Why Change Orders Matter

Rhiannon K. Baker and Philip S. Bubb | Fredrikson & Byron

I recently settled a dispute with a construction client where the absence of formal written change orders was an issue. The parties disagreed on what was compensable, but this disagreement could have potentially been avoided if they had adhered to written change orders.

Most construction contracts, and sometimes even estimates or purchase orders, require that changes to the original scope of work be approved in writing. Despite the requirement, there are many instances where the parties do not follow this and do not properly document changes. As a result, costly disputes often arise.

Changes are often needed in the course of a construction project. And those changes typically include work that is either added or removed from the original scope of work. While that might sound like a unilateral request or decision, in practice, it is not.

In fact, a change order is a contract amendment. As Construction Law Today explains, “a Change Order is a bilateral agreement between parties to the contract – an owner and prime contractor, prime contractor and subcontractor, two or more subcontractors – to change the contract. A Change Order represents the mutual consensus between the parties on a change to the work, the price, the schedule, or some other term of the contract.”

Because a change order is a contract amendment, change orders should be written out and approved by all parties – which can take time, money and patience – something parties are often not happy about.

What Should be Included in a Change Order?

A change order is going to vary depending on the project and the parties involved. However, all change orders need to include detailed information, including:

  1. A description of the requested change;
  2. Itemized documentation of any costs;
  3. A summary of the total costs of the proposed change;
  4. Any impact on the project completion date.

Can a Party be Compensated Without a Change Order?

In the absence of a written change order, claims for additional compensation are not easily made. To receive compensation, contractors must prove the following:

  1. That the extra work was not within the original scope of work;
  2. That the additional work was done at the request of the owner or general contractor (GC);
  3. The owner or GC represented that additional payment would be forthcoming;
  4. The owner or GC waived the contract provision requiring changes to be made in writing, or otherwise acquiesced to the change by ignoring those provisions.

Best Practices

As you know, changes will inevitably happen at some point on your projects. You should have a contract in place that anticipates these changes and clearly delineates how parties are to respond with change orders when they arise. To every extent possible, change orders that detail the change in scope, price and project time should be documented in writing and signed off by all parties.

Construction Change Order: Friend or Foe

George Nicholos | Vandeventer Black

The dreaded Change Order or CO is almost unavoidable on most projects. COs commonly result because of things such as inaccurate specifications, ambiguous or inaccurate drawings, unforeseen conditions at a job site, issues with construction materials, faulty budgets or schedules, or additional requests or changes by an owner. CO logistics vary by contract, and it is important for all contract parties to understand, and follow, the change order requirements.

Either party may initiate a CO. Unfortunately, when the contractor has initiated the CO, skepticism may commonly arise from the owner’s team. One way to avoid this is to maintain a positive project relationship among the parties, including not letting issues linger. After-the-fact COs are particularly frustrating, and typically such delays waive entitlement to otherwise valid change claims.

Regardless, although initiating a CO may induce animosity between the parties, COs serve important purposes and are better viewed as a positive first step to avoid later disputes and disputes resolution processes.

Whether the CO is friend or foe depends on one’s perspective. From the perspective of a friend, properly administered CO processes provide a means for documenting scope changes, addressing pricing changes, and memorializing other changes or modifications to the base contract. They can prevent “scope creep” and, when properly memorialized, may confirm the agreement of the parties about the subject of the CO.

When properly prepared and administered, the CO clearly and effectively memorializes the “why, how, who, and what” of the change by providing a clear roadmap for why certain changes were made, who directed the changes, etc.  This helps prevent many problems that typically arise later after memories may have faded or intentions been forgotten. Accordingly, CO’s should include more, rather than less, detailed information, including approved sketches of the changed work as appropriate.

The parties do not want to be “penny foolish” about CO preparation. Even a small undocumented change in construction can result in significant negative impacts on the overall project, promote animosity and distrust among the parties, preclude otherwise allowable adjustments to the contract’s time, performance period, or both, and even result in unexpected liabilities.  Contractors and owners alike should seek the assistance of legal counsel to assist with the memorialization of key construction records for that day when your project encounters problems or changes and memories suddenly go hazy amid the finger-pointing.

General Contractor Supporting a Subcontractor’s Change Order Only for Owner to Reject the Change

David Adelstein | Florida Construction Legal Updates

The opinion in Westchester Fire Ins. Co, LLC v. Kesoki Painting, LLC, 260 So.3d 546 (Fla. 3d DCA 2018) leads to a worthy discussion because it involves a common scope of work occurrence on construction projects involving a general contractor and subcontractor.  The contractor submits a subcontractor’s change order request to the owner and the owner rejects the change order.   What happens next is a scope of work payment dispute between the general contractor and subcontractor.   Yep, a common occurrence.

In this case, a general contractor hired a subcontractor to perform waterproofing and painting.  A scope of work issue arose because the specifications did not address how the window gaskets should be cut and then sealed. The owner wanted the window gaskets cut at a 45-degree angle and the subcontractor claimed this resulted in increased extra work.    The general contractor agreed and submitted a change order to the owner to cover these costs.  The owner rejected the change order claiming it was part of the general contractor’s scope of work even though the cutting of window gaskets at a 45-degree angle was not detailed in the specifications.

After the subcontractor filed a suit against the general contractor’s payment bond