We often blog about the fact that there are some bad laws on the books. What about when we come across a situation that appears perfectly legal, but are surprised that it is? I had such a case yesterday.
I met with a gentleman who lives in a condo and was upset about a massive construction project taking place. He simply thought that there were better, more economical ways of doing things and that the Board’s approach was simply wrong. I looked at his documents and informed him that The Florida Business Judgment Rule would basically protect the Board from these types of decisions, including the best way to approach the project, what repairs to make, who to hire and how much to pay. Courts don’t want to get into the business of running companies and deciding if boards can do a better job. So, absent fraud, self dealing or criminal conduct, a court is not about to stop a construction project already in the works.
Then I looked a little closer. This condominium knew it was facing lots of repairs. In order to protect itself, it hired the services of an engineer. The job of the engineer was to come up with a list of repairs, specs to make the repairs, and then prepare what is commonly known as a “bid package” that would be sent to qualified contractors who in effect bid on doing the actual work for the project that the engineer designed. So, the condo is hiring the engineer with the goal of the engineer protecting the association from needless repairs, over spending, and ensuring the work gets done timely and within the quote promised by the contractor who ultimately gets selected by the Board. By the way, in this case the engineer also suggested the contractors to send the bid package to.
Here’s the problem……. The fee for the engineer was 15% of whatever the condo was paying ultimately for the construction costs. Am I crazy or does the engineer have a financial incentive to ensure that the condo spends as much money as possible, makes more repairs than are required and actually goes way over budget? The more the condo spends, the more he makes. And guess what? Apparently, the engineer already said that instead of the job costing 4.5 million as bid by the contractor, hidden costs and change orders are likely to bring the job closer to 6 million dollars, but this is apparently “perfectly normal.”
To me, this is like hiring a law firm to do the collections for your association and the law firm gets paid more money if the delinquencies go up rather than down. It’s like the manager getting a financial incentive when more people break the rules rather than less.
I’m sure an engineer will tell you that they are simply basing their pay on the size of the job to be performed. They probably would say that it’s like a lawyer who takes a third of a settlement in a personal injury case. It’s not the same. Not even close. The lawyer does not control the amount of the settlement. The lawyer takes the case on a contingency and risks not getting paid one dollar and in fact may lose a ton of money on the case. Here, the engineer takes zero risk and in fact gets to decide his own salary before the job actually begins. If the contractor then says “sorry, we need to do more because of hidden defects,” the engineer just earned more money with no incentive to even check if the additional work is actually even necessary.
I know lots of people in the construction industry, including engineers, read this blog. I would love to hear from them on this topic. And, if this situation happened to you in your condo or HOA I want to hear about it as well.