Friday, December 30, 2011

The Perils of Hidden Damage: Part I

How do you fix it, What Happens if you can’t?

By Tyler P. Berding JD., Ph.D.
      Every community association will face a major reconstruction project several times in the life of the development. This may occur because of clearly anticipated problems, such as re-roofing or re-painting, but it can also occur because of completely unanticipated (and unreserved-for) problems such as dry rot repair, soil subsidence, or leaks in windows and siding.

California’s Davis-Stirling Act only requires that a community association reserve include those components that visual inspections of accessible areas reveal have a useful life of 30 years or less, and makes no allowance whatsoever for reconstruction due to hidden and unknown deterioration. There can be two decidedly different outcomes to any attempt to repair previously unknown damage. The first is a predictable project that succeeds in repairing the damage within the association’s means. That is the subject of Part I. Part II, however, considers the situation where invisible damage is so unexpected and expensive to repair that it overwhelms the association’s resources.

Part I

 How to Extract a Successful outcome from an Unexpected Repair

            Even during planned or expected repairs, surprises can occur when building components that are not “visible or accessible” are exposed during construction. Normal painting projects can reveal rotted areas due to long-term intrusion of water. A minor deck or siding repair can expose framing components that have allowed water to enter slowly for years without any way to get it out except evaporation.  Problems with deteriorating concrete walkways or driveways due to the invasion of roots, or soil subsidence due to unconsolidated fill may develop so slowly that they escape notice. Or there can be a catastrophic event—a spontaneous failure that occurs when someone leans on a rotted balcony railing, for example. Three people in Antioch, California were severely injured recently when such a railing collapsed.

            None of these building components would likely be included in the usual reserve account and unless detected by some other means, would not appear in the maintenance budget, yet the association in a typical condominium and in many planned developments, is nevertheless responsible for necessary repairs. Unexpected repairs for which there was no reserve funding. So now you have a collapsed balcony or maybe a lot of rotted framing-- what do you do? Follow these steps and you will improve your chances of successfully solving the problem.

1.      Find the Right Expert

            First, retain the services of someone who can advise the association on the proper repair. A general contractor, architect, engineer, or construction manager—each has specific expertise. Which expert will you need? A lot depends on the complexity and extent of the problem. If, for example, you have a failed balcony support beam—something that has rotted due to years of water intrusion—just replacing the failed beam may not be enough. You don't want it to happen again. And, just because only one balcony failed this time doesn’t mean that there aren’t others in the same condition.

            In the example above, you would retain someone who is a pro with waterproofing. Would you choose a building consultant, a contractor, or an architect? Architects are more expensive, but for a very complex waterproofing issue you want someone who has enough skill and understanding to re-design the system to make it watertight. You would not want to simply replace part of a system that didn’t work. On the other hand, if the basic design is sound, but the materials have failed to do their job, a materials consultant who specializes in waterproof membranes may be the right choice. In our practice, we would start with the architect or an engineer because this particular balcony railing example involves a life-safety issue and because a re-design and/or strength calculations may be necessary.

            If the problem is relatively straightforward such that a re-design of the waterproofing system or a re-calculation of the strength of the system isn't required, and the project simply requires a re-build of the original design, then a building consultant or a general contractor might provide the necessary specifications.        But if the basic structure has proven inadequate for other reasons, such as deflection over time, or failed joists or columns due to inadequately sized beams, for example, a structural engineer might be necessary to do the proper calculations and provide a re-design of the structural components. A few hours of an architect's time will usually be enough to determine the level of expertise required for the project, so if in doubt, hire an architect first. And in any case, if the job is big enough, it may also be wise to consider retaining a construction manager to represent the board throughout the process. Your expert can also help you determine the extent of the damage—as discussed further below, a sometimes critical bit of information.

2.      Detect Hidden Damage

            Destructive testing, where portions of the building’s skin are removed, can reveal a lot and maybe that investigation will identify clear limits to hidden damage. That may also occur in conjunction with a routine repair and expose greater damage. It can also be done randomly in older buildings to attempt to identify problems before they become catastrophic. But even where you collect a lot of data, you may still not know the full extent of the damage beneath the outer skin of a building unless most of that skin is removed. But by that time, the “investigation” may become so extensive that replacing what is to be removed to inspect will commit the association to a major repair. There is a tipping point after which further removal for test purposes becomes inefficient. But the Board’s need to know remains.

