Don't Let Your Next Construction Project Bankrupt Your Building

If you're facing a major renovation, some crucial information could save you thousands of dollars and months of headaches. Attorney Lisa Radetsky, partner at the law firm Phillips Nizer, reveals why standard construction contracts are stacked against building owners, and how New York's recent retainage law changes have made protecting your building even trickier.

Learn the hidden pitfalls of change orders that always increase costs, never decrease them, and learn why facade projects almost inevitably require expensive modifications. Radetsky explains the critical insurance requirements that most boards overlook, including New York's unique Scaffolding Law that makes building owners liable for contractor mistakes. She also shares practical strategies for keeping projects on schedule, from financial penalties to completion bonuses. Habitat's Emily Myers conducts the interview. 

The business of running a building is demanding work that requires making endless decisions — some that can quickly lead your board into a quagmire of legal difficulties. Legal Talk interviews New York's leading co-op/condo attorneys to find solutions, and get some guidance, on these challenges. For more co-op and condo insights, sign up to receive Habitat's free newsletters or become a Habitat subscriber today!

Transcript

[00:00:00] Emily Myers: Welcome to Legal Talk, a conversation about the governance issues facing New York's co-op and condo boards. I'm Emily Myers with Habitat, the magazine for New York City's co-op and condo board directors, and I'm joined by Lisa Radetsky, partner at the law firm, Phillips Nizer.

Any board involved in a large scale construction project, like a facade repair or energy efficiency upgrade needs to know how to navigate the complexities of construction contracts. This includes everything from defining the scope of the project to understanding what funds can be held back to ensure the job is completed as planned. Lisa, what are the primary components of a construction contract that a board should be aware of? 

[00:00:43] Lisa Radetsky: So there's several things about construction contracts. Contractors generally wanna use something called AIA Forms, which are promulgated by the American Institute of Architects. These forms are promulgated for use nationwide, so they do not necessarily reflect some of the unique aspects of New York law.

So to back up just a tiny bit, the first thing the board should do is they should hire a consultant, which may be an architect or an engineer to draw the scope of the project because that scope and those documents defining the scope of the contract are actually annexed to the contract or referred to in the contract.

And then that becomes material in terms of the enforcement of the contract. So I think the first thing people should know about AIA forms is they are promulgated by the AIA, the American Institute of Architects, and they tend to favor the industry. Not only do they favor the industry, they do not account for certain aspects of New York law .

[00:01:46] Emily Myers: Can I ask, do you amend then most construction contracts? 

[00:01:51] Lisa Radetsky: Yes. We amend them by adding a rider, and the rider contains provisions that account for some of the deficiencies, both in the forms because like I said, they are industry favorable, not owner favorable. So certain aspects of the contracts need to be appended or amended.

They're usually not amended. It's usually supplemented by a rider. It's more what's missing as opposed to what's changing. Although certain things change, like just for example, the contracts provide for interest on late payments. If you don't complete that section, it defaults to the maximum rate permitted law.

I would also tell any board they should not attempt to do this themselves. They should hire competent counsel. Because there's just too many pitfalls. There are various different AIA forms and they are selected primarily on the price of the project. It's a scope, but it tends to follow the price.

 I think for a board that has a fiduciary duty to its unit owners or its shareholders, the most important thing is to make sure they get a contract that either is a stipulated sum or a guaranteed maximum price. When a board seeks, when an owner seeks to enter into a GMP, guaranteed maximum price contract, there's often a cushion that the contractor adds so they, won't exceed the maximum price.

But the downside of not getting some sort of price guarantee is it could end up being more than is budgeted. So that's the first thing that they have to make sure, that there's a price control. Then in terms of the pitfalls? Change orders. So this goes back to your architect or your engineer who designs a project.

The better and more thorough their specifications are, the less likely a board will need a change order. A change order allows the contractor to change the price. So change orders require the owner's signature. I didn't wanna dwell on facade projects 'cause they're their own special animal, but in facade projects, more often than not, there are change orders because the specifications are developed from drops where they drop down the side of the building and take pictures. And almost inevitably in this city, when the contractors remove the outer layer of the bricks, they will find something they didn't know about that needs to be fixed to preserve the water tightness.

