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HOW APPROVING VENDORS CAN KEEP YOUR COMMUNITY’S POCKETBOOK “GATED”
By Todd A. Derby, CPA
Experienced board members and managers understand that a community’s operational and financial success can hinge on vendor relationships. Good vendors can add value, appeal, and security to the community while saving on overall costs; these are the businesses that become trusted long-term partners. On the other hand, poor vendor choices can cause frustrations, inefficiencies, cost overruns, public strife, and waste. To take it a step further, some vendor choices may open the community up to the project failures, unrecoverable costs, unenforceable contracts, allegations of misdealing by the board or manager, insurance liability, and worse. Of course, it doesn’t need to be that bad.
Protecting your community from vendor mishaps begins with the vendor selection and approval process. Before contracting with a vendor, or even allowing them to perform minor work for your community, you should obtain basic assurances that your community is dealing with a legitimate business who is not going to pose a financial or legal threat to the community down the road. These basic assurances come in the form of licenses and insurance.
Licenses are issued by various governing bodies to make businesses identifiable, accountable, and to ensure that certain minimum standards have been met by the business to practice a profession or occupation. Licenses are a way to protect the public from unqualified, unethical, or underhanded businesses. At a minimum, all vendors should provide evidence of a current license to conduct business in their jurisdiction.
As an added protection to the public, a business may be subject to additional license requirements due to their profession or occupation. The Virginia Department of Professional and Occupational Regulation (DPOR) is responsible for regulating many of the businesses serving community associations, such as architects, community managers, contractors, and professional engineers. Other organizations that regulate businesses serving community associations include the Virginia State Bar, Virginia Bureau of insurance, and Virginia Board of Accountancy.
Board members and managers should use available online resources to verify the status of any licenses required in the vendor’s field, and investigate any filed complaints or actions taken against the vendor. Applicable licenses should be independently verified before a vendor is approved for use, and re-verified annually in order to continue doing business with them. Communities should only work with vendors who are able to meet license requirements and who have a clean record. Settle for any less and you may be throwing money away.
Before vendors may be approved for use, communities should also obtain a certificate of insurance. Most managers and boards are aware that a vendor needs to maintain his or her own commercial general liability and worker’s compensation policies; however, a certificate of insurance by itself is not a golden ticket.
Community boards and managers should see that a vendor maintains the appropriate types and amounts of insurance for the services they will provide to the community. Begin by obtaining certificates of insurance directly from the vendor’s insurance carrier. This guarantees that the information contained in the certificate is accurate, complete, and unaltered. No vendor should be approved for use until they show they are adequately insured to work for the association. Further, an updated certificate of insurance should be obtained within 30 days of expiration in order to continue working with a vendor.
When reviewing a certificate of insurance, the limits of coverage typically garner the most attention. It is important that board members and managers think critically when evaluating whether the limits are adequate for the type of work the vendor will perform for the community. Factors that will come into consideration are the value of community property, the number of workers the vendor will employ on the property, whether heavy machinery is involved, or it substantial structural renovation is being performed. Every situation is different and therefore, requires consideration of the vendor’s policy limits. Consider consulting with an insurance professional to establish acceptable minimum insurance types and limits for the vendors serving your community.
When bidding out a new project that is significant to the community in cost or scope, consider if additional insurance is required of a vendor. Also be aware that certificates of insurance do not account for recently filed claims that have reduced policy limits, and obtain a current loss report for the insured, if necessary. A larger project brings a higher level of risk; this warrants closer scrutiny than that required for a type vendor approval.
Once vendors have satisfied the licensing and insurance criteria of the community, and are approved for use by the board, there is another order of business; managers need to obtain a Form W-9 from the vendor. Form W-9 was published by the IRS to assist businesses in obtaining tax information from others. The tax information obtained from a W-9 is used to determine if the community association is required to report payments made to the vendor and to prepare any required tax filings.
Typically, community associations must report payments to vendors who are paid more than $600 for services during a year, if the vendor is non-corporate taxpayer (sole proprietor, single member llc, partnership). However, payments to attorneys must be reported regardless of their taxable entity type. The IRS has implemented a great number of reporting requirements; consult with an accountant to ensure compliance is met, as penalties may be imposed for failure to report certain payments. Since the burden is on the community to obtain tax information and prepare tax filings, no vendor should be paid prior to supplying a complete and accurate Form W-9 to community management.
Community board members are entrusted with spending hundreds of thousands of dollars on behalf of their neighbors each year. Community managers are trusted by boards of directors to provide sound guidance on spending community finances. Spending this money prudently and with sound judgment begins by selecting the right businesses to work for you. Board members and managers can ensure that community funds are spent wisely by utilizing standards for vendor selection and approval. Obtaining and verifying applicable business licenses, reviewing a certificate of insurance for adequate policy types and limits, and obtaining a Form W-9 from a vendor sets the foundation for a successful business relationship, and ensures that community funds are spend sensibly while remaining protected from liability exposure.
Todd Derby is a senior accountant at DesRoches & Company, CPAs, PC who specializes in providing tax and audit services for the common interest community associations throughout
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