The boards that direct co-ops, condominiums, and HOAs across the country are made up of volunteers who donate time to help govern their communities. Among their duties is selecting vendors to provide goods or services for those communities—everything from lawn care to roof repair; surveillance to extermination. As volunteers, board members often have limited expertise in the wide variety of industries and occupations related to their properties—so they may be at a loss as to how to even find qualified vendors, let alone evaluate and choose the best product or service at the best price.
Tap the Manager
According to Steven R. Wagner, principal at law firm Wagner Berkow in New York and also president of his own Manhattan co-op, your property manager is a key asset in the process, because “You need somebody who’s familiar with building systems to help you cover what needs to be done.” For most projects, the property manager can make use of their contacts and relationships in the industry, and draw on personal experience with contract negotiations and procurement. He or she will also act as an intermediary between the board and the vendors they engage. The process usually goes more or less as follows:
First comes some version of a needs assessment. The board, a committee, the manager, or another building professional such as an engineer or architect will alert the board to a maintenance or compliance issue. Next, the board and its advisors will determine the parameters of the project. Do they want a full gym upgrade, or just some updated equipment? Do they want to purchase the equipment, or lease it? Have residents who use the gym made specific requests? All of this might go into what is known as a statement/scope of work. Using this as a guide, the manager and any relevant professionals will produce a request for proposal (RFP) and distribute it to a list of bidders deemed qualified for the task.
How many bidders get the RFP depends on a number of factors. For some jobs, there might be only a couple of players with the needed expertise. For other categories, like painters or insurance providers, the field could be vast. Most pros advise soliciting a higher number of bids than might seem necessary, because there is always the possibility that some vendors might not meet requirements and others might not respond at all. Keep in mind that well-regarded companies are in demand for a reason, and may not be able to accommodate your project in the timeframe required, thus eliminating them from the prospective pool.
Seal the Deal
To ensure that all bidders get a fair shake, their responses to the RFP should be delivered in a sealed format. Depending on the community’s process, some boards elect to have a copy of the RFP sent to every member of the board, plus the property manager, who then all simultaneously unseal the bids at a scheduled board meeting. Others, like those managed by Claudine Gruen, Vice President Director of Operations for Garthchester Realty in Queens, limit it to the manager and the board president, and sometimes the engineer or other professional involved. They coordinate the unsealing together, and then share with the rest of the board online. Gruen says at least two people should be charged with unsealing the bids together. This provides transparency and accountability.
The RFP will also spell out other submission requirements, such as how the proposal should be formatted and what details it should include. Proposals that do not meet the requirements or the deadline are disqualified. Those that remain can be considered on their merits, which are assessed in a variety of ways.
Stay on the Level
Once the bids are open, the process of evaluation and elimination begins. This is another area where the manager’s expertise comes into play. He or she, in consultation with any relevant professionals, will create a bid leveling sheet. If the RFP was thorough and well composed, and the responses met all the criteria, then the leveling can be straightforward. But there are often variables that the RFP didn’t include, or idiosyncracies among vendors that cannot be captured within the specified format. In those circumstances, leveling is even more important. A board may have to assess a dozen proposals, and comparing them can be complicated. One might include materials costs; one might not. There could be a wide disparity between estimated time to completion. Warranties might vary. Interpretations of the scope of work could differ among the bidders. It’s rarely apples-to-apples.
If a project is especially complex, or beyond the expertise of the property manager, Wagner recommends investing in an owner’s rep. An owner’s rep is a dedicated manager with particular knowledge of a specific project who can distill the proposals and align the variables to make them easier to capture and compare. There may still be discrepancies, but the basic elements for weighing each proposal evenly are there. Any remaining questions can be addressed in the next step, which is inviting select bidders for a board interview.
Face to Face
Depending on the number of qualified bids, the board might interview all or only the top few. This allows the board and manager to get to know the people with whom they will be working. It also gives them an opportunity to ask questions or get clarification on aspects of the proposals that might not have been clear. And not least of all, in-person impressions are important. Body language, physical presentation, and other subtleties speak volumes on a professional’s preparedness, commitment, and soft skills like communication or problem-solving. A bidder might also present a physical example of their wares, or technology that makes them stand out.
Before and after the bid leveling, the manager or owner’s rep might go back to each bidder and ask them to “sharpen their pencils”—a common euphemism for adjusting their proposals to a more favorable price or offering. This is also a good time to leverage future projects or suggest bulk purchasing or other efficiencies.
Avoid Even the Appearance of Conflict
Even seasoned boards have to be alert to avoiding even the appearance of a conflict of interest when it comes to bidding. Having a board member who is a plumber, for example, really helps when something comes up regarding the building’s pipes. But when it comes to actually procuring a formal plumbing contract, having that board member involved in the process becomes complicated.
