Selecting Management: The Contract
Apr 24, 2022
By Kelly G. Richardson, Esq. CCAL
The previous column discussed different types of association management services. After selecting the management service type and candidate firm, carefully consider the proposed management contract.
Price is NOT everything:
Hiring a management firm solely on price is a mistake. Associations may discover “you get what you pay for.” Factors affecting the fee are:
- Level of desired service.
- Workload, the number of accounts the manager handles.
- Quality of personnel – more highly qualified managers command higher salaries.
- What is included/excluded - There are normally a list of extra charges and fees.
The base management fee is the beginning, not the end of a thorough review. Look more deeply at the service level and costs.
Reviewing the contract
Legal counsel should review the contract before it is signed, but if not, consider the following key concerns. Space does not permit a complete list of all important items, but here are some to consider.
Workload
How many other associations is the manager simultaneously handling, and how large are they? Fifteen accounts may be fine or two may be too many. This will depend upon the nature of the other accounts and your HOA’s desired service level.
Vendor tie-ins
Does the company require, or simply offer, additional services at a fee? Does it have affiliated vendors to which it refers ordinary non-management work, such as maintenance or repairs? While such services are convenient, the association should have a choice, because such services might be obtained elsewhere at less cost. Management firms must under Civil Code 5375 disclose affiliated entities up front - did they?
Contract Length
Management contracts normally specify a specific term. Starting to manage an association involves much start-up work and it could be months before the company begins to realize any profit. A minimum term up to 12 months with a cancellation right or reasonable buyout fee, is fair. Avoid contracts which automatically renew annually without a cancellation right - such contracts help the company, not the association. However, General Managers need some job security, so a guaranteed term is normal for GM employment contracts.
What about extra fees
Too many management companies compete solely on price, (as opposed to service, qualifications and reputation), and too often the focus is only on the base fee. One way companies can offset a lower base management fee is to have many extra charges. Check those charges, including document or transfer fees and homeowner charges for services.
Funds handling
Management companies often propose that association funds be deposited in the company’s bank trust account and the manager signs association checks. This is more convenient, but the better choice is to require that the account be the association’s and not permit management to sign checks.
Fidelity insurance
The association is required by Civil Code 5806 to carry fidelity (dishonesty) insurance and so should the management company. Make sure the association’s coverage includes the management, and meets or exceeds the minimum amount specified by Civil Code 5806. Check with the association’s insurance broker to make sure the fidelity insurance meets the legal requirements and sufficiently protects the association.
Find a good manager, carefully review the contract, and request reasonable changes. Start a strong manager-association relationship - and keep it for a while!
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