Financial Oversight, Checks & Balances Who Holds the Purse Strings?

When it comes to hiring professionals – either to do work on a property, or provide some sort of service for a co-op/condo/HOA community—it’s generally the property manager who solicits bids, goes over proposals, and cuts checks to pay for whatever work or service is rendered. This is all done with the approval and oversight of the board, of course —or at any rate, it should be. 

Unfortunately, board members are usually working people themselves, many with families and tons of other responsibilities, and it can be all too easy to get lax when it comes to monitoring the ins and outs of a building or association’s daily business. This is why it’s so important for boards to be proactive and pay attention to how – and to whom – their managers are soliciting bids, writing checks, and otherwise directing business.

The Bid

Once the scope of a particular project is ascertained, the first step is to solicit formal bids. On the one hand, bidding offers boards and managers a way to make sure they’re not overpaying for goods or services (or underpaying, and getting a proportionally poorer result). On the other hand however, the bidding process also makes it possible for unscrupulous administrators to make a few illicit dollars by getting kickbacks from vendors – so oversight of the process is critical.

“If it’s major work, then the people involved are your property manager, the management company and supervisory staff, and the board,” explains Alvin Wasserman, director of asset management at Fairfield Properties, based in Melville, New York. “Who has the skills and qualifications to competitively bid the work? For a major project, you need a licensed professional to prepare the specifications. So to start with, proposals need to be solicited from either several engineering firms, or several architectural firms, depending upon the nature of the work. The first job of the property management company is to provide a list of names of engineers or architects about whom the management company has had positive feedback from other clients over their years of experience.” Good property management companies have extensive lists on hand of vendors to recommend for various projects. 

To make the process as fair as possible, each bidder should use the same forms, and there should be no fewer than three bids on any given project.

“Assuming the building is interested in those with the lowest two bids, say, it may arrange for those candidates to appear at a board meeting so the board can make their own evaluation of these contractors prior to a final decision,” says Marcie Waterman Murray, of counsel with Tane Waterman & Wurtzel, P.C., in New York City. “The board can then take into account the managing agent’s recommendation, the bid results, and comments” from the architect or the engineer, if one is working on the project.. “Contractors may also be asked on the bid form what prior business they have done with that managing agent, and represent in the final contract that there is no benefit (‘kickback’) being provided to that agent in return for the agent’s recommendation of that contractor.”

Kickbacks sound like the stuff of gangster pictures, but they do happen—and boards need to watch out for them. “I have a particular contractor client whom I have represented for decades,” Murray recalls. “We met when he called me on a building I represented to tell me he was completing the bid, but knew he wouldn’t get the job. I asked him how he knew. He said because the managing agent wanted kickbacks from the contractors he would recommend, and this contractor informed the agent that he would not be paying any such ‘payola.’ Turned out, of course, that this contractor was completely correct. The agent was among the first wave of manager-indictees at that time.” 

Scores of New York City property managers were charged with bribery and racketeering in the mid-1990s, after a years-long investigation by then-Manhattan District Attorney Robert M. Morgenthau found that they had routinely extorted contractors for the right to perform work on the properties they managed. By the time indictments were handed down (and met with guilty pleas in many cases), the industry-wide graft amounted to millions of dollars. According to Morganthau in a June 1994 article on the scandal in The New York Times, “The investigation showed that for many, kickbacks were the rule rather than the exception in this industry. Contractors treated kickbacks as just another cost of doing business while managers treated the graft as their due.” 

Remove Temptation – and Read the Fine Print

While graft may not occur with nearly the same frequency these days as it did before the waves of indictments nearly 25 years ago, it is imperative—indeed, it is the fiduciary duty of the board—to do due diligence on all bidders for a given project, and to seriously consider several.

“The improper way would be to get only one bid, and just go with it, and not shop around,” says Robert Rinaldo, vice president at  D&J Property Management in Forest Hills, New York. “In an emergency situation when we don’t have time to get at least three bids, we’re going to work with a company we’ve worked with before, and that we trust completely. We know we can count on them to do it again and replicate that success.”

The final piece of the puzzle is the contract. While most vendors have cut-and-dried agreements that are rarely relevant once the project is done, the possibility is always there, and should be taken seriously. “It’s important to get your building’s attorney to go over [any contract], just to make sure there’s nothing in there that’s going to work against you,” says Rinaldo. “At the end of the day, if  you get into litigation over a project, you don’t want to be held liable for something you could have avoided through a better understanding of what’s in the contract. As a managing agent, I can read the contract and understand it, and so can the members of the board, but no one’s going to interpret it as well as an attorney would.”

Wasserman agrees. “The contract, in my opinion, should always, always, be reviewed by the board’s attorney.” 

As for the final decision, that too should be made by the board – and only the board. “The board ALWAYS makes the decision,” Wasserman says. “The board should always sign proposals and contracts… never the managing agent, in my opinion.”

In assessing a set of bids, the board should not move on the basis of money alone. The lowest bid may well be the best bid overall—but not always. The old adage, “You get what you pay for,” is doubly applicable to contract work—sometimes with dire results. Wasserman tells of a board presiding over a multiple-building residential community. All of the units needed new roofs. The project was going to run between $100,000 and $200,000. 

“Against my company’s advice, the board said, ‘We’re going to handle it,’” Wasserman recalls. “And they went to the yellow pages, and found a roofer who came in with a dirt cheap price. One year later, every single roof was leaking. They had no recourse with an engineer; there was nobody to sign off on the work as it progressed. When they then hired an engineer after the fact, they saw that flashing was missing, sheathing hadn’t been replaced, and if you stepped on the roof, your foot would go right through the wood. Then the board went after the original contractor, and guess what? He was out of business. Gone. So, it took another hundred thousand dollars to make it right, and the community was furious. Tremendous waste of money. A number of board members resigned, and I think a couple of them might have moved.” 

So take heed - you get what you pay for!

Buyer Beware

The vast percentage of jobs work out just fine. The lobby needs paint, a painter is hired, the lobby gets painted, the residents are all happy with the freshly-painted lobby. But every once in a while, boards have bad experiences. Sometimes these happen without warning, even after everyone has done their homework and followed best practices to a T. But a good board will at least try to look for red flags before any damage is done.

Sometimes the issue is with being too stingy. Wasserman recalls an instance where structural defects in a building required immediate attention. “The fascia on the brick building was coming off, and water was leaking into people’s homes in the basement. The board president knew a bunch of guys at the local volunteer fire department who did contract work on the side. No engineer, no specs, no nothing. They didn’t want to hear about proposals from management. The board president and the majority of the board thought it was a great way to save money.” 

Unsurprisingly, this did not end well. “Right now, as we speak, those walls are being replaced. And the board president is gone. She moved years ago. The attorney for this co-op is going after the contractor, because he did everything wrong. And all we can do in management, which is what we did, is document it. We document what we recommended, we document what the board’s decision was, we document that they refused to involve an engineer or competitively bid it, and we put it in the board meeting minutes, and there it is. That’s all we can do.”

Another thing to look out for: outright fraud. “Those few of my clients who have found themselves victims of unscrupulous managing agents are always those whose treasurer and/or fellow officers were too relaxed and took on faith everything s/he/they were told about payments made,” says Murray. “I want my clients always to be signatories on all their bank accounts and have to co-sign checks over, say, $1,500. I want them to receive monthly, original bank statements – because I have, unfortunately, had to deal with fraudulently ‘adjusted’ bank statement copies (to conceal thefts). If an officer is too busy to deal with these details, they should resign and allow someone more amenable to dealing with them to take over.”

And what are some signs that there could be shady dealings afoot in your community’s books? “Really anything out of the ordinary,” Murray says. “Original bank statements are no longer provided monthly, or copies are substituted for the originals; unexplained shortfalls at fiscal year-end; payments not backed up by architect-approved payment requisitions or invoices; expenses that seem too high based on what the board is aware of what was done; issues they may have heard about problems in other buildings run by the same agent, etc.”

Another warning sign: fake companies that exist solely to collect illicit payments. In the Information Age, these have become less of a problem. “In terms of fake companies, we’ve never had that experience, because we have a very comprehensive system of checks and balances,” Wasserman says. “Our real estate software program will not issue a check to a vendor or contractor unless we have an active insurance certificate on file. We’ve never issued a check to a phantom company.”

Finally, individual members of boards can be on the take. “In terms of boards having some kind of inside dealing,” Wasserman says, “I’ve suspected it over the years, but I could never say for certain that it’s taking place. When the board president says to our manager, ‘I want you to issue the check for so-and-so contractor, but don’t mail it. I want you to hand deliver it to me, and I’ll hand deliver it to the contractor,’ that kind of thing raises my eyebrows.”                                 

Greg Olear is a freelance writer and novelist, and a regular contributor to The Cooperator. 

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