Risky Business

The board of the small Manhattan building went for the cheapest bid - but not really. Its members looked at plans for storage bins that were to be built and chose what looked to be the most inexpensive. But then, after, they were built, the bins came in at $1,000 apiece - not the $600 each as promised - which was roughly the same price as the other two bids that had been turned down.

What happened? Simply put, a low ball became a fastball and the building got shortchanged. The board didn't do its homework, or didn't understand the numbers, or didn't understand the right questions to ask. It went for the cheapest, not necessarily the best, bid.

Take another example. Nearly a decade ago, John Dew's co-op, the Clinton Hill Apartment Owners Corporation in Brooklyn, embarked on an extensive parapet restoration. The parapets on all 12 buildings in the co-op complex needed to be repaired. The board, however, didn't do its homework on the contractor. It also went for the cheapest bid, and the results showed. "As the first building was underway, we received reports that the work being done was substandard, so the work actually stopped for seven years."

When Dew was elected president five years ago, he inherited the contract and all the headaches. "We had to do a wall destruction to demonstrate that the new parapets were done in a substandard manner. We then had to negotiate a release from the contract, and bring in a new contractor." The work was finally completed, but the lesson was one that wouldn't be forgotten: cheaper is not always better. Boards have to do their homework.

When it comes to doing capital projects, boards want to get the most bang for their buck. But sometimes the cheapest bid can hide the biggest risk, and boards need to know when it's time to take the low bid, and when it's not.

"What frustrates me is that it always seems to be about the number," says Stephen Varone, director of operations at Rand Engineering, a consulting engineering and architecture firm that specializes in co-op and condo repairs and alterations. "There isn't enough paying attention to the quality of who's giving you the bid."

In comparing bid prices, observes one contractor, "Most boards like to stick their heads in the sand. They don't want to look any further than what's superficial. So if they get a number that's particularly cheap - of course no one wants to get a large assessment - they go for the cheaper number."

RFP AND COSTS

Of all the costs incurred in running a building, there are three that top the list: replacing the boiler, renovating the lobby, and fixing the exterior of the building. The cost and complexity of big ticket repairs, such as a lobby renovation or roof repair job, can easily overwhelm a board to the point where they are just looking for the fastest, easiest, seemingly cheapest way out of the problem. And it's at that moment, observes Anthony Colao, president of Flag Waterproofing, that boards are at their most vulnerable financially. "The owner doesn't see the problem until they get burned."

The process starts with the "RFP," the request for proposals. For big jobs, the smart board should hire a consulting architect or engineer, have him or her meet with the property manager and the board to work out the specifications of the project, and, above all, take the time to make sure the board members understand the scope of the project, so concerns are allayed and any questions are answered.

After meeting with the board, the consulting architect or engineer puts out an RFP on the project's specifications. The bids are submitted, opened and, again, reviewed with the board members. "We do not send bids out to companies just for the sake of obtaining bids - only to qualified contractors," says Burton Wallack, president of Wallack Management. Once the board reviews the bids, "We recommend they choose two or three contractors to interview. You go through the bids. You ask them, No. 1: how did they arrive at their bid? If there was a variation, why it was done this way. And, we put in our contract that all work must be done by the contractor, unless it is steel work. If they are going to sub, they must name the subcontractor in advance, so we can review who the contractor and the subs are."

When reviewing bids boards, the architect/engineer, or the agent must design the RFP so that they are comparing apples with apples "As long as everybody is the same caliber contractor, then you can go for the best bid package, the lowest bid," says Steve Greenbaum, director of management at Mark Greenberg Real Estate. "But when you are dealing with contractors who are not fully staffed or brand new, or they are not really professional, then you are dealing with a whole different thing."

Recently, Colao prepared a $790,000 bid on an exterior restoration job on a six-story building in Queens for roof repair, parapet work, and pointing. Of the five bidders, four were at his end of the scale, says Colao, while the winning bidder was $500,000. "When that happens, there is something wrong. Either he bid the project improperly or he's using subcontractors that are not insured. It can't be apples and apples. Whenever a board sees one number out in left field, and they go for the carrot, it always bites them in the back."

Maureen Buja, president of a 120-unit co-op on East Eighth Street, has learned the hard way that it is critical that a board understands what it is reading when soliciting bids for building repair. "History tells us," says Buja, that going with the cheapest bid isn't always the answer. A decade ago, the building had a capital improvement plan worked out to do an expensive roof repair. Then the boiler went bust, and the building's money was used to replace it.

