A capital improvement is “A structural addition or alteration that increases the overall value of a property. It can also increase the useful life of a property by improving its quality or strength. A capital improvement can also adapt a property to new use through upgrades or modifications.” Associations will find that capital improvement projects also enhance homeowners’ quality of life and will attract new homebuyers to the community.
Capital improvements are not the same as repairs and maintenance. The purpose of repairs and maintenance is to maintain the quality of the property such as sealing cracks on paved roads, repairing gym equipment and HVAC cleaning and service. Examples of a capital improvement would include replacing your roof, new cladding and constructing a new deck or balcony, among others. Even with regular maintenance, most components of a property will deteriorate over time and will need to be replaced.
Homeowners’ monthly dues are typically routed through two accounts, the operating, and the reserve fund. Your operating fund pays for the day-to-day expenses of the association. This includes the maintenance and repairs of common areas. From income generated each month, the association also deposits a certain amount into their reserve fund which serves as the association’s savings account. The association will use reserves to fund capital improvement projects and emergency expenditures.
With larger capital improvement projects, you may need to get approval from the association. For example, some governing documents require that the board has homeowner approval for any capital improvement project that is greater than 5% of the annual budget. As a precaution, consult your manager/management company or attorney before undertaking major financial decisions. If a capital improvement project requires a one-time special assessment, this may take months to attain. This is another reason why planning for capital improvement projects requires foresight and proper financial planning.
A reserve study is a critical budgeting tool and an indispensable part of running an association and should be prepared by an engineer or architect that is specifically trained and/or certified in the creation of reserve studies. Reserve studies gauge the condition of the association’s current reserve fund to help the board get a more accurate picture of their finances and plan a long-term budget for capital improvement projects such as new roofs. A reserve study plays a pivotal role in assisting the board make the best financial decisions regarding the organization’s future. Generally, a reserve study consists of two parts:
- Physical Analysis. This portion of the study assesses the physical condition of community areas that an association is responsible for maintaining and repairing. It describes their quantity, condition, typical useful life, and an analysis of the probable repair or replacement costs.
- Financial Analysis. This portion of the study assesses the association’s financial health, such as its revenues, expenses, and reserve fund balance. The financial analysis measures the impact of maintaining and replacing key components over the next 20 to 30 years and recommends a reserve funding strategy to make sure adequate funds are available when needed.
The decision to proceed with a large project is a commitment to the extra time and funds required to get the job done. Depending upon the size and scope of a project, an association may use reserves to finance the capital improvement, or a bank loan may be necessary. The bank will conduct a preliminary financial assessment to determine credit quality of the association. This process typically takes no longer than one (1) week and involves a variety of factors, such as association size, delinquency ratio, assessment increase required to cover the debt service and loan to value. Check your association's governing documents to learn if a vote of the membership is required for official loan acceptance. It is important that all members understand the loan is considered an unsecured commercial loan to the association using the association’s balance sheet. It is not a loan to the individual members of the association and does not affect any homeowner’s personal credit.
Hire and engineer or architect to create drawings of construction details and provide a bid specification. These bid specifications are sent to several contractors to acquire “apples to apples” proposals for the board’s review and comparison. Keep in mind that the best contractors are often booked months in advance and some projects are temperature and weather dependent.
Requests for Proposals
A request for proposal (RFP) is an announcement that a community is interested in receiving proposals for a particular project. The RFP should be used primarily for larger purchases or for ongoing services.
The RFP packet includes:
- The bid specifications or detailed instructions about the products or services requested
- Information about the association that the contractor will need to prepare a bid
- Information about work conditions
- Requests for information about the contractor that will help the association evaluate the contractors ability to perform the work and meet the specifications
Preparing an RFP Packet
1. Gather preliminary Information:
- Conduct a thorough site review of the area(s) where the work is to be done. This may last 3-4 weeks.
- Outline the work to be done in detail. For contractors to provide accurate bids, they must have Complete details. This may include consulting with a professional engineer or architect.
- Specify the materials to be used, and where the materials will be stored
- Set a realistic deadline for completion of the work
2. Compile a complete RFP packet which includes:
- The full name, address, and telephone number of the association
- A detailed description of the work to be done (bid specifications)
- Key dates
- Whom to call for information or inspection of site
- Where to submit the bid
- Request for three to five references from previous jobs of similar size and scope
- Warranties required
3. Review for accuracy and thoroughness:
- Ensure that all your bidders are bidding on the same job
- Ensure the specifications are complete and accurate so the work doesn’t end up costing far more, taking much longer than you planned, or creating disputes with the contractor
4. Conduct a pre-bid walk-through
- Review each bid to verify that it conforms to your specifications.
