How to Document Contractors' Cost Estimates

Getting cost estimates before you hire contractors to do work at your site is not only a smart business practice, but it's also a HUD requirement. If you don't get those required estimates, you could run afoul of HUD or your contract administrator. And you put the site owner at risk of having to pay back any costs HUD or your contract administrator find to be excessive.

In the May issue of the Insider, we discussed how to bid out your site's landscape maintenance. We briefly discussed the HUD requirement of being able to show that you're paying a reasonable price for contractor services. In this article, we'll delve deeper. HUD has some specific guidelines for when you must get cost estimates. First, we'll cover those guidelines, and then we'll discuss elements to include in a checklist to help your contracted work stay on track.

Dollar Levels Determine Type of Estimate

The type of cost estimates you must get before actually contracting for services or supplies—that is, signing a written contract or making an oral agreement—depends on how much you expect the services or supplies to cost per year. Sometimes contracts cost more than you think, so it's wise to err on the high side when estimating what you expect to pay.

$10,000 or more. When you expect services or supplies to cost $10,000 or more, HUD generally requires that you get written estimates from at least three contractors or suppliers [HUD Handbook 4381.5, par. 6.50(a)]. You might decide to get more written estimates, but HUD requires a minimum of three.

Technically, HUD rules require only that you “solicit,” or ask for, three written estimates. But to protect yourself from potential trouble with HUD and your contract administrator, you should secure at least three written estimates—or have a very good reason (and proof of that reason) that you attempted to but could not get them. For example, you asked many contractors for estimates on a specialized job, and all promised to get back to you with estimates, but only two actually responded.

Less than $10,000. If you expect services or supplies to cost less than $10,000, you can opt to get oral, rather than written, estimates before signing a contract. If you prefer, you can get written estimates, which is always a good practice regardless of the cost. For work under $10,000, HUD doesn't set a minimum number of estimates you must get. But you're required to secure estimates to assure that the site is getting the lowest possible cost [HUD Handbook 4381.5, par. 6.50]. You're expected to use your best judgment to decide how many estimates to get, and each situation may be different. You can always ask your local HUD office or contract administrator for guidance.

HUD rules for oral estimates, like those for written estimates, technically say that you only have to “solicit” estimates. But many sites have gotten into trouble for not at least attempting to secure estimates, and documenting that effort.

When Employed Staff Provide Services

What if you use centralized work crews? For example, management company employees who perform services such as plumbing for one or more sites. In this situation, HUD knows it's not practical to get estimates from outside contractors each time you send an employee to do a job such as repairing an air conditioning unit. But it's important to keep documentation to show HUD that your employees are providing services at the best price.

One way to do this is to periodically get estimates from local contractors for the types of jobs these employees are handling. Doing this at least once a year is recommended. Then calculate how much it costs your employees to do the same jobs, and keep documentation of your calculations in case HUD auditors ever question you. If you need guidance on how to document that your employees are performing the service for the best price, check with your local HUD office.

Keep Proof of All Estimates

HUD requires you to keep proof of all estimates, including written estimates, bid packages (where you spell out your expectations for the job and the rules for providing estimates), and oral estimates. You must keep this proof for at least three years after the work or service is completed or the supplies are bought [Handbook 4381.5, par. 6.50].

If you're audited by HUD, the auditors will be looking for this documentation. “And if you're using your site's replacement reserve account to pay for the contractor or supplier, your local HUD office will probably want copies of the written estimates and documentation of the oral estimates before they'll let you withdraw funds from the account,” explains management expert Michael Johnson, a senior executive with Alco Management, Inc.

In addition, during management reviews, local HUD offices and contract administrators often want to see copies of the written estimates and documentation of the oral estimates, adds Johnson. You risk losing points on the review if you don't have them, he notes.

Track Estimates with Checklist

To help you comply with HUD's rules on getting estimates and track your estimating process, use a checklist that contains the following items. File completed checklists with the estimate requests and bids you seek for services.

• Your site name and address. Place this information at the top of the checklist.

• Service or supplies. Here, you should provide a detailed description of the work or supplies for which you're getting estimates.

• Contractor/supplier information. List the name and contact information for each company you have asked to estimate your work or supplies. If you receive an estimate, note the amount next to the contractor's name. If the estimate is written, attach a copy to the checklist. If the estimate is oral, make a note to that effect. If you don't hear back from the contractor, note that next to the company's name.

  Be sure not to throw away the original written estimates that the contractors or suppliers gave you. Even if you've described them on the checklist and attached a copy, if you get audited, HUD auditors will want the actual written estimates.

• Insurance check. Note here whether the contractor/supplier has insurance, and if so, whether you attached a copy of the certificate of insurance. Many management companies have a policy of requiring that contractors have insurance to protect the site from liability. HUD Handbook 4350.1 leaves it up to you to decide whether the contractor should have insurance. If you decide that it should, get an insurance certificate from the contractor that names the site's mortgagee, HUD, and the site owner as additional insureds [Handbook 4350.1, par. 21-10].

• Reference check. Indicate here whether you checked the contractor's/supplier's references—it's a good idea to do so, especially if it's a company you've never worked with before. If you check references, note the references' names and what they said about the company.

The above is standard information you should gather about each estimate you solicit. At the bottom of your checklist, you also should note the following, depending on the circumstances:

• Number of estimates solicited. If the dollar amount of the contract for work or supplies is expected to be $10,000 or more, and you didn't secure three estimates, explain why.

• Other contractors and suppliers contacted. You can use this space to list the names of any other contractors and suppliers that you contacted but that didn't give you an estimate.

• Selected contractor/ supplier. Identify the contractor/supplier you selected and state why you made the selection. If you didn't select the contractor/supplier with the lowest estimate, be sure you explain why. Note: If you're not the person who makes the final decision on outside contractors and suppliers, you can note here that this is the company you recommend. You should still note why you're making the recommendation.

HUD rules don't necessarily require that you select the contractor/supplier with the lowest estimate. There are many legitimate reasons for not doing so, notes Michelle Norris, a financial management expert and senior executive with National Church Residences. “One company may give you a higher estimate because it's willing to provide more services and use better materials. But because HUD requires that you spend site funds only for reasonable and necessary expenses, it's important to document the reason you didn't choose the contractor or supplier with the lowest estimate. Otherwise HUD could question whether you're using site funds effectively,” she says.

Insider Sources

Michael Johnson: Executive Vice President, Chief Administrative Officer, Alco Management, Inc., 35 Union Ave., Ste. 200, Memphis, TN 38103; (901) 544-1707; www.alcomgt.com.

Michelle Norris: Senior Vice President, National Church Residences, 2335 N. Bank Dr., Columbus, OH 43220; www.nationalchurchresidences.org.

Sidebar

Three Tips for Getting Three Estimates

It's not always easy to get three cost estimates. Maybe you don't know any contractors to call, or perhaps local contractors aren't interested in your job. It can also be tough to get estimates if your site is in a rural area, or if your project is highly specialized. Here are three tips that may help:

1. Join group purchasing organizations. Some group purchasing organizations, like Buyer's Access, will either solicit estimates for you or put you in contact with contractors/suppliers that are interested in giving you estimates on your job.

2. Get contractor and supplier names from local trade associations. Contractors and suppliers that are interested in providing services for and selling products to HUD-assisted sites often advertise with local trade associations. Check association newsletters or on association Web sites for these ads.

3. Network with other management agents and site owners in your region. Some contractors and suppliers work readily with HUD-assisted sites and may be happy to estimate your project.