But in a well designed set of specifications for another type of project, say an elevator. You should be able to get the specifications to a quality that you won't need change orders. They should be able to spec it all out. 

[00:04:51] Emily Myers: And the risk with a change order of course, is that the cost is going to rise beyond your budgeting.

[00:04:57] Lisa Radetsky: Correct. And it always increases the cost. It never goes down. So in say an elevator, if you ordered brass doors and decide you wanted silver colored doors, that's a change order. I guess the other change order could be like in a lobby if you ordered a certain material.

And then it turns out the wait for the material is too long, that is also a change order. When your professionals creates the specifications for the job, they should be cognizant of the availability of the materials that their client desires and make sure the same will be available.

[00:05:37] Emily Myers: And so how do you protect against that in the construction contract? 

[00:05:41] Lisa Radetsky: The way to protect against that is your professional has to design the specifications to minimize the risk for change orders. You can't, I guess you can't totally protect against it because things happen. Like you order a certain kind of marble and it doesn't come in, so you need something for the floors.

But that's what I say it's a lot about your professional anticipating the needs of the project. 

[00:06:09] Emily Myers: I'm aware that retainage laws have changed and not really in favor of boards. Can you explain what's happened and how boards might need to adapt to ensure that they're protected if a contractor fails to deliver? 

[00:06:21] Lisa Radetsky: Retainage laws changed at the end of November of 2023 in New York.

Governor Hochul signed a bill that favors the construction industry. It used to be that the custom of the industry was 10% retainage, and sometimes, people would negotiate for more. Now retainage is capped at 5% of the contract amount. And nobody really knows exactly how this is all going to play out.

What we're trying to do now is for the first 50% of the job, we're trying to hold back 10%, and then when we get the next draw request on the price, then they'll have to be a makeup payment, if you will. So the amount for the first 50% is only 5%, and then that'll have to be taken into account.

Candidly, I don't know that the law's gonna support this position, because the law is less than a year old. But that's what we're trying to do to ameliorate the risk at the beginning of the job. But that final payment for final completion, it can only be 5% of the entire job. 

[00:07:28] Emily Myers: Okay.

I imagine a discussion about construction contracts is incomplete unless we talk about insurance. I know it's a separate area, but what are you looking for in terms of insurance requirements in a construction contract? 

[00:07:44] Lisa Radetsky: So I think in terms of New York law and boards and practitioners must be aware that the AIA forms do not contain indemnification provisions and due to case law developments in New York, there is no indemnification in the underlying agreement. The carrier has a basis to decline payment. So that is like the first thing that goes into my contract rider is indemnification. So that's the first thing, 'cause you need that to have the insurance. The other thing in New York that building owners have to be aware of, Labor Law 240, which in slang is known as the Scaffolding Law. So the Scaffolding Law makes the owner liable for what happens on the job, even if the owner had nothing to do with it. So the scaffolding company made a mistake when they put a scaffold and the contractor didn't notice it, and somebody falls off the scaffold and gets hurt, the injured person who hopefully lives, but the injured person gets to sue the contractor. They also get to sue the building. And this is unique to New York and it makes the owner liable for something the owner hasn't done. So the owner protects themself against these risks requiring their contractors to have something called action over insurance. So action over insurance, which is carried by the contractor, will fully protect the owner against these claims. In New York, an injured person can recover under the Labor Law 240, 241 and 242. They can recover amounts in excess of what the common law permits in terms of damages.

[00:09:32] Emily Myers: . I imagine the difficulty is finding contractors who have this. 

[00:09:38] Lisa Radetsky: That's correct. So I guess there's two pieces to this. If somebody's doing a small job the total bill, it's a cost benefit analysis. So if somebody's coming in to lay carpeting or a floor, it's probably going to put the price up more than makes sense.

But if you're doing an elevator or if you're doing Local Law work, or if you actually are doing anything that requires any kind of scaffolding, boards would be well advised to review this issue with their insurance consultant. And just in terms of construction and just going back to the indemnification provision, this indemnity issue, it also applies to small scale jobs that get done within buildings where boards require owners to carry insurance naming the board is additional insured. So if there's no indemnification to back up that insurance, if something happens, like someone slips and falls in a hallway, even though the building has the insurance certificate, they're gonna have problem claiming the coverage through the laws here. 

