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Is there a conflict of Interest?

Should you engage the construction company

Should you engage the building company, which built your new apartment building, to manage your apartment building?

A slightly controversial discussion:

The construction company, which built the apartment building, is often engaged for the on-going building management. Legally or morally there is nothing wrong with this, but, we find ourselves in a quandary.
Your brand new apartment building has just been “handed over”, which signals the beginning of the “DLP”, that is, the “Defects Liability Period”, or in consumer speak, the warranty period. The owner’s corporation needs a building manager, cleaners and maintenance personnel to look after the building, especially now the building is now the responsibility of the owner’s corporation. Naturally, the owner’s corporation are keen to maximize the life and quality of the building’s presentation and the building’s functionality, ensuring value and performance for the long term.
An industry practice, or so it seems, is to engage the construction company, who built the apartments, in the caretaker role for the building management. There is reasonable logic in engaging the construction company that built the apartments to manage the building, including:

  • 1 They have local knowledge of how the building works and where things are
  • 2 They know the sub-contractors which supplied and installed the equipment and assets in the building
  • 3 They are builders so they know a lot about buildings
  • 4 There is already a business relationship and personnel known to members of the committee
  • 5 They know the legislation for legislative compliance for the essential services
  • 6 They are financially stable (we hope they are, they just built your apartment block)
  • 7 They have longevity and experience in apartment buildings

The logic is sound, it’s like taking your car back to the dealer you bought it from for a service, and there is a “but” and quite an expensive one.

  • 1 There is a conflict of interest
  • 2 The builder’s expertise is in construction, not facility or building management.

So let’s talk about these.

Conflict of interest

The conflict of interest rests with fact the construction company built the apartment building and, as such, the construction has a warranty, or “DLP” obligations. The construction company is interested in making money and keeping the money they have already made. Hence, if the construction company is in the management role for your new apartment building, during warranty/DLP period, then, in our opinion, there will likely be fewer warranty issues brought to the attention of the owners corporation, not because the construction company has done a great job (although this is sometimes the case) but, because the construction company doesn’t want to spend money fixing things he has already done. No one likes doing work twice and being paid once.
Not all construction companies are without integrity, we don’t want to cast aspersions on genuine inspired people. There are construction companies which will not even consider the management or caretaker role of an apartment building, as it is not their field of expertise, and they don’t like the politics which building management often brings.
Let’s provide an example of this conflict of interest; our example is a water leak, a storm water leak in particular. The brand new apartment building has beautiful balconies with stunning floor tiles and stunning views. The problem is, when it rains heavily, the water doesn’t always go where it is meant to go, and, consequently the water takes the path of least resistance which happens to be the underside of the balcony floor, that is, we see on the roof of the balcony below that there are signs showing of water damage; signs such as the paint is ruined, discoloration, rust marks and other such signs of water damage.
The problem is fixable, but to fix the problem will likely involve ripping up those beautiful floor tiles, digging into the concrete, adding fittings or water proofing as required, and then replacing the floor tiles; all this work to be completed on multiple balconies.
What would the cost be for all this work and who is liable if the building is under warranty or “D.L.P”? Who has the responsibility to report the newly discovered defect/issue to the owner’s corporation/body corporate? The answer is the building management, which, in this example is the construction company.
In an idea world this is an ideal situation because the construction company is aware of the defect and can offer practical solutions, free of charge, and, make the repairs under their warranty obligations, all free of charge. Fantastic!
“Spock!”
“it’s life Captain……but not as we know it”
What do you think is really going to happen?

Through the building Manager’s eyes.

Let’s look at the situation though the building manager’s eyes, whom is employed by the construction company.
If you’re the newly appointed building manager of the brand new apartment building and your boss owns the construction company, I’m thinking, the conversation about the storm water defect will be an awkward conversation. However if you’re a building manager employed by a third party, then the conversation becomes a duty of care; the employee is not in fear of their employment, and the building management company is reporting upon facts. The building management is carrying out its duty of care as the building management company was engaged to do.
The remedy of the defect situation is a completely separate issue altogether, which the owners corporation/body corporate will decide in due course.

Loss of Power of Negotiation

Consider something smaller, the owner’s corporation has engaged the construction company to provide building management services at the beginning of the “Defects Liability Period”. We ask you to consider:

  • 1 Are you getting market value?
  • 2 How do you know the scope of works set out is thorough enough for the site and for the price you are paying?
  • 3 How do you recognize that the building manager is experienced, and, has the interests of the owner’s corporation at heart?
  • 4 By engaging the construction company to manage the apartment building, immediately at “hand over” , at the start of the D.L.P, then owner’s corporation have put themselves at a disadvantage as they have given away their power of negotiation, there is nothing to work with, and there is none or little accountability or position of strength the owner’s corporation. Why? Because there was little or no shopping around and no sound basis for the engagement of the construction company as the building management.

In the defence of the construction company, they might engage a building management company to represent them on the site. Several large construction companies do this as it maintains some of the benefits of performing the work themselves and adds a separation as well. That is, the building management company has a duty of care to all parties and the seven logical benefits, mentioned earlier, for engaging the construction company as the management, partly remain intact.
There is still a fiscal relationship between the construction company and the building management company, so technically, there is still a conflict of interest; but not as dire. The advantage in this scenario, is the building management employees are not employed by the construction company. The employee doesn’t have the conflict of their own interest in the reporting of defects or issues.
The strongest methodology is a completely separate entity who is responsible for the building management, (preferably a company with construction and trade experience, whom understands the processes and know the protocols).

The construction company’s expertise is in construction, not facility or building management, cleaning, waste disposal, maintenance management and the other facility services which serve an operational apartment building.
If the construction company engages their existing employed “trade assistants”, and “builder’s labours” to perform cleaning and building management in the new apartment building, the performance of the maintenance and management task suffers as these people are trained for construction, consequently, the accountability for performance diminishes and the overall value of the building will likely suffer.

Conclusion:

Engaging the construction company to perform the management role of the new apartment building during the “Defects Liability Period”, and even longer, in our opinion, has risk, both financially and practically in the long term. This is not because construction companies are without integrity, but, because it is best practice to protect one’s assets in the best way possible.
We would be interested in hearing you experiences, frustrations and thoughts. Do you agree or disagree?

Nigel Wraight
Principle
Wraight Property

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