Now the property is at a critical point: the roof has to be fixed and the money has to be found to do it. But the building is lucky: along with a competent management company to guide it through the project's process, the board is able to rely on the expertise of two shareholders who are familiar with the construction industry. A wide net was cast for contractors, including contractors recommended by shareholders, and the board combed through the contracts as they came in, querying the bidders on how they arrived at their numbers.

That was critical. "You have to understand what you are asking for," says Buja. "Doing pointing on a building that's a block long is different from doing it on a little house. You have to have people come in and explain what the necessary work is."

The initial bid range ran from $160,000 to about $360,000. The board selected a contractor who bid $180,000 and negotiated the price down to $165,000. "It wasn't the bottom line that drove us initially. It all sort of fell out in the end. We had a good volume of thing to judge [the bids] by." And, also, "We were lucky to have people helping us who had experience with things that went awry."

SUBCONTRACTORS

One of the key issues that can cause problems and cost increases is the use of subcontractors. In order to take on more jobs, contractors frequently farm out some of the work to "subs." Hiring a company that subcontracts can lower the price on a big job, sometimes by thousands of dollars, sometimes by hundreds of thousands of dollars.

The primary reason for that, says Varone, is the weather and the cost of insurance. "It's hard to keep these firms fully staffed 12 months of the year, when you have 11 jobs going in October and none in January. That's one of the reasons traditionally [that] you sub - you couldn't guarantee pay." The reason now that more and more companies are subbing out work is because of the cost of insurance. "The cost of insurance is astronomical and the insurance is based on how many people are on staff."

A contractor who subs out his work can submit lower bids than a company that uses its own employees. The reduction in savings makes the lower bids extremely tempting for boards that want to keep assessments down and a reserve fund secure. But what looks great on paper can fade in reality and turn into something quite different: shoddy work, expensive change orders, and a lack of proper insurance for the subcontracting crews who are working on the site day to day.

Another reason contractors use subs is the high cost of insurance. For the past 16 years Joe McCallion, president of Upgrade Contracting, has been doing exterior restoration work, including waterproofing and roofing. Over time, he has seen insurance costs increase fourfold, from $30,000 a year to $70,000 to the current price of $120,000. McCallion subcontracts specialty work on a job, like bridging, but uses his own employees for the rest. And the cost goes directly into the bids that he submits. On any bid, five to seven percent of the total is to cover his liability on the job.

"If I am doing a $1 million job, $70,000 of that is for insurance," explains McCallion. "I don't understand how these [other] guys are doing it, and supervis[ing] the job right, and hav[ing] a foreman, supervisor, project manager. It's aggravating. We have the right insurance, we pay our guys a good rate, and the only jobs we are getting is pretty much repeat business - they like us, they know our work - and word of mouth."

It is cheaper to go with a subcontractor, because that reduces the contractor's overall insurance costs. "They [the subs] are small companies," explains Colao. "They operate out of one or two vans and most have the minimum limits of liability." But that raises a new problem: many subcontractors don't carry the proper coverage, and boards don't realize they are vulnerable until an accident happens.

"Most people are not sophisticated enough to ask for an insurance certificate that delineates the work being done. Often enough you will have a guy with a certificate of insurance for painting the inside of the building. But he's hanging the scaffolding on the outside of the building, and most likely his policy has an exclusion for that kind of work. So there is no coverage when there is an injury or property damage." The co-op doesn't see the detriment until it runs into problems.

Colao continues: "The biggest problem with contractors today that I see is illegitimate insurance policies. What that means is that there are contractors who subcontract out all their work to smaller companies that don't have the proper insurance. Many of the subcontractors don't have the proper insurance and you are competing with that." Again, a number of boards don't know to ask the contractor who the subcontractor is, and whether he is insured for all the work he will be doing, and asking for proof of that insurance. "The owner doesn't see the detriment to that until they have been burned, because there is no coverage on the [liability] claim."

Industry consultants like Varone are quick to stress that there is nothing inherently wrong with choosing a company that subcontracts its work. What is important is to put the right protections in place and to have an understanding of the potential problems.

Observes Greenbaum: "It affects the payment, insurance, lien waivers. I need to make sure they are wearing the right uniform. I need to make sure that the sub is licensed, insured, has workman's comp." And it's not enough that the primary contractor has a rigger's license for working on scaffolding outside the building: the subcontractor also has to have one, or the building and primary contractor could be fined for unlicensed employees working on the scaffolding.

