Why You Should Never Ask Vendors to Pay for Vetting

Why You Should Never Ask Vendors to Pay for Vetting on vendorsmart.com

While it may seem reasonable, asking vendors and contractors to reimburse your vetting expenses can make HOA boards and their management companies vulnerable.

Hiring vendors for projects or regular service is one of the most important and time-consuming tasks HOAs and their property management companies face. Charging vendors to pay those costs it one of the biggest mistakes they can make.

As discussed in earlier posts, proper vetting requires at least the following five steps.

  1. Verifying vendors are properly licensed and certified under local, state and federal law.
  2. Verifying vendors are adequately insured. This requires not only verifying that all their insurance policies are in force, but reading through policy endorsements in their commercial general liability, professional liability, business auto liability, and workers’ compensation policies to ensure owners and residents are adequately protected.
  3. Running a credit check on the business and/or its owners.
  4. Running a thorough background check on the owners of the business. This can range from checking local and state civil and criminal courts to checking on customer reviews and complaints with the Better Business Bureau. Properly vetting construction contractors requires even more checks.
  5. Asking for, and checking, professional references.

The costs of gathering and analyzing this much information adds up fast. Even after paying hundreds of dollars to purchase credit reports and background reports, it can take hours to analyze the information, particularly if your board of directors wants a short list of at least three qualified vendors.

To defray these costs, many property management companies require their contractors, vendors and suppliers register with a third-party risk management company at a cost of between $100 and $200 a year. This arm’s length approach enables property management companies to ensure their contractors are thoroughly vetted every year without creating the appearance of pay-to-play that is explicitly prohibited by many state laws governing homeowners’ associations.

Under most states laws, the officers and directors of condominium and home owners’ associations have a fiduciary responsibility to their shareholders, i.e.; residents. For this reason Florida statutes 718.111(a) and 720.3033(3) prohibit them and any property manager they hire, from soliciting, offering or accepting “any thing or service of value or kickback for which consideration has not been provided, for his or her own benefit or that of his or her immediate family, from any person providing or proposing to provide goods or services to the association.”

New Hampshire Law 356-B:40-1 “requires managers to disclose to community association boards any fees other than maintenance fees they receive for contract work.”

Don’t short circuit your risk management

While these laws don’t explicitly prohibit HOA boards, officers and directors or their property management companies from charging vendors vetting fees, the reality is that in the occasionally litigious world of homeowners’ associations, taking payment from a potential vendor could make one vulnerable to accusations of kickbacks. Asking vendors to reimburse your vetting expenses, in other words, could introduce new risks.

This would obviously be counterproductive given that at its core, vendor vetting is a risk management strategy. It goes well beyond protecting yourself from being ripped off by fly-by-night operators. Its more important purpose is to mitigate damages in the unlikely event that a vendor accidentally causes property damage, personal injury or even death. Verifying their insurance coverage and financial background can reduce what residents and owners pay in repair, medical, legal and other expenses in the event of an accident.

At the very least, HOA boards should consult with their CPAs and lawyers before collecting any fees from vendors.   VendorSmart‘s team of professional analysts mitigate the risk of working with third-party vendors by monitoring compliance documents (Certificate of Liability Insurance, Workers’ Comp, Business Licensing, etc.) and storing them safely and securely online so they can be accessed at any time by the management company. We do  the vetting so you can find vendors you can trust. Contact us today to get started.