When Are Three Bids Necessary and what is the requirement?
Fact versus Fiction: HOA Bidding Procedures.
In 2013 I worked as a government affairs liaison for a major HOA management company in Texas and was tasked with working with the Texas Legislature to steer legislation in a way that helped protect HOAs and HOA members. Then, as now, existed a vocal minority who sought the State Legislature’s help to enact legislation that would significantly disempower HOAs on account of bad HOA board members. Working for an HOA management company for many years at that point I knew that vast majority of HOA Board members were in fact quite well-meaning, measured, and thoughtful. However, the individual “bad actors,” as we called them, were (and are) a real public relations nightmare for our industry. So much so that the some of the most powerful members of the Texas Legislature had serious interest in taking further steps to strip HOAs of key authority necessary to remain operational- a dystopian reality which only two years prior we had narrowly escaped through last-minute heroics by a State Representative whose name I’ve vowed to keep a secret. Now every time a Board President used HOA funds to harass a nemesis neighbor or a homeowner was fined for using the wrong color duct tape to winterize their spigots we would receive the news alerts and we would then rush to try to explain to the legislature that these were just outliers. To make matters worse, bad HOA Board members become so popular to hate that each major metro in Texas now had a designated investigative TV news reporter who specialized in showing up to HOA Board meetings with a boom mic, camera crew, and chasing around frantic board members under the guise that they were “sniffing out impropriety in HOAs” due to improper HOA bidding procedures or other forms of malfeasance. Suffice it to say: the only press HOAs received was negative and as an industry we had to solve this problem else the legislature would solve it for us.
That year a State Representative from the Houston area named Luna Hernandez filed a ham-fisted bill that purported to create rules for HOA Boards to follow when voting on contracts but which in reality essentially crippled HOA boards from making any decisions at all. Concerned, I visited her office to learn more about her intentions and to my surprise she turned out to be a sane, reasonable, and thoughtful person who did not want to destroy or harm HOAs, but rather she simply wanted to protect homeowners from board member self-dealing. It turned out that a community in her district had a Board President who fired their HOA management company and hired herself on as a new management company, siphoning away the HOA’s funds in the process due to a series of bad business decisions leaving the homeowners association destitute. At that time, there were no specific rules in state law safeguarding against HOA Board Member conflicts of interest except for a requirement in the Nonprofit Corporations Act for disclosure of the existence of the conflict of interest. Her goal was to ensure that association funds were spent wisely and safeguarded, a cause we could all stand behind- so I decided to help.
HOA Bidding Procedures: What does the law require?
Subsequently, I redrafted Section 209.005 of Texas Property Code, then House Bill 503, to address create a process that mandated transparency, fairness, and yet permitted flexibility for the wide array of situations across the State of Texas. After much haggling, amending, redrafting, and reamending we finally were able to pass a version, albeit a watered-down version, of a bill that only addressed board member conflicts of interests rather than version that outlined fair and transparent HOA bid procedures on the whole. A decade later this section was amended to add back a requirement that had been stricken from my original draft requiring a bid process for contract services exceeding $50,000- however it does not specify that the process must require three bids.
How to address HOA Board Conflicts of Interest:
Prior to Texas Property Code 209.0052, though it was an industry standard to obtain three bids for HOA contracts, there was no legal requirement to do so unless specified in the HOA’s declaration. Texas Property Code 209.0052 requires three bids be obtained however only applies in situations where a board conflict of interest exists. This is defined as a current Board Member, or relative within the third degree, has a financial interest in the contract or company proposing the contract. In such cases the material facts of the conflict must be disclosed, HOA must obtain at least two other bids, and the conflicted board member:
- May not be given access to the other bids;
- May not participate in any board discussion regarding the contract; and
- May not vote on the award of the contract;
The remaining non interested HOA Board directors may then, in good faith, authorize the contract.