Then, there is the issue of unexpected difficulties. "Let's say you are doing a brick work job and there's an issue with asbestos or steel that you could never have foreseen. Who knows if subs really know what they are doing?" says Greenbaum. "You really need to know what's going on. If you have subs, what's their talent?" Hiring a contractor who uses subs "means a lot more work for the managing agent and the supervisor and the supervisory engineer."

Ultimately, it is the contractor who must deliver the finished product and is responsible for the work he has subbed out, whether or not he actually performed the work himself. That is a critical point, says Colao, who four years ago ended the practice of hiring subcontractors for projects on which he bid. The reason was simple. "We had a subcontractor who was paid for work, and the work wasn't satisfactory to the owner and, ultimately, I had to go in with my own people, remove all the work, and replace it." The potential damage to his reputation by relying on a subcontractor, and the extra expense and hassle involved convinced him that it wasn't worth the headache to use them on his contracting jobs, except for such specialty work as bridging and ornamental sheet metal repair and restoration.

PITFALLS AND PROTECTIONS

One of the biggest pitfalls for boards is not realizing the licensing requirements to which contractors must adhere. "The City of New York requires anyone who is working on a scaffold to be an employee of the company that has the special rigger's license," says Colao. If the subcontractor's crew is using the scaffolding and the subcontractor doesn't have a rigger's license the building is in jeopardy of the fine along with the primary contractor.

Can this be solved? There are steps that boards can take to protect themselves when looking to hire a contractor. The following are things for which they should look out:

1. Additional insured. To further protect the building from liability in case of an accident, the board should ask to be named as an additional insured on a contractor's policy. "And nobody should be entertaining [the idea] of a contractor doing waterproofing without $5 million worth of insurance, at the bare minimum," advises Colao.

2. Corporate seal. All bids submitted should carry the company's corporate seal, which will establish when the company went into business. "It's a simple thing, and we do it on all our public works projects, and in the private market, most people don't ask for it," observes Colao. The corporate seal will identify how long that company has been in business under that name. If a contractor is stressing years of experience, a corporate seal can help to determine the accuracy of his comments.

3. Rigger's license. Anyone doing façade work should have a rigger's license, and the license should be posted while the work is underway. A subcontractor working on the façade of a building is not covered under the primary contractor's rigger's license. And in case of injury or property damage, the building may have to pay a fine for having an unlicensed rigger on the building.

4. Lien waivers. These are waivers that property managers should get from all subcontractors on the property. The waivers are essentially a pledge from the subcontractor to waive his right to place a lien on the building in the event the primary contractor does not pay him for his work.

5. Hold harmless agreement. Pledges should be signed holding the building harmless in case of an accident on the property by one of the workers on the site. "More and more," observes McCallion, "you have managers on the phone saying you have to sign this, and that's fine, they are covering themselves."

6. Cost comparison. "When you're looking at a bid, you have to make sure, if it's a low bid, [that] they are not going to hit you for change orders. Make sure they understand the bid," says McCallion. Longevity and reliability, McCallion maintains, are among his best selling points. "I've got guys working with me for over 10 years."

Above all, ask questions. One thing that would help enormously, believe industry professionals who have watched the changes with dismay, would be if boards were to begin to insist on a basic set of standards for all their projects. Otherwise, companies will continue to slip under the wire on projects, and drag down the quality of the work and continue to put everyone at risk for liability.

John Dew says his building has learned from its experience ten years ago. As the board is about to undertake a major roof repair job, the directors have been very aggressive in protecting both their financial interests and the interests of the building's physical structure.

"When we put our projects out to bid, we required they be broken down by component so we can do a comparison from one bidder to the next. We don't just look at the bottom line. We look at how they break out costs." Dew is not overly comfortable hiring contractors that use subs, "but for certain projects, you have to take them." The co-op will hire a company that uses a subcontractor, but it is very firm that it is the primary contractor who is responsible. "We don't sign any documentation. They use them at their own discretion. We will not have a relationship with a subcontractor."

Some experts say the chase for the cheapest bid will not end until boards become as self-aware as Dew and his fellow directors. "The only way I can see it changing is that boards are more and more aware of the fact that they get what they pay for," says Varone. "They have to do their homework, and find out who exactly is doing the labor, who is the supervisor, and what they are getting for their money. And if it's just about the bottom dollar, we will have the same poor quality, which is ludicrous. People have huge amounts of money invested [in their homes] and they are turning money over to the lowest common denominator. What if you dealt with your health that way?"