            There are other options for gaining that knowledge without massive destructive testing. An alternative to physical removal of the building’s skin may be using non-destructive testing (NDT) to map the extent of damage—particularly dry rot or moisture. There are companies which use technology to determine the extent of damage in hidden areas. Infrared cameras which can detect the extent of moisture are one option. Using a small camera inserted through a hole in the skin is another. Discuss with your expert the various NDT options that might be available to help you know the extent of your risk before the project begins.

Another approach to dealing with unexpected damage—negotiating with your contractor for a fixed-price contract or a contract with a price cap, either of which limits the association’s maximum financial commitment to a sum certain. That may be difficult to achieve, however, since any good contractor will also understand the risk involved and will be unlikely to accept it, leaving a thorough expert investigation as the only real option. So where is the tipping point past which further testing to determine the extent of the problem becomes so extensive that you might as well rip off all of the skin? Only a qualified expert can help you decide that. Each project of course, will be different. But any good expert will tell you to collect as much data as possible, and after analyzing that data can prepare a scope of repair for a contractor to bid.

3.      Bid the Job

            Once the problem has been analyzed and the plans and specifications for repair have been drawn, the bidding process can start. Normally a list of preferred bidders is prepared. This preference usually comes from past experience or specialty. For political as well as good business reasons, several bids should be obtained. Even if the board or management favors a particular contractor—perhaps because of a successful project performed earlier—obtain at least three bids to demonstrate due diligence in the bidding process. When the bids are opened it is up to the board, with management's recommendations, to choose the right contractor. Price may not be everything. Past performance, specialty, and availability may have important roles to play. All of those factors should be considered before the final choice is made.

4.      Draft the Contract

            Your attorney can assist in reviewing and negotiating the contract. There are a lot of considerations, and good contract drafting is a skill and topic all its own. But some of the considerations are: (1) is this a cost-plus or a lump sum contract? (2) Does the owner furnish all plans and specifications (and except responsibility for them) or is there an element of “design-build” in the contract? (3) Are there unconscionable provisions—a provision buried in fine print, or a disclaimer of all express or implied warranties? Courts will often not enforce such provisions. (4) What are the payment provisions? Will there be progress payments or a lump sum at the end of the job? Will the owner hold back (retain) a portion of the payment to be sure that all mechanics liens are cleared? (5) What if the project is delayed? Should there be penalties for that? What about incentives for bringing the job in sooner? (6) How are we to deal with changes--an especially important topic for big jobs where the extent of dry rot, for example, can’t be known at the beginning of the job? (7) Who bears the responsibility for misleading drawings or specifications (see 2 above)? (8) What insurance will the contractor carry? (8) What warranties or indemnity will the contractor be required to provide? (9) What licenses must the contractor have? (10) Will the owner have the right to stop the work and under what circumstances? (11) What dispute resolution provisions will be included in the contract? We could go on, but you get the idea. There are many questions that must be asked and which can only be answered in the context of the particular job. Your attorney working with your architect or engineer can fashion a contract that is appropriate for the job.

5.      Fund the Project

            How will the association pay for all of this, especially if it is a job that no one expected? Generally speaking there are only a few options. If the job is one for which funds are immediately available then there is no problem. But what about those surprise projects--or normal projects where hidden damage is discovered mid-way through the job? For surprise repairs the association can borrow the money—either from a bank or from itself. It can go to its reserves, but generally funds borrowed from reserves must be repaid within a year. Or it can go to the members for special, or increased monthly, assessments to pay for it.

            If the proposed special assessment is no more than 5% of the existing budgeted expenses, or the job requires no more than a 20% increase in the regular monthly assessment, the board can simply impose it; otherwise it will have to get the approval of the members, not usually an easy thing to obtain. But a big job can quickly outdistance those statutory maximums and if the member vote does not approve the new assessment, recourse to a bank may be the only option. But banks usually don’t lend without adequate security, and in most cases that security will be the association’s income stream. A bank is not likely to take a deed of trust on the club house! And if the income stream is not big enough to service the loan, then we’re back to raising member assessments and a vote if more than a 20% increase is needed.

            If all goes well and the job is completed on time and on budget, you are home free. But if the contractor is in breach of his or her contract because they did not complete the job; or is proceeding so slowly that it will not be completed on time; or because the work is poor and has been rejected by the inspectors or the construction manager, it may be time to consider termination of the contract. But before that happens, consult with the association's attorney to be sure that the contract provisions are followed so that the association will not be in breach.

            A successful job usually requires that the scope of the job be well understood and defined before the job was started, with only minimal increases in the amount of work discovered later. Small amounts of additional work can usually be accommodated in any funding plan. But what happens if the amount of work discovered after the job starts is not small, that major amounts of damage are discovered after the contractor began working on the building—see Part II.

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