Academy/Procurement, Bids & Contracts
Vendor due diligence
The lowest bid is not a vetted vendor. Here is what to confirm before the contract goes to a vote.
Vendor due diligence means checking a contractor's license status, insurance, financial stability, complaint history, and references before you sign, not just comparing bottom-line price. It turns a bid into a decision you can defend later. Skipping these checks is the pattern courts have treated as outside the board's protected judgment.
The five things to check
Before a contract reaches the board for a vote, someone should confirm five things about the vendor: license status, insurance, financial stability, complaint history, and direct references.
License verification is a status check, not a one-time lookup. Confirm the license, classification, expiration, bond, and disciplinary history through the applicable licensing authority, and check again the day the contract is signed and again before work begins, since a license can lapse or draw discipline between bidding and start of work. Which authority licenses which trades, and whether a trade is licensed at all, varies by state. Check your state's contractor licensing board directly.
Insurance requires the same care. A certificate of insurance is a snapshot of coverage on the date it was issued, not the policy itself, and it needs refreshing on a schedule tied to the vendor's renewal date. Being listed only as "Certificate Holder" gives the association no rights under that policy; only "additional insured" status, created by a policy endorsement, extends real coverage.
Why a low bid isn't due diligence
A board's vendor decision is shielded from later liability under the fiduciary standard known as the business judgment rule, but only when the board actually investigated before deciding.
"The business judgment rule provides a director of a corporation immunity from liability when a plaintiff sues on grounds that the director violated the duty of care to the corporation so long as the director's actions fall within the parameters of the rule."
Source: Wex, "business judgment rule", Cornell Law School, Legal Information Institute
A board that skips license checks, insurance verification, and references has nothing to point to as evidence of that investigation. One HOA law firm's blog describes a case where a board member signed a contract without submitting it to the board at all, in direct violation of the board's own bidding resolution, and frames the business judgment rule as offering no protection to a board that stayed willfully ignorant of information it should have gathered.
Check once, then check again
Due diligence is not a folder you build at onboarding and never open again. License status, insurance, and complaint history can all change between the day a vendor wins the bid and the day work actually starts. Build the recheck into your process: verify again right before signing, and request a fresh certificate of insurance annually and whenever the vendor's policy renews.
Keep the record of what was assigned, and what was checked, in writing. A written work order and a dated due diligence file do more for the board than a memory of a phone call.
Check yourself
Answer before you read the explanation, recalling it is what makes it stick.
A board picks a vendor because the bid was the cheapest, without checking license, insurance, or references. The vendor's work damages a resident's unit. What happens to the board's business judgment rule protection?
A vendor's certificate of insurance lists the association only in the "Certificate Holder" box, with no endorsement attached. What coverage rights does the association actually hold?
A board verified a contractor's license the week bids came in, then signed the contract four months later once the project budget cleared. What did that gap leave unchecked?
Sources
- Wex, "business judgment rule", Cornell Law School, Legal Information Institute
- Business Judgment Rule Does Not Protect the Willfully Ignorant, Tinnelly Law Group, HOA Lawyer Blog
- How to read an ACORD 25 (Certificate of Liability Insurance), FO Agency
- HOA Vendor Compliance Checklist, 7 Documents to Collect, TrackMyVendor
- Contractors Board 2026: US State License Lookup Directory, Contractors Board
- How to Compare HOA Vendor Bids and Choose the Best Value for Your Community, Kuester
Related elsewhere in the Academy
Procurement, Bids & Contracts
Next, learn how to verify the piece most boards skip fastest: the contractor's license.
Which licensing authority applies, what your state requires for background checks on non-employees, and what a thorough due diligence policy should require in writing all vary by state and by your governing documents.