- Check each bidder’s references.
- Check each bidder with your local Better Business Bureau and the local Office of Consumer Affairs to see what type of complaints they have received, if any.
- Verify insurance compliance and obtain original certificates of insurance.
- Verify licenses (if required).
- Eliminate any bids that are unacceptable based on steps #1-5.
- Compare the remaining bids in terms of price.
- Recommend a contractor to the board based on the following criteria:
- Demonstrated understanding of what needs to be done
- Possession of the necessary qualifications to do the job
- Reasonable price
A contract is an agreement between two or more parties, enforceable by law, by which each party promises to do, or not to do, something.
Key Elements of a Contract
Parties to the Contract
A contract should state the complete names, addresses, and telephone numbers of the two parties to the contract. The community association, not the management company, should clearly be identified as one of the contracting parties.
Scope of Work
- Requirement that the contractor conform to applicable codes, industry standards, or manufacturers specifications.
- Requirement that the contractor provide sufficient employees necessary to perform the scope of work as described in the contract.
- Requirement that the contractor clean up after the work is performed and restore the common elements or areas to their prior condition.
- Exact location where work is to be performed.
- Working hours.
- Provisions for tools and equipment; include security, storage, insurance, rental, and repair terms.
o Quality, type, quantity, color
o Who provides them
o Delivery and storage
o Who provides insurance coverage
o Disposal of leftover materials
o Who is responsible for security and for any missing equipment
- Job site safety requirements
- Total agreed-upon amount that will be paid for the product or service
- When payment(s) will be made
- In what manner payment(s) will be made
- On what terms payment(s) will be made
- Amount of retainage if any
- When the work is to begin and when it must be completed
- Provide for liquidated damage payments by the contractor, or reduction in cost if the contractor is responsible for not meeting the deadline
Standard of Performance
- An objective standard against which a contractor’s work can be judged
- A promise or guarantee that parts, materials, or labor will last for a designated period
- A warranty should state:
o What is covered
o Length of warranty
o What is not covered
o What the contractor will do if the work or product proves defective
- A clause stating that if the contractor’s employees, agents, or subcontractors damage any common or individual property in the community while performing contracted work, the contractor agrees to fully restore the property to its condition prior to the damage.
- A clause stating that the contractor will indemnify and hold harmless or reimburse the community association for any amount the association is required to pay because a claim was made against the association because of the contractor’s work, as well as for any legal costs associated with defending the association against any claims.
- A requirement that the contractor have all necessary insurance for the project, including liability,workers’ compensation, and vehicle insurance.
Licenses and Permits
- A requirement that the contractor demonstrate to the community association that it has the necessary licenses and permits for the work before work begins.
- A requirement that the contractor be required to comply with all federal, state, and local laws, regulations, or codes that are applicable.
- The names and addresses of the individuals representing both parties for the purposes of that contract.
- A way for the community association to extricate itself from a contract if it so desires.
- What constitutes a default or failure of either party to fulfill the terms of the contract?
- What each party’s rights are if the other defaults.
- A provision for the community association’s financial protection if the contractor should default.
- Performance bond: A guarantee by a surety (a third party) to protect the community association if the contractor fails to perform or finish the work.
- Payment bond: Usually included with the performance bond, a guarantee by a surety that the contractor’s suppliers and any subcontractors will be paid if the contractor does not pay them to protect the association from having a mechanic’s lien placed against them.
- Waiver of lien: A document giving up the right to make a claim against the community association for payments not received.
- Have the association’s attorney review the proposed contract before it goes to the contractor.
- Present your association’s contract to the contractor that the board selected.
- The contractor’s representative will either sign it “as is” or propose changes.
- Negotiate any changes the contractor proposes, have the attorney review them, and have those changes initialed by the contractor.
- Present the initialed version of the contract signed by the contractor’s representative to the authorized community association representative for his or her initials on any changes and signature on the contract.
- The president and/or secretary of the community association should sign contracts on its behalf. As a manager, you should not sign a contract as you are not the party entering into the agreement, the community association is.
- Give the contractor and the board copies of the contract signed by both parties.
Tips on Successfully Completing a Contract
- Monitor the job site while work is in progress.
- Inspect the completed job before final payment.
- Prepare a payment schedule if you are going to make progress payments.