done to avoid any unforeseen conditions being identified once the work has begun.
The contract itself
The contract typically used is a form written by the American Institute of Architects but Wagner suggests making several adjustments to the document.
“This is a fixed-price contract, but you want to make sure you have unit prices in the contract and these should also be on the bid sheet,” Wagner says.
This means that if you have work being done on the facade, for example, you know the prices of lintels, structural steel per linear foot, and brick replacement per square foot.
“If additional work is required you will already have a pricing structure and won’t find yourself in the middle of the job and in an argument about the price,” Wagner says.
A contractor can apply for an amendment to the contract through a change order if it is necessary to properly complete the work, but if the contract is built on very detailed plans and specifications, you are in a better position to avoid them and possible expensive cost increases.
You also want assurance that the contractor you are offering the work to that they are the one who will actually do the job rather than subcontracting the work in its entirety to someone else. “Require them to identify all subcontractors or confirm all the people will be employed by and be on the payroll of the contractor,” Wagner says. Keep in mind that “poorly paid day laborers may not be qualified to do the work or may not be properly insured.”
If you are in a union building, you also want to make sure your contractor is supplying labor who are union members or will be responsible for dealing with any labor disruption caused by non-union employees.
Another important detail is to have a start date and completion date outlined. The dates should be readily achievable if the contractor adequately staffs the job and works day to day, Saturdays, Sundays, and holidays excluded. “The time allowed for the work needs to be reasonable and there should be fees imposed, known as liquidated damages, if the contractor does not complete the work on time,” Wagner says.
He points out the liquidated damages cannot be so high that they are viewed as a penalty. Liquidated damages should bear some relationship to the inconvenience or harm suffered. Penalties are unenforceable. Also, if there is no deadline or liquidated damages, “a contractor will be able to drag out a job if the cost for overrunning on time is meaningless,” Wagner says.
An AIA contract has provisions for terminating the contract but Wagner says it’s important to look over this with an attorney to make sure you can terminate the contract for convenience if you need to—for example, there is a labor disturbance or an unexpected problem arises.
Quality of life issues
It’s vitally important that the contract addresses quality of life issues for the residents in the building. A Tenant Protection Plan, which is required by the Department of Buildings for many jobs when a building is occupied, will outline the ways your contractor plans to control dust, noise, and inconvenience to residents but Wagner says the DOB rules requiring a Tenant Protection Plan only establish a minimum standard.
“You may want it to go beyond the minimum standard to protect the residents of your building,” he says.
Wagner recommends going into considerable detail. For example, if facade work requires doors and windows to be sealed, specify the type of tape, the grade of plastic sheeting you want used and how it is to be attached to the windows and doors. Outline for how long the precautions will be taken and when they will be removed.
“Many of the standard forms for Tenant Protection Plans stick to the minimum requirement but going into specifics, like whether mechanical equipment or hand tools will be used to avoid excessive noise and what specific steps will be taken to prevent dust are important,” Wagner says.
This is especially important now that more people are working from home.
Insurance coverage
Insurance issues are guided by whether or not there is a contractual relationship established between parties.
“You want the insurance carrier to name the co-op or condo and the managing agent as additional insured parties and state there is no requirement they add insured parties with a direct relationship with the contractor,” Wagner says. “Boards also want the contractors and subcontractors insurance to be primary and to include no ‘labor law’ exclusion,” he says. This substantially reduces the financial risk for the board in the event of an accident or claim.
The language here needs to be very specific. Wagner says having an attorney look over the contract will help ensure there is the correct coverage in place for all parties.