If a board member stands to gain personally in any way through their position—say through their business getting the building’s plumbing contract—not only would that need to be disclosed to every association member or shareholder (at least in New York as of January 1, 2018, when Business Corporation Law [BCL] 727 went into effect), but that board member would then need to recuse themselves from any discussion and votes involving the contract. And, as Gruen notes, “Perception is reality, especially in this business.” So even with disclosures and recusals, by skirting the usual bidding process, a board risks the trust of its membership—which, as fiduciaries, is its main function.
Don’t Forget the Past
This brings us to another important caveat. It may seem like ancient history, but today’s New York property professionals are still feeling the sting from a double wave of corruption-related indictments brought by Manhattan District Attorney Robert M. Morgenthau back in the 1990s. A three-year investigation ended in charges for more than 80 New York residential managers and management companies in the summer of 1994. Almost exactly five years later, 30 more individuals and 10 corporations were charged with stealing $4 million through kickback and bid-rigging schemes in another industry scandal.
According to the Department of Investigation’s press release about the second set of indictments, Commissioner Edward J. Kuriansky said, “Bid-rigging and kickbacks have obviously been a way of life for many years in the residential real estate industry. But, by violating their positions as managing agents, building superintendents, and co-op board members to divert tenant funds into their own pockets, the defendants siphoned off the scarce resources that co-ops and residents need to make critical repairs to their buildings and to pay off their mortgages. ... Today’s coordinated response by local law enforcement will go a long way toward ending this cycle of greed.”
By all accounts, it has. While there are undoubtedly still unscrupulous players continuing to pocket money under the table from vendors, Scott J. Sandler, managing partner at Sandler & Hansen, LLP, a law firm in Middletown, Connecticut, says the industry has changed. “Every now and again you do encounter a bad actor; a manager walks away with association funds, or a board member tries to convince the board to hire his buddy—but thankfully those are the exceptions to the rule,” he says. Intensified scrutiny from law enforcement—and from boards and management firms themselves—has led to a more ethical and accountable industry all around.
Know the Signs
That said, boards should still keep eyes open, and act quickly if something untoward seems to be going on. And perhaps most importantly, says Wagner, “Ask the question. Challenge authority. I’ve seen some crazy things that were picked up by board members who just didn’t understand and asked the question.”
Kickback schemes, shady bidding, and the like are not always easy to identify—or prove. For that reason, it’s wise to build some guardrails into contracts to help prevent fraud. Here are a few from the pros:
Don’t commingle funds. The funds of one co-op/condo should never mingle with those of others, or with those of the management company. If discrete accounts are not part of your contract with management, that’s a big red flag, because it opens the door to foul play.
Same goes for if a managing agent and a sponsor share an accountant, contractor, or attorney. According to Wagner, such intertwined relationships risk losing the normal checks and balances that come with independent professionals. For example, if the contractor for the building is also working for the sponsor, it’s possible that work performed on sponsor units could be charged back to the building. It’s possible for such relationships to be run ethically, but all parties must properly disclose their relationships and sign conflict of interest waivers, and board oversight must be vigilant.
Insure against fraud. Most community policies stipulate that their managing agent have insurance against fraud - so double check to make sure you’re covered. Additionally, arrange for the building to be named on the policy as an additional insured. That way, if management does perpetrate fraud, the building can make a claim directly, rather than having to sue for the money.
Check the accounts. Standard practice is to have a dollar threshold over which purchases or contracts need board approval. If yours doesn’t, institute one without delay. The threshold will depend on your corporation’s or association’s budget, but $2,000 is average. (A number too low would stymie day-to-day operations; a number too high inhibits the board from its fiscal oversight.) One way to spot possible graft is by checking the accounts for expenses just below that approval threshold. If there are a number of them that don’t seem to align with normal costs or known expenditures, it could be a sign that there is some shady spending going on. Also, if a vendor changes suddenly without notification to or approval by the board, that’s another red flag. This is another reason why a formal bidding process should be used for large contracts: it allows the board to have familiarity with its vendors and the reasons for selecting them.
All this begs the question: does every contract or project a co-op, condo, or HOA undertakes really need to be bid out? According to Richard Brooks, partner at the Braintree, Massachusetts-based law firm Marcus, Errico, Emmer, & Brooks, there are no laws that govern the bid process, and bylaws generally don’t address bidding either; it’s really more an exercise in common sense. Small jobs certainly do not require soliciting multiple bids - and in an emergency, obtaining bids is not practical or justified. Brooks adds that for long-term service providers like a manager or an attorney, “There’s no reason to go out to bid unless things aren’t going well.” In fact, these relationships benefit from their longevity, where institutional knowledge, personal comfort, and familiarity with the property have value that might outweigh price. Brooks and other attorneys do however advise against provisions for obtaining bids that are not simply “at the discretion of the board.”
Deciding how and on whom your community spends its money is one of the most important - perhaps the most important - duty of a board and its trustees; by understanding the process and committing to transparency and ethics, your board can know you’re upholding your end of the deal.
Darcey Gerstein is an Associate Editor and Staff Writer for New England Condominium.