Contracts

T&M versus Fixed Fee Contracts
I'm going to interrupt my series on "Owners and Boards" because before continuing it is necessary to point out the existence of these very different contract types. They do influence the costs, operations and achievements of the HOA. Boards must take this into account as part of the planning process. Delaying infrastructure replacement will increase maintenance costs and can influence other contracts. These things combined will also influence owner fees.

Some have difficulty distinguishing the critical differences of "T&M" Time & Materials contracts and "Fixed Fee" contracts. Simply stated, there are very different levels of service provided by these types of contracts. They each have their place, but it is poor business practice to compare the performance of "fixed fee" and "T&M" contractors without recognizing the contract differences. It should be the goal of all boards to get the best performance from all contractors. To do so requires paying people for the work they perform and recognizing that there are performance limitations built into these contracts. "You get what you pay for."

1. "T&M" contracts favor the contractor. The contractor is paid for all materials and labor expended in the performance of the contract. It is a completely open ended contract. We have a number of contractors who operate with a "T&M" contract. Our maintenance contract is this type of contract. It does include an estimated number of annual hours, but each and every hour expended on the property in performance of the contract will be paid. I have advised the board to expect a possible 25% maintenance increase in 2014. This is in part due to the unusual winter.  We used more hours in 2014 and we will pay for those hours and any materials required. Our snow removal is a similar contract. It also includes a predicted or base amount for a certain number of "pushes" of snow each winter. However, a winter which dumps more snowfalls than per the contract will increase the costs. 
2. "Fixed Fee" contracts favor the association. The contractor is paid a lump sum for work. It is a closed ended contract and just about everything is included in the base contract. However, certain "extras" are identified as payable above and beyond the contract. Our management contract is an example of a "Fixed Fee" contract.  One disadvantage is quality. "Fixed Fee" contractors are under constant pressure to do things as quickly as possible. How many "water main failures" should our management be involved in each year? How many foreclosures? How many evictions? How many floods, or legal suits? Obviously, each of these things takes manhours.   Most of our annual project contracts are also fixed fee but do identify certain "extras" which are paid at additional cost over the base contract amount. Roofs, streets, driveways, concrete, etc. usually are accomplished via specific fixed fee contracts. 

It should be obvious that "T&M" contractors have no incentive other than good business practice and integrity to reduce hours expended. For example, every door closer that fails, every exterior door that fails in winter will be repaired and the contractor will be paid.

A "fixed fee" contractor will be more likely to point out inefficiencies which absorb manhours than will a "T&M" contractor. It falls upon the management and the boards to monitor the expenditure of time and material in "T&M" contracts. Management and the boards must also decide at what point maintenance dollars are not achieving the desired results.  One example is the replacement of entry doors, sills and frames. So too for brick window sills. These can probably be repaired indefinitely. But should they? The reserve specialists in 2011 said "no, they should be replaced." Furthermore, when failures do occur, repairs can be quite costly. Brick sills, for example will fail and the result will be interior leaks and damage to the interior of units.

Obviously, resident inconvenience and disruption also should be considered when making a "repair versus replace" decision. However, the only impact this has on T&M contracts is to increase the scope of work of the contract and our annual costs.