Eyes Wide Open

The boiler goes down; the windows need replacing; the roof is leaking; the pointing is crumbling; the plumbing is old; and the wiring is failing. The list of potential incidents at a building is long and tiresome. The list of solutions is even longer. Ellen Kornfeld, a vice president and partner at The Lovett Company, turns pages on her personal vendor list, a 25-page document she has collected and added and deleted from over her 15 years in the industry.

"Architects, attorneys, assessors, boiler repairs, boiler replacement, contractors, electricians, engineers, exterminators," she says, flipping several pages. "The list goes on and on. There are a lot of vendors your average building needs. Just the other day I added a new electrician. He did a good job on a building, so I'm going to try him out on a few smaller jobs with other buildings."

Most managers and management companies have such a list and when a board needs help, it is to them or to their architect or engineer that they turn for suggestions. A term often heard in the public sector but not as frequently in the private sector is "prequalified." The board says: "We need someone to replace the windows on the fourth floor." The manager or architect or engineer answers: "Sure. We've got a list of prequalified vendors that we use."

For many boards they may — wrongly — associate this with the investigations that go into vendors that the city uses. The two "prequalifications" are similar but not exact. In some cases, they don't appear close at all.

So, what does it mean when your manager tells you he's got a prequalified vendor? Should you be concerned? Should you do a more in-depth investigation or rely on their word? To what lengths do you need to go to insure that the vendors you are using are capable of doing the jobs you are setting for them?

In a word, it's about forms. Logging onto the New York City Department of Housing Preservation and Development website (www.nyc.gov/html/hpd) and entering into its section for developers/vendors interested in working for the city, the applications start rolling in. And with them, lots and lots of questions:

Do you use subcontractors? If yes, list them and the percentage of work they do.

List all licenses and certificates held in the name of the company or any individual and expiration dates.

Describe your staff and their qualifications.

Describe any pertinent equipment owned by the company.

Provide references from within the last 12 months.

Provide a financial statement.

Fill out VENDEX forms. The VENDEX forms are where things really start to get serious. There are two 13-page documents, one for the corporation and one for the principals. Besides financial information, these investigate any criminal charges or claims that may have been made against the individual or company. Those include: (1) In the past five years, have you been convicted, after trial or by plea, of a misdemeanor? (2) Is there any felony charge pending against you? (3) Is there any misdemeanor charge pending against you?

Do things slip through the cracks? They certainly can, as illustrated by a recently publicized incident involving dormitories at the State University of New York at Old West. In that case, two Long Island brothers were charged with falsifying their forms, claiming they had experience that they didn't. In addition, they failed to report that a previous company they owned went bankrupt. Lying on the forms can lead to a charge of perjury. Things can go wrong, but generally, the thoroughness of the prequalifying should weed out the troublemakers. That's the theory, at least.

When it comes to life in the private sector, the qualifications and the questions seem to be a bit more vague, depending on whom you talk to. The key word isn't "forms" so much as it is "experience." Managers hear about a vendor or ask others about them, get a thumbs up, and try them out on a project or two. Some managers do have a policy that suppliers must have an affidavit on file with them, verifying that they are not under investigation or haven't been previously indicted. Others take a less formal approach.

"The knowledge of the management company is a key element," explains Donald Levy, director of management at Lawrence Properties. "They'll know or find out the vendors reputation, their reliability, the work they've done before, their pricing and quality. The proof is in the pudding. A board or manager may have worked with someone for years and you don't need to revisit the issue over and over."

While the affidavit does provide protection should something go wrong, it is difficult to verify the information, he notes. Witness the Long Island case. (Complaints against a specific vendor can be checked at the Better Business Bureau, www.NewYorkBBB.org.) "There is nothing better than years of experience," agrees Alvin Wasserman, director of Fairfield Property Services. But, he adds, that can change. Contractors especially seem to come and go with some regularity, closing down one company on Monday and opening another on Tuesday under a different name. Staffing changes as well, so the great people you had two years ago may not be the same ones entering your building this year.

The answer? Keep it fresh. Make sure that references are current and don't settle for answers from them like, "This was the greatest company I've ever worked with." Also, be open to new vendors. Trust but verify, says Wasserman. "Even though you may have good experience with someone, you still don't want to let your guard down."

In most instances in the private sector, criminal background investigations aren't performed on vendors. Nor are Dunn & Bradstreet inquiries. Real estate attorneys say this makes sense, up to a point. If you are involved in a $2,000 job, you don't want to go and spend a few hundred dollars getting a report. However, when boards start looking at projects that range $100,000 to $1 million, the extra protection can save heartache later.