In addition Section 22.230 of the Non Profit Corporations Acts specifies that a contract between a corporation and one or more interested directors is valid and enforceable if:
- the material facts as to the relationship or interest and as to the contract or transaction are disclosed to the voting body and that body, in good faith, authorizes the contract, OR;
- the contract or transaction is fair to the corporation when the contract or transaction is authorized, approved, or ratified by the board of directors, a committee of the board of directors, or the members.
This section does not preclude an interested director from participating in votes or discussions on the matter, however, Property Code 209.0052, which applies to single family residential subdivisions, offers more restrictive guidance and should be followed. However, neither of these sections outright prohibit Board Member conflicts of interests. Why? Well, in 2013 when we first proposed an outright prohibition of Board Member self-dealing certain rural communities came forward with a real-world problem: sometimes there really is just one good option. While in principal, it makes to prohibit board members from participating in any community bids, in practice this can be limited in situations where a board member in a small town owns, or is related to someone who has a financial interest in, a local services provider. So, this provision was revised to instead require disclosure of the HOA board member conflict of interest and for that member to be recused from voting on the contract.
In general we recommend adopting HOA bid procedures that outline how your HOA will handle these situations. Many HOAs will find that there are enough service provider options that there is no reason to allow undue influence from an conflicted board member, however, many others may find disclosure rather than prohibition is in the best interest of their HOA.
HOA Bidding Procedures: What is Required of the HOA Board?
Although there is otherwise no explicit requirement that an HOA must obtain three bids (except as aforementioned), HOA Boards are still responsible to make decisions that are informed, in good faith, in the best interest of the HOA, and within the scope of their authority and therefore the practice of three bids has remained a norm.
The rule of thumb for HOAs has long been that there is safety from scrutiny or allegations of impropriety so long as three bids are obtained. While obtaining multiple competitive bids is often a fantastic way to ensure you made the decision that was in the best interest of the homeowners association this approach does not translate to all types of spending or contract decisions.
Sometimes obtaining three bids simply isn’t practical, there may not be three options available, or this may even be counter-productive. So how you satisfy the duties of the board instead becomes a question of making “informed decisions” that are in the “best interest of the homeowners association.” First, we need to look at what an “informed decision” is and what it means to “act in the best interest of the HOA.”
Informed decisions in this context means: you’re relying on the advice of experts, including your attorneys, accountant, community association manager, insurance broker, or other expert and have a basis for making the decision.
Acting in good faith and in the best interest of the corporation, in this context means: Directors should not make decisions to benefit themselves or their own interests, should not disclose any confidential information, should make decisions based on the interest of the corporate entity as a whole.
If you’re reading this- then you likely know that the lowest cost doesn’t necessarily mean something is in the best interest of the HOA. Let us accept that not all decisions are made strictly on the basis of cost but rather they are made on the basis of value and the extent to which they solve a problem. There are many times the most expensive bid offers the best value and solution to a problem when facts such as quality, warranties, specialization, and a vendor’s likelihood to be in business for the coming years are considered. So instead of choosing the lowest cost bid, the HOA Board is held to the standard to act in the best interest of the HOA, in good faith, and to make informed decisions.
What is in the “best interest of the HOA” is subject to the Board’s business judgment of various factors, including cost, quality, and overall fitness for the community. Provided that you rely on experts along the way and can demonstrate ordinary care in your decisions there is quite a bit of latitude afforded.
The decision to seek three bids hinges on several key factors:
- Decision Factors: Consider if price is the primary concern or if the project’s specific requirements dictate the bidding approach. For instance, if solving a unique problem is the goal, finding the right expertise might outweigh the need for multiple bids.
- Scope of Work: Determine if the project has a fixed scope or if there’s room for alternative solutions. A fixed scope often invites comparable bids, while open-ended projects might require specialized skills, reducing the pool of potential bidders.
- Provider Availability: In cases where multiple providers can offer similar services, obtaining three bids is usually beneficial for comparison and value assessment.
- Time and Resources for RFP Process: Evaluate if there is sufficient time to engage in a thorough Request for Proposal process. This involves drafting detailed requirements, allowing contractors time to submit thoughtful proposals, and reviewing these proposals meticulously.
