Dodging Disaster: How HOAs Can Spot Red Flags Before Hiring Contractors

By: Kristen Pierce

At some point in time, every HOA must hire a contractor to perform work within the HOA’s common area (“community project”). Whether it is new roofs on a townhome, repair work to perimeter fencing, or installation of a new community center, every HOA must carefully review its options and determine which contractor is the best contractor for the community project. Associations contemplating such projects must proactively avoid construction vendors with a negative reputation with regard to quality of work, completion of work, or failure to timely complete the work. As such, it is important for HOAs, and the governing Boards, to be aware of potential red flags before hiring contractors by conducting their own due diligence. While conducting due diligence is never a guarantee that the community project will be completed correctly, on time, and on budget, conducting due diligence can assist HOAs in separating the potentially average contractor from the potentially great contractor.

Review the HOAs Governing Documents and Applicable State Laws

Before an HOA commences seeking a contractor to provide services for their community project, a Board must first review their governing documents and applicable state laws to see whether a community vote is needed to approve the community project, whether the HOA has the funds to pay for the community project, whether the funds the HOA does have is authorized to be used for this specific community project, whether a special assessment would need to be levied to raise the funds for the community project, or whether any additional steps must be taken before an HOA begins to solicit bids from contractors. For example, Section 209.0052 of the Texas Property Code requires an HOA to solicit bids through an established bid process if the contract for services costs more than $50,000.00. An HOA should check with a community association attorney to determine which specific guidelines provided by their governing documents or their state the HOA must abide by before receiving bids from contractors for the community project.

Draft and File a Policy Resolution Regarding Obtaining Bids or Proposals for Certain Contracts

As stated above, Section 209.0052 of the Texas Property Code requires an HOA to establish a bid process if the contract for services will cost more than $50,000.00. However, Section 209.0052 of the Texas Property Code requires additional measures that ensures the contract is fair and in the best interest of the HOA. The Board of the HOA should adopt a bidding policy that takes into account the specific requirements of Section 209.0052 of the Texas Property Code. Such bidding policy will need to be filed with the county and distributed to the membership. Specifically, the bidding policy should include:

Guidelines for the HOA if they decide to enter into a contract or decide to review a bid that is submitted by: a current Board member, a person related to a current Board member within the third degree by consanguinity or affinity, a company in which a current Board member has a financial interest in at least fifty-one percent (51%) of the profits, or a company in which a person related to a current Board member within the third degree by consanguinity or affinity;
The number of bids or proposals that are required prior to the Board reviewing each bid and making a determination;
Whether the Board may engage a third-party to assist in preparing the request for the bid, such as their management company or other individual; and
Any other guidelines that the HOA believes should be included when reviewing bids and ensuring a fair and equitable process that keeps the best interest of the HOA in mind.

An HOA should consult a community association attorney to determine their specific state guidelines and any other guidelines that should be put in their bidding policy.

Carefully Review the Scope of Work Provided by the Contractor

Once an HOA receives a bid or multiple bids, the contractor’s bid often includes a Scope of Work that defines the specified area(s) or steps needed for the community project. Typically, the Scope of Work is a one- or two-page proposal that lists details pertaining to the community project. While some contractors list very explicitly what processes need to be accomplished and what materials (including the quantity) will be used, others provide very little detail, if any. For example, if the HOA is seeking to install a new community pool, it would be a red flag if the Scope of Work lists the following description: “dig hole, install rebar, concrete, and pool tiles, install pool pump, clean worksite. Total price - $80,500.00.” In this example, the Scope of Work does not list the specifications of the community project, any additional potential expenses that the HOA may be responsible for, which party will obtain permits for the community project, or any specifications that may be important to the HOA such as the type or color of pool tiles. If an HOA receives a minimally detailed Scope of Work or the Scope of Work does not include important details that the HOA would like included, such as the type and color of pool tiles, the HOA should ask the contractor for a more detailed Scope of Work that defines each step and itemized materials that will go into the community project. If a contractor is hesitant to provide this information or pushes back against providing additional details, the HOA should reconsider entering into a contract with this contractor.

