Construction Chaos: Protecting Your Building From Contractor Woes

When contractors walk …

SHIELD YOUR BUILDING FROM CONSTRUCTION CHAOS

When your co-op or condo board embarks on a multimillion-dollar construction project, you want everything to go smoothly. You’re relying on professional advice to make sure things go as planned, but you’re also counting on your contractor to do good work, not walk off the job, not have financial problems during the job and not have problems with its subcontractors. But what happens when things go wrong? 

POWERFUL PROTECTION. Let’s start with every board’s nightmare scenario: Your contractor walks off the job, leaving work unfinished and subcontractors unpaid. Those unpaid parties have a powerful tool at their disposal — New York’s lien law. This allows contractors and subcontractors who have improved a property to file a lien against it, creating a cloud on your property’s title. While a lien doesn’t automatically guarantee payment, it certainly gets everyone’s attention.

To guard against this scenario, careful planning is required. The first step is proper vetting of contractors. While many boards rely primarily on reputation and bid prices, investigating a contractor’s financial creditworthiness is crucial. Even the most reputable contractors can run into trouble, particularly in construction, where “robbing Peter to pay Paul” is an unfortunate industry practice. A contractor might take on new projects using payments from current ones, leaving previous jobs incomplete.

One powerful protection is surety bonding. Think of it as insurance for your construction project. Payment bonds ensure contractors and subcontractors get paid, while performance bonds guarantee project completion even if the original contractor abandons the work. These typically cost between 1% and 3% of the total project value. While that might seem steep for a budget-conscious board, it can be money well spent — particularly if your lender requires it. You can work with bond brokers to create the right package for your project’s needs.

Another essential safeguard is hiring a construction manager. While this adds cost, they serve as the board’s eyes and ears on the project, monitoring work quality, reviewing contractor records and ensuring subcontractors get paid. Don’t make the mistake of relying solely on your contractor to protect your interests — while they want satisfied customers, their primary focus is their own bottom line.

APARTMENT RENOVATIONS. Individual unit renovations present their own challenges. When shareholders or unit-owners undertake alterations, their contractors can also file liens if payment disputes arise. The impact differs between co-ops and condos. In condos, a lien attaches only to the individual unit’s ownership interest. However, in co-ops, the lien affects the corporation itself — albeit only the pro rata percentage owned by that shareholder.

This distinction makes it crucial for boards, especially in co-ops, to have robust alteration agreements. These should require prompt resolution of any payment disputes and lien removal within a specific time frame, typically 10 days. Remember that renovation mishaps can affect multiple units — imagine a plumber accidentally cutting through a pipe during a kitchen renovation, causing catastrophic water damage to a neighboring apartment whose owners are away.

AN OUNCE OF PREVENTION. Have experienced construction attorneys review your contracts and alteration agreements before work begins. While legal fees might seem like an unnecessary expense when budgets are tight, they’re a bargain compared with the cost of construction disputes. Your building’s attorney can ensure contracts provide adequate protection for timely completion and proper payment processes, while alteration agreements shield the building from individual-unit renovation disputes.