PLAIN TALK—REHABILITATION GLOSSARY AND COMMENTS ABOUT BEING CAUTIOUS
HERBERT H. FISHER, ESQ.
It is inevitable. The ravages of time, and the natural elements, take their toll on buildings and their related common areas. Sooner or later the buildings and surrounding improvements must be repaired or replaced. Boards of Directors are prone to leave what appears to be a complex process to their management company, a retained construction manager, a general contractor and/or an architect, only to be disappointed when costly surprises pop up during or after the performance of the work.
One of the handicaps that housing cooperative officers and board members face is that they are confronted with terms they do not understand. Terms of art, words that have particular meaning to those familiar with the construction industry, may as well be Greek to the average layperson.
I often thought that if Board members had a glossary of construction terms available to them, how much simpler and less time consuming the contracting process would be. Moreover, communication between all the necessary parties would be less fraught with misunderstandings, some of which go undiscovered until after all the activities have been completed (and sometimes even after the applicable statutory or contracted statute of limitations have expired (here we go with the first “buzz” word of the trade)). See statute of limitations below.
So let’s try our hand and see if my assumption is correct.
GLOSSARY OF TERMS:
Approval: An “OK” needed from the architect and/or owner, as required, for specific situations provided by Contract. There are no built in approvals unless provided for by Contract.
Architect: A person trained in the art of design and construction of physical structures. A licensed architect is an architect who has been licensed by the state or jurisdiction in which he does business, as required by state statute. Out of state architects may be permitted to do business in a state other than where licensed with regulatory limitations.
AIA: American Institute of Architects. A voluntary membership trade association with industry-wide stature providing standardization and documentation to the practice of architecture.
Architecture: The art of design and construction of physical structures.
Bids: Responses from contractors on a Bid Form prepared by the Architect or Engineer seeking pricing for the Work described in the Plans and Specifications. Caution: Technically, once the owner accepts the bid without any other qualification, it can be construed as a binding contract enforceable against the owner. Although it is customary in the industry that the acceptance of bids are subject to the negotiation of a full contract, it is advisable that the Bid Form so state and that acceptance is conditioned upon a board resolution approving the bid.
Bond: Payment: To pay for job in event general contractor fails to do so. Completion: To pay for getting the job done if contractor fails to do so
Builders Risk: A form of insurance coverage that covers risks of loss during construction which property loss and general liability insurance policies may not covered. E.g. loss of work in progress will not be covered by property loss insurance or work related injuries may be excluded from general liability coverage.
Completion: Partial: Completion at a specified point in the Work defined by the Contract, usually in the provision governing payments; typically payment is due when a certain percentage of the total work is done, or a certain part of the project is done.
Completion: Substantial: When the Work required by the Contract has been done but for certain minor and insubstantial items which do not interfere with the use of the improvement. These minor and insubstantial items, revealed by on-site inspection performed by the contractor and the owner’s representative, are referred to as “punch list items”. The punch list items are corrected prior to final payment. At the point of Substantial Completion all funds have been paid, except retention.
Final: When the punch list has been completed and retention is paid.
Contract: A written document providing the purpose, terms and consideration or price of the transaction.
Architectural: Between an owner and an architect to provide architectural services
Engineering: Between an owner or architect and an engineer to provide engineering services directly to the owner for owners use, or with an architect or another engineer in support of the first architect or engineer. Engineers fall into specialized categories like structural, mechanical, electrical, etc.
Construction: Usually between an owner and a party to provide the material and do the work or provide the work to achieve the construction or rehabilitation (reconstruction in whole or part) of a structure or structures. Oft times just referred to as The Contract. May be a Rehab Contract, Repair Contract
Construction Party hired by owner to supervise the Work to be provided by others. All Manager: trades or all parts of the part are done by contractors who are prime contractors and not sub contractors.
Contractor’s Insurance Liability and Workman’s Compensation: insurance provided by the General Contractor and General Contractor’s sub contractors.
Contractor’s Sworn Statement: An itemized statement, usually broken down by trades, listing who is doing all of the segments of the Work and all materialmen contracted for by the contractor and showing the amount charged for Work or material.. Delivery to the Owner before any Work starts is the initial step towards providing maximum protection for the Owner.
Draws: Term for requesting payment. If not otherwise specified, when the work is completed.
Job: The Work contracted to be done, including materials, needed to be done to achieve the Owner’s desired results..
Materialman: The vendor of materials or supplies used in the project.
Plans and Specifications: The Plans or Drawings and Specifications prepared by Architect or Engineer. Plans are sometimes referred to as Drawings. The Plans are drawn picture of the area on which work will be done from the entire building or property down to each room or wall to the extent detail may be needed for the notations to be readable. The Specifications are the written compilation describing everything from the condition of the work place, how work is to be performed, the materials to be used and sometimes even the equipment to be used in the performance of the job.
Project: The specific job, group of specific work needed to achieve the owner’s goals.
Rehabilitation or Rehab: Where the work is not for new construction, i.e., building of new structures but the repair of existing structures.
Retention: An amount of money withheld from each draw to protect the owner in event of difficulties on the job or the Contractor’s default. Usually this amount is 10%. It is a common practice to reduce the percentage to 5% when 75% or so of the job is done. Caution: This reduction should be approached cautiously and be conditioned on there not having been any problems on the job, such as stop work orders, a pattern of defective work, etc., recognizing that if the owner has to pay for incomplete or corrective work, it will, in all likelihood, be more expensive than originally priced.
Specifications: The written description of the Work to be done, including detail as to how certain parts of the job are to be done, if not standardized, and what materials and equipment are to be used in doing the Work. Usually prepared by the Architect or Engineer
Statute of Limitations: Time period within which a law suit can be filed set by state law. This period can be shortened by contract.
Sub: The contractor, usually in a specific trade or phase of the project, who is hired by the General Contractor to provide labor and material for that particular part of the project.
Warranty: Normally given by provider of materials. Some warranties are conditioned on their being installed by manufacturer approved contractors or n a specific way. Most warranties are limited warranties which means there is list of exceptions when the warranty will not apply. Get specimen copies of warranties before the contract is completed. Consider making them exhibits to the contract.
Work: What is needed in way of labor, material and equipment to do the Job.
Waiver: A document required by statute where contractors, subcontractors, materialmen, architects, engineers, deliverymen, surveyors and possible others who render service resulting in enhancement of property value relinquish rights to place a lien on the property which can result in foreclosure to force the sale of the property to satisfy the debt for the unpaid service. See Contractor’s Sworn Statement
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COMMENTS: The process begins when the Cooperative determines it needs to have work done. The Cooperative or its agent contacts a contractor to do the job, whereupon the contractor will visit the site, and some time thereafter, submit its proposal to perform the work contemplated. Very often the proposal contains only a brief statement of the work to be done and the price. Prudence, however, dictates that the agreement should also provide at a minimum:
a specific description of the work; a starting date and completion date; warranties for material and workmanship; insurance requirements; who and how often is construction debris removed and at whose expense a representation by the contractor that the work will be performed in a manner so as to minimize disturbances to the residents; a representation by the contractor that he will not damage any part of the property not otherwise earmarked for demolition; permits to be secured, if required; and a schedule of payment, to include the number of installments, frequency and amount of each disbursement, and the conditions upon which payment will be made, usually inspection and approval by the Cooperative or its representative.
Alternatively, if the work contemplated is complex, or if it involves the basic structure of the building, the cooperative should hire an architect to analyze the problem and make recommendations as to scope of work needed; and upon owner’s approval, draft plans and specifications. Once the plans and specifications have been completed, Contractors will bid on the job as described in the plans and specs. Thereupon the Cooperative , with the advice of the architect, will select a contractor to do the job and a contract will be drafted, based on the plans and specs, with terms to include the minimum conditions set out above.
Work Inspections: Once the project commences, someone, acting on behalf of the Cooperative, needs to check on the execution of the work to confirm that the work has been performed in accordance with the contract. This job is best left to someone familiar with construction or repair techniques and materials, as well as any applicable building code requirements. If an architect is involved, the architect will inspect the work. Usually, the inspection takes place only when the contractor has notified the Cooperative that it has completed the work, or an agreed upon stage of the work, and that the contractor is thus entitled to payment.
Payment and Waivers: Every State in the Union affords unpaid contractors and materialmen a claim enforceable against real estate whenever such persons have expended labor or supplied materials in connection with the improvement of the property. This claim is known as a mechanic’s lien.
In order to avoid problems arising out of any such claims, the Cooperative must insist that the contractor identify all subcontractors and materialmen involved in the work, detailing the amount owed to each. It is vital that this information is received by the Cooperative PRIOR to the issuance of any payment.
The disclosure usually takes the form of a sworn written statement or affidavit, and need to be accompanied by legally sufficient written waivers of lien, who provided labor or material or services or equipment to the job signed by everyone.
Types of Contracts: Just because a document bears the name “Contract” do not assume that your interests are adequately protected.
The simple, pre-printed contract supplied by a contractor usually says nothing but “I will do the work and you pay me.”
The more sophisticated AIA contract forms are better. However, in my opinion, and the opinion of other owners’ lawyers, these documents strive to protect the architect and the contractor to the utmost, but not necessarily the Owner.
For example, while there is language in the AIA forms creating a principal - agent relationship between the architect and the Cooperative, the AIA documents make it clear that the Cooperative retains the architect in order to utilize his expertise in the design and construction of physical structures, and NOT to act as the eyes and ears of ownership in the day to day supervision of the general contractor and the work. Simply put: the architect is not contractually bound to the Cooperative to be its agent for that specific purpose.
Bonding: Oft times a job is too small to justify the bond premium or the bond premium gets to be too big because of the large dollar amount of the job. Premiums are set depending on the insurance company’s evaluation of the contractor. In Chicago area, they usually start at 1% of the contract amount. Thought should be given to require the bonding at Owner’s option requiring the Contractor to get a quote. This allows the Owner to get an insurance company’s evaluation of the contractor. It answers the question “Are you bondable?”
Insurance: In short, pay attention to the insurance carried by the contractor, and require that the contractor require all subs (all parties coming onto the Cooperative’s property) to carry similar insurance. Watch the insurance limits. Be sure they are compatible of what should be carried in your area based upon what verdicts are coming through your local court system where any case against you will be tried. Strive to pass potential risks arising out of the work to the contractor’s insurance company.
This is done by being named an “additional insured” on the contractor’s policy.
The contractor’s policy should provide the Cooperative with primary and contract liability coverage and waive any rights to be reimbursed in whole or part by the Cooperative or the Cooperative’s insurance company.
The contract should provide a provision that the contractor indemnify the Cooperative for any claims arising out of the Contractor’s work on the premises and the contractor liability coverage may be needed to provide insurance funding for that indemnification undertaking.
The extent that a cooperative may wish to bargain for more is a matter of negotiability in a particular locality. The courts have been loaded with cases dealing with policy coverage for additional insured's dealing with insurance companies revising policy language to attempt restrict a contractor’s policy’s exposure to additional insureds.
Are you now ready to take on that contract? And the contractor? And the architect?