[00:10:46] Emily Myers: So you've touched on small scale projects and then the larger infrastructure jobs.

Perhaps you can just be clear about when a construction contract is needed. Clearly a construction project's probably not needed for a smaller job? 

[00:11:01] Lisa Radetsky: So whether it's needed or whether it's customary to be done, I'm a lawyer. I think it's always a good idea to have a contract, but I appreciate that many small jobs are done off proposals or very informal contracts.

But even if the contract is an informal contract, I have a little one page indemnity. I advise my clients like, I don't care that you're doing a proposal. I don't care it's a $10,000 job to put tiles in somebody's bathroom. Just get your guy to sign this because the insurance is worthless without it.

 And you don't wanna be in this fight. But certainly for the types of jobs that we've been talking about here, like an elevator, facade, roof. Those are large scale jobs, there's way more risk and boards are advised to hire contractors who carry action over. 

[00:11:54] Emily Myers: Watertight construction contract is ideal, but even then, I guess things go wrong. In those situations. What's your advice? 

[00:12:00] Lisa Radetsky: My first bit of advice? If the board or if there's someone from the managing agent supervising the job, they should memorialize in writing anything they're unhappy with. Phone calls, I guess it's okay to have a phone call, but then you have to follow it up with a writing because ultimately the phone call never happened. People have a different recollection. It's a problem. So then I guess what you're really getting to is what happens if there's a real dispute. The AIA forms all provide for arbitration.

Some of them provide for mediation and then arbitration. So there's a common wisdom that arbitration favors the construction industry, and the reason why is a lot of the arbitrators that end up on these panels are from the construction industry. This you'll have to discuss with your attorney. I've worked with attorneys who say, forget arbitration.

If there's a problem, I just wanna go to court. So the thing about going to court is it takes longer, it can be more expensive, but a building might be more likely to get a favorable determination from a judge. I would counsel boards to discuss with their attorneys how they feel it's best to proceed because there is a split of opinion in this area.

Not everybody agrees. 

[00:13:21] Emily Myers: So then what are the key takeaways for board members to ensure they're protected and informed when they're entering into construction contracts? 

[00:13:29] Lisa Radetsky: I think the key takeaways is a contract that controls the price. We didn't really get into the procedure, but they should have an idea before they bid it out. It should be established by some sort of competitive bidding process so they understand what they're getting. Indemnification in New York is a must and for major jobs , where if something goes wrong, there's potential for very serious injuries or death, there should be action over insurance.

Even if their carrier covers it, their premiums will go up. It's just, it's better if it's on the contractor's insurance. If the contractor has action over insurance, the contractor's insurance will be responsible to defend the board. 

[00:14:14] Emily Myers: I imagine one of the big concerns for boards is a project overrun. How do keep the construction project on track?

[00:14:20] Lisa Radetsky: So the one way to do it is to provide financial incentive to the contractor. Meaning, if they don't finish the job by a deadline, they make less money. So those provisions are tricky to negotiate because contractors don't like those provisions. But since boards are not able to hold significant retainage anymore it's something they may wanna consider.

Especially, like if you have a building with only one elevator, or even with two elevators, but you have how many apartments, you may wanna have some leverage over the contractor so they're incentivized to finish it. We all know the facade jobs that go on for years. It's actually been a subject of discussion in the community boards of how long are you gonna let people leave up their scaffolds?

But anything that's going to impact the quality of life for residents, I would encourage boards to think of financial incentives. If you don't wanna go negative, the other possibility is you go positive. If you finish by X date, we'll give you a 2% bonus. I don't wanna spend anybody's money but that's something they could consider if the work being performed is gonna disrupt the quality of life in the building.

[00:15:39] Emily Myers: So it's weighing up carrots or sticks.

Lisa, thank you so much. 

[00:15:43] Lisa Radetsky: Thank you for having me! 

[00:15:45] Emily Myers: Lisa Radetsky, partner at the law firm Phillips Nizer.