Due Diligence on Capital-Improvement Projects: Some Easy Steps
Dec. 16, 2009 — How does a board avoid a construction dispute regarding the performance of a major capital improvement project? The short answer: due diligence.
Take this real-world example. The board had selected an engineer to prepare specifications and perform oversight for a major capital improvement project. He was. unfortunately, unfamiliar with municipal requirements and/or local guidelines mandating certain approvals from both the Department of Buildings and the Board of Health. The project had to be stopped midway through for the submission of revised plans and approvals for the latter.
To obtain Board of Health approval, the building needed large-scale corrective remedial repairs. The process incurred unnecessary expenses that resulted in extensive delays.
The contractor claimed not to be at fault, since he followed the engineer's specifications and received payment approvals. The engineer asserted that the corrective repairs were simply added-value items required for the project and the board would have incurred these expenses if the specifications had been correct. The board threatened litigation against the engineer and contractor, and negotiated significant reductions in both the engineering fee and the cost of the repairs.
As a board, you need to perform due diligence with your manager in identifying the specific scope of work, establishing a budget, and engaging a construction expert (either an engineer or architect) for preparing specifications for your capital improvement project. This should be done in conjunction with the selection of a contractor.
Just as there are doctors and attorneys with designated medical specialties or areas of legal concentration, the same is true for engineers and architects. Certain professionals have an expertise or an area of specialization and who are well-versed in particular construction issues, whether in involve, say, the heating plant, the masonry facade, an electrical upgrade, or a swimming pool. Particular professionals may have more experience or knowledge than others when it comes to the requirements of the municipality or the Department of Buildings.
So you need to choose wisely and conduct interviews with both the prospective experts and the contractors, as well as check references and experience. The scope of work designated in the specifications is critical to the success and performance of your project; this includes
- the scheduling time of start and finish
- progress payments, retainage and penalty provision
- amount of insurance, workers compensation, umbrella coverage and deductible limit; and
- the type and length of guaranty/warranty.
Using the standard American Institute of Architects (AIA) construction agreement presents certain issues, since the AIA General Conditions require significant revisions in order to properly protect the owner building. Accordingly, it is recommended that your attorney revise it and/or prepare a rider or an entire separate agreement that does not incorporate the general conditions, which are not necessarily owner-friendly.
Using an expert and/or the manager to perform oversight and supervision of critical stages of the project and approve payments is both necessary and essential to success since it enables you to confirm compliance by the contractor with the specifications, as well as his or her adherence with manufacturer's requirements, in conjunction with the issuance of the manufacturer's warranty.
The lesson: Proper, prior preparation prevents poor performance.
Attorney Ronald A. Sher is a partner at Himmelfarb & Sher
Illustration by Danny Hellman
Adapted from Habitat November 2009. For the complete article and more, join our Archive >>