Marcie Waterman Murray, a partner with Deutsch, Tane, Waterman & Wurtzel, recalls one case where a property she represents was getting $100,000 of work done on the building. The board president decided he wanted D&B reports on those companies submitting bids. It turned out that one of the companies they preferred was involved in a few lawsuits and had open accounts.

Would this have been done by the managing agent? Not necessarily. For a new company, possibly, but perhaps not with one that the agent knows well. "It's not smart to rely solely on the managers, even if you trust them and it's been proven," notes Murray. "You don't want to close your eyes, hold your breath, and jump. Boards are ultimately responsible and accountable and should have input into the process." Some boards have put complete faith in their agents and not experienced any difficulties, she adds, but attorneys have to look at the potential for problems.

As the series of kickback-related indictments in the management industry proved, there is an inherent conflict in the process. Yes, managers have the experience with the vendors but experience may breed ease. One New York City architect claims that some mangers push certain contractors to the exclusion of others, not using the recommendations of the board or engineer or architect. Prequalifying can become a joke, or at least a waste of time.

"Sometimes, they get foisted on us," the architect observes. "It's happened to me more than once. They have 'their' contractor come down in price to meet another bidder or managers pressure boards to go with their suggestion. There have been a couple of cases, for me, where it has been a horror working with them."

He also notes that often getting on a list is a matter of being aggressive — the hungry bird, not the early bird, ends up catching the worm. One trick that he has seen: company brochures that misleadingly list past projects. The outside of the property may look great in the picture, but the work they actually completed was in the basement.

Three degrees of qualification. Allan Bahn is a partner with Bahn & Multer, a former Manhattan rackets prosecutor, former New York City inspector general for construction, and former New York City deputy commissioner for construction. He recommends setting up different levels of due diligence or qualifications based on the amount of money of the job:

Under $25,000. Rely on the manager for the most part, given that there is a level of trust and comfort with him/her. Always check to see if the company is insured.

$50,000-$100,000. Do a minimum amount of due diligence. You can order a D&B report or have the vendor supply one that they pay for. They'll bill it back into the job probably, but it's less expense for the board up front. If they refuse, then you probably don't want to be dealing with them. Also, knowing any financial weakness in the vendor can change how you would schedule payments, relating them more to work performed than on faith.

$100,000 and above. Full due diligence. "This is where you can really get burned," notes Bahn. "Most contractors are honest but there is a significant portion that isn't. Look at the scandals. They all focused on kickbacks. If you do due diligence and there is true competitive bidding, then you are much safer."

So, when the manager or architect or engineer tells you that the vendor is prequalified, ask them what that means. Find out what the process is, when it took place last, if it has been updated. If it is more than 18 months old, tell them you want it updated. Not surprisingly, perhaps, get an attorney involved, he says. Having one supply a contract to the bidders can eliminate requests for additional money on the back end. Separating the level of effort and investigation like this can prevent boards from getting lost in minutia.

The best defense is an active board, observes Christopher Kelly, principal of CK Engineering. "One of the reasons co-ops get hurt is that there wasn't a clear leader or direction. Too many people didn't take the job seriously. Those that are active, delegate duties, talk, take their egos out, will be successful."

To that end, Arthur Davis, a Manhattan co-op consultant, suggests that boards have one person designated to do background checks. "That way you will have someone familiar with banks and who will know what to ask. It is good to have experience in this." The attorney and managing agent should be eager to help you develop a list of questions and major issues, he says. A simple rule: if the vendors don't respond well to your inquiries now they won't respond to them well later, either.

It is inevitable that issues and problems will arise. It is part of doing business. Most of the time these are resolved without resorting to litigation. It is important for boards to remember that verifying doesn't show a lack of trust. It shows responsibility and foresight. Vendors should understand this.

"I have a property where the electrician told me we needed a new riser in the building, probably costing a few thousand dollars," recalls Kornfeld. "We decided to get a couple of opinions and found out we could just replace some wires instead. There's no harm in getting a second opinion. If you give them business, they shouldn't get upset."

Also important is to note how the vendor responds to problems. Here, experience is the best judge. No amount of paperwork is going to tell you what will happen when the project actually gets underway or the task has begun. How the vendor has dealt with other mishaps is best known by those who have worked with the company before.

The key lesson in all this? A board needs to determine the dollar values at which it will investigate vendors more thoroughly, regardless of someone else's opinion of them. Depending on the size of the work and the expected length of the relationship, a board can decide how deep it wishes to dig. And even then, terms can be worked out if a board is impressed with a particular vendor. At least, having done its homework, the board will be going into the relationship with its eyes wide open.