When Three Bids Are Typically Required
- High-Value Contracts: For significant expenditures, such as those exceeding $50,000 in single-family community associations, obtaining three bids is often a procedural standard. This practice not only ensures competitive pricing but also aligns with industry norms and transparency expectations.
- Routine Service Contracts: Regular services like landscaping or janitorial work, which have a well-defined scope, typically benefit from multiple bids to ensure quality and cost-effectiveness.
- Contractors Involving an HOA Board Member Conflict of Interest
When Three Bids Are NOT Necessarily Better
The days of vendors fighting for your business are over in some industries. In fact, for certain industries it is quite the opposite: the customer must vie to be accepted as a customer by the service provider. Being a good customer means different things in different industries but the paradigm shift that has occurred is substantial and good service providers now hold many of the cards.
- Insurance and Energy Contracts: In insurance an insurance carrier or wholesaler can only work with one broker representing an insured- so hiring more than one broker doesn’t help you if they’re going to the same insurance carrier for pricing. There are a limited number of insurance carriers who offer coverage for specialties such as homeowners and condominium associations so using a single, experienced broker for insurance can be more effective than multiple brokers. Having a single broker who is able to navigate the markets, get formal quotes from only those they know will be a serious contenders (they have to keep their suppliers happy too), and leveraging them to obtain the best terms often provides a better outcome than multiple brokers who each have only limited access. The same is true for energy brokers as one skilled broker is better than 3 skilled brokers each with only 1/3 of the marketplace to work with.
- Limited Provider Markets: In markets with a few providers, the focus shifts to securing a provider capable of delivering quality services, rather than solely on the number of bids. In some specialty markets the vendors are so few, and so sought after, they have to be picky with whom they choose to work. HOA Boards are notoriously fickle when making decisions and if an already busy provider detects that they are working with a customer who is not ready to move forward- the provider may simply choose not to offer a quote. It happens all the time.
- Routine and Emergency Repairs: For ordinary repairs, establishing preset rates with trusted vendors offers efficiency. In emergencies, quick action is paramount, and having pre-arranged vendors ensures timely response. This also avoid exhausting your vendors and managers who will eventually stop offering quotes for service.
- Extremely Complicated Estimate Preparation: In some cases the work of preparing an estimate is as much work as the job itself. Damage Mitigation and Restoration work, as an example, entails an invasive process to create the needed estimates while is also subject to significant degrees of change as new damage is discovered. The contractors who liaise effectively with insurance companies can be more beneficial than focusing on multiple bids and often results in greater insurance proceeds made available to you.
- Elevator and Legal Services: These services often require specific expertise where the provider’s qualifications and experience may take precedence over the number of bids. In the case of elevators, proprietary systems may limit the choice of service providers. For legal services, the effectiveness and experience of the attorney or firm are often more critical than the cost, especially in complex legal matters. For services requiring specific expertise or dealing with variable costs, multiple bids might not offer additional value. The focus should be on the unique requirements and effectiveness of the service. You probably do not want the cheapest attorney in town.
- Hard to Predict/Variable Scopes of Work: While it’s essential to obtain multiple bids, focusing solely on a certain fees can be misleading. Understanding the all-in cost, including potential additional fees, is crucial for a comprehensive financial assessment. Some companies may offer low upfront fees but compensate with higher back-end charges, thus making it imperative to consider the total financial commitment over just the upfront cost. Management companies are an example of this.
Conclusion: Making Informed Decisions in HOA Bidding
In conclusion, the necessity of obtaining multiple bids in HOA management is not a blanket rule but varies with each situation. HOAs need to assess each project or service requirement individually, considering the nature of the work, the availability of providers, and the specific needs of the community. By carefully evaluating these aspects, HOAs can make informed decisions that align with their goals, ensuring they achieve the best value and most effective solutions. Remember, the ultimate aim is not just to fulfill a procedural norm but to ensure the best outcome for the HOA and its members.