The Trainer — September 2012
REVIEWING CONTRACTORS' BILLS; AVOIDING INELIGIBLE LEGAL CHARGES
In this month’s feature, we discussed how to avoid audit trouble by spotting and correcting overbilling errors in contractors’ invoices. If you don’t review these invoices, you could unknowingly pay more for items and services than the amounts you thought you negotiated, or pay for items or services you didn't order. By correcting invoice errors, you can save a lot of money. We explained how to spot and correct overbilling errors to avoid paying too much for contractors' services and possibly facing audit troubles as well.
In our article on making sure ineligible legal expenses aren’t charged to the site’s operating account, we explained that if auditors aren't satisfied that you've complied with HUD rules on handling legal expenses, you could end up having to repay the site out of your own pocket for hefty legal fees. We gave you four tips for complying with HUD rules and avoiding having to repay your site's operating account for ineligible legal expenses.
TRAINER'S QUIZ
INSTRUCTIONS: Each of the questions below has only one correct answer. On a separate sheet of paper, write down the number of each question, followed by the answer you have chosen—for example, (1) b, (2) a, and so on. The correct answers (with explanations) follow the quiz. Good luck!
QUESTION #1
You get a bill from your contractor and the labor portion seems too high. What should you do?
a. Check to see whether the labor rate matches the rate set in your contract. If the number of hours you're being charged for isn't specified in the invoice, ask the contractor for this information.
b. Ask your attorney to look into the matter.
c. Ask your accountant to look into the matter.
QUESTION #2
When is double-billing likely to occur?
a. When a contractor bills you twice for a back-ordered item—once when it orders the item, and again when it receives the item.
b. When a contractor bills you either for work in progress or for work that it hasn't yet begun, and then bills you again after the work is done.
c. When your accountant reviews your contractor’s invoice and charges you based on how many errors it finds.
d. All of the above.
e. Both a. and b.
QUESTION #3
Your contract for a project should specify what kinds or brands of parts the contractor will use. True or false?
a. True.
b. False.
QUESTION #4
You suspect your contractor performed and billed you for unnecessary work. How should you determine whether the work was necessary and the bill is proper?
a. Check with the standards of the contractor’s trade association.
b. Check your contract for a definition of “necessary” and whether written permission from you was needed to authorize extra work.
c. Hire an engineer or other professional consultant to review the work and make a determination.
QUESTION #5
The owner of the site you manage is refinancing the site’s mortgage, and says you can pay the related legal fees from the site’s operating account. Is he right?
a. Yes.
b. No.
QUESTION #6
Which of the following legal services will HUD allow you to charge to the site?
a. Preparing for and conducting eviction trials.
b. Drafting lease amendments.
c. Appealing property tax assessments on the site.
d. Defending against fair housing lawsuits.
e. All of the above.
f. Both a. and b.
QUESTION #7
You ask your attorney to give you a bill that itemizes the services performed and the cost assigned to each service. The invoice you receive includes the items “trial preparation” and “lease drafting.” Is this enough detail to satisfy HUD auditors?
a. Yes.
b. No.
ANSWERS & EXPLANATIONS
QUESTION #1
Correct answer: a
Also ask the contractor exactly who was working on the project and in what capacity. If the contractor says that a trainee was used, tell the contractor you don't want the trainee's time to be billed at the full rate. And ask your employees if they can recall how many of the contractor's workers were on the job and when.
QUESTION #2
Correct answer: e
If you get a bill for work or items that seem familiar from a previous invoice, check to see whether you have already paid for them. If so, show the contractor the original invoice and the canceled check, if necessary. To avoid double-billing problems, you should pay for items only after you receive or use them and for work only after it's actually done.
QUESTION #3
Correct answer: a
True. A contractor may try to bill you for more expensive, brand-name parts, but actually substitute generic or used parts. So in addition to specifying what brands will be used in the contract, ask the contractor for a copy of the invoice for the product that identifies the product's brand name. Sometimes a product's brand name is clearly visible on the product itself.
QUESTION #4
Correct answer: b
First, check your contract. Some contracts give your contractor the right to perform tasks and charge them to you when certain conditions are found or when work is “necessary.” Good contracts also include a clause saying that contractors must get your written permission to perform necessary work or work that hinges on certain conditions. If the contractor hasn’t gotten this written authorization for work it has billed you for, refuse to pay for it.
QUESTION #5
Correct answer:b
No. HUD says the owner must pay these expenses out of distributions or other non-site funds, even though the matter indirectly benefits the site as well as the owner. Other ineligible owner-related legal expenses include those associated with defending mortgage foreclosure actions, filing bankruptcy petitions, drafting and negotiating loan workout agreements, converting a partnership to a limited liability corporation, and resolving disputes between partners.
QUESTION #6
Correct answer: e
All of these legal expenses are legitimate, according to HUD. In addition, legal costs associated with drafting letters to residents, contractors, or HUD; recovering costs of damages from residents; enforcing a contract with a contractor; and, under certain conditions, lead paint litigation are also expenses that can be charged to the site’s operating account.
QUESTION #7
Correct answer: b
No. Auditors should be able to tell not only what work was performed, but when it was performed, the site to which the work related, and the names of any residents involved. Don't accept shorthand descriptions of the work.