Joseph R. Young | Smith Currie | October 1, 2018
Design and construction changes can be a challenge for everyone involved in a construction project. Designers and contractors endeavor to deliver a project that meets the owner’s needs, budget, and aesthetic considerations. As a project comes to fruition, the project frequently changes, and the parties must address and resolve the financial considerations of those changes and implement the changes at the project level. Often times the most critical aspect of a contractor’s financial success or failure of a construction project is its ability to manage changes. Contractors are sometimes faced with changes that are beyond the reasonable expectation of the original undertaking and have significant planning, scheduling, and cost implications that may not be considered or addressed in the contract’s changes clause. Changes of this magnitude may be considered “cardinal changes” and provide the contractor with recourse beyond restrictions imposed by the contract’s changes clause. But cardinal change is a risky basis for a contractor to refuse to perform additional or changed work. Even major changes can probably be more safely handled within the terms of the contract’s changes clause.
A “cardinal change” is a change or the culmination of changes ordered by the owner that are beyond the scope of the contract and that may constitute a material breach of contract. To be considered a cardinal change, the change or cumulative effect of the changes must be substantially different from the original undertaking such that the contractor is subjected to obligations that far exceed any obligations imposed on the contractor in the original contract or constitute such a drastic modification that result in a new and substantially different undertaking. Some courts have found the owner in material breach of the contract for ordering a cardinal change. The owner’s material breach either excused the contractor from further performance or awarded the contractor with additional compensation to account for the contractor’s damages in implementing the cardinal change.
Under a standard changes clause, the owner generally has the right to change the work or order extra work. In turn, the contractor is generally entitled to additional time and compensation associated with that change or directive.
The devil is in the details. To what extent is the owner entitled to change the work? And how much additional time and compensation is the contractor entitled? The answer is, it depends. There is no bright line rule about what could be considered a cardinal change or what was reasonably contemplated by the parties in the original contract. Unless the contract expressly limits the owner’s right to issue changes, reliance on the cardinal change doctrine is a risky basis to refuse additional or changed work. Clear contract language addressing the scope and magnitude of permissible changes is the most reliable source of addressing significant changes.
An owner generally does not have express restrictions on what can be changed, when the changes can be made, or the extent of the changes. The right to change the work is often only restricted by the owner’s implied duty to carry out its contractual obligations in good faith. On the other hand, contractor’s rights to additional time and compensation are often limited by provisions restricting how changes must be scheduled or priced. For example, contractors may be restricted to pricing changes based on various pricing structures including, but not limited to, actual costs, specific markups for overhead and profit, specified unit prices, and specified labor rates. Contractors may also have to provide specific proposed schedules and specific time extension requests and schedule analyses demonstrating the additional time associated with the change. In other words, the owner is generally much less restricted in its use of the changes clause and the contractor is often required to provide substantial support to justify entitlement to a change order providing additional time and compensation. This may leave the contractor in a position where the owner believes it is entitled to make substantial changes to the project for which the contractor may be unable to reasonably plan, staff, and price the changes.
However, what if the changes drastically change the type of project or use of the project? What if the contractor agreed to build a single-family residence, and the owner tried to use the changes provision to order a multi-family multi-use project with commercial areas and residential areas? What if the contractor agreed to build a one-story shopping center and the owner changed the project to a multi-story office building? What if the contractor agreed to build a multi-family rental community, and the owner changed the project to a condominium project? What if the contractor agreed to build a hotel, and the owner changed the project to add a casino? There is very limited authority or precedent on how these types of changes may be addressed absent clear contract language, so the question of where these would be considered cardinal changes remains unknown.
From a contractor’s perspective, each type of project has different pricing, staffing, and contracting considerations that are challenging to specifically address in the changes clause. Different types of projects also have significant risk considerations. If at all possible, contractors should seek to address the concept of cardinal changes in the contract. The contract should address some limitations on the extent of changes or place restrictions on material changes in the use of the project or the contractor’s work. The contract should also address when the contractor may refuse to perform changed or additional work. By clearly defining the limitations of the changes clause, parties can minimize the disputes about ambiguities over the legal concept of “cardinal changes”, and the parties can eliminate the risk of an unnecessary dispute as to whether there has been a cardinal change. The best course of action for all parties is to incorporate the cardinal change concept into the contract and follow the terms of the contract in managing and addressing changes.