Understanding Third-Party Service Provider Contract Agreements

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One of the primary duties of a property management firm is to ensure that a real estate asset is being properly maintained. While some firms are set up to complete the majority of these services in house, most will use third-party service providers to perform at least some of these tasks. Therefore, the contract between the management company and the service provider becomes a critical document. This month, we are going to review some of the key components that any property management service contract should include.

One of the most important things actually isn’t a component at all, it’s the document. While nearly all service providers will have a standard document associated with their specific business, we recommend that the property manager not only have a standard document of their own reviewed by counsel, but push to use this with all of the service providers. In doing so, this will ensure that the most important components are included and enforceable. As with any negotiation, leverage is the key here – whoever has more leverage will usually be able to influence whose form is used. However, this is one of the items to which we try to strongly adhere.

There are five basic components that should be included. The first is the very reason the agreement exists – general guidelines and performance. This outlines the nature of the work or services that are to be completed, how it will be done, where it will be done and for whom it will be done. Think of this as the summary of a book, as it provides an overview of the agreement.

The second component details the exact scope of services to be completed. This section outlines the specific service needs of the property and expectations of the provider. For example, a snow removal contract will include under what conditions that snow and ice will be removed, what areas will be plowed or shoveled, when they will be treated and other requirements. The more specific this section is, the less chance there is for misunderstandings to occur, so be sure that this component is detailed and precise.

The third component is insurance requirements. It is very important for the contractor or service provider to be properly insured. This includes sufficient limits on general liability and property damage. It should require the contractor to maintain workers’ compensation insurance and it should include the property management company and the property owner as additional insureds. Finally, it should provide an indemnification and hold harmless clause in the event that any legal action is brought forth against the contractor that is associated with the service agreement.

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The fourth component is a cancellation provision. It is commonplace for this provision to have two different aspects. First is a right to cancel by either party with some pre-determined period of advanced notice. So long as the appropriate notice is given, the contract can be canceled. The second aspect is a right to cancel by the property management company immediately in the event an owner elects to terminate their management agreement.

The fifth component is a general health and safety provision. This will ensure that all of the work at the property and duties of the service provider comply with all rules, regulations, laws and statutes. Our contracts specifically include reference to the Occupational Health and Safety Administration Act. We also have language that reinforces our commitment to a drug-free work environment and requires the contractor/ service provider’s employee to also be drug-free while performing its obligations associated with the contract. Finally, we require workers be property trained, including certified if appropriate, for the intended work and take the necessary precautions to protect both themselves and any pedestrians.

We will close this article with a few procedural items that we follow. First, service contract agreements should be annual or seasonal in duration. This is done for a few reasons; it tends to keep the service provider “on their game,” it provides the owner with flexibility and it allows for adjusting the primary components in future years. Not that we aren’t loyal to our service providers, but annual agreements are expected in our business. Second, the terms and conditions of fees, rates and/or terms and payments should be clearly spelled out with no ambiguity. Lastly, the direct lines of communication should be clearly stated, identifying the primary contact for the property manager as well as the service provider. We like to also include direct phone numbers for each, most typically a cell phone number, right in the agreement. The last thought is simplicity. Although we have covered a lot of content, our standard service agreement is two and a half pages. It is comprehensive but concise, which is appreciated by both property owners and service providers/vendors alike. Ira Krumholz CPM

OAS

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