Ask for Referrals and Photographs of Previous Work Performed

If an HOA is interested in hiring a contractor, it would be good business practice to ask for referrals and photographs of their previous projects. Sometimes, contractors state that they are able to do a specific project, but an HOA finds out later that the contractor has never taken on this type of community project or has never taken on this size of community project. Asking for this information prior to entering into a contract with a contractor may give the HOA a good assessment of the quality of work of the contractor. If the contractor is unable to provide referrals, previous photographs of work, or the previous photographs of work are not the same type of community project that the HOA is interested in undertaking, the HOA should reconsider entering into a contract with this contractor.

Review the Contractor’s Insurance Policy

Arguably the biggest red flag that can present itself is if a contractor does not have insurance coverage. If a contractor does not have insurance coverage, an HOA could potentially be liable if an individual becomes injured at the construction site. It is imperative that the HOA determines if the contractor has insurance coverage, that the requirements for insurance coverage is in the contract, and that the HOA is added as an additional insured through an endorsement on the insurance policy. At minimum, a contractor should have the following coverage:

Worker's Compensation and Employer's Liability for all employees working on association property with minimum limits of $100,000 each occurrence, $500,000 total policy, $100,000 per employee.
Comprehensive General Liability, including Contractual and Completed Operations: $1,000,000 per occurrence and a general aggregate amount of $2,000,000.
Automobile Public Liability Insurance: Bodily Injury with limits of at least $250,000 per person and $500,000 for each accident and Property Damage of least $100,000 for each accident with medical pay coverage of $10,000 regardless of fault, covering all owned, non-owned and hired vehicles.
Umbrella or Excess Liability Insurance: $1,000,000 per occurrence.

If a contractor refuses to provide insurance coverage, refuses to add the HOA as an additional insured through an endorsement of the insurance policy, or is scared away by the thought of the above insurance coverage, the HOA should reconsider entering into a contact with this contractor.

Ensure there is a Contract in Place

Although many contractors have contracts that they use for their projects, it is important for an HOA to hire an attorney to review the contract to determine whether the provisions listed are appropriate and of the best interest of the HOA. However, some contractors do not utilize contracts. Often, contractors use a proposal with a Scope of Work, pricing information, and a start date, along with a signature line at the bottom as their “contract.” This is a red flag that the HOA should be keenly concerned with. If the contractor does not have a contract in place, ask if they will provide one. If they refuse, let the contractor know that the HOA will hire an attorney to draft the contract. If the contractor is nervous about the imposition of a contract, the HOA should reconsider using this contractor.

While it is impossible to completely dodge disaster with contractors, it is important to find out as much information as you can prior to entering into a contract with the contractor. Although a contractor may come highly regarded, if they are against any of the above-referenced items or refuse to provide any of the information mentioned in this article, it is best that the HOA learn this information before entering into a contract. This is not to say that all contractors are bad or that every community project will end in disaster as there are many reputable and qualified contractors in the industry that perform excellent work. However, it is important for an HOA to do its own due diligence to separate the potentially average contractor from the potentially great contractor. As always, it is important for an HOA to consult an attorney prior to soliciting bids from contractors and prior to entering into a contract with contractors.

Kristen Pierce is an Associate Attorney with Henry Oddo Austin & Fletcher, P.C., with a focus on Property Owners and Community Associations law. This article is made available by the attorney and/or law firm publisher for educational purposes only as well as to give you general information and a general understanding of the law; it is not being made available to provide specific legal advice. By using this website and/or article, you understand that there is no attorney-client relationship between you and the law firm publisher or attorney author. This website should not be used as a substitute for competent legal advice from a licensed professional attorney in your state.

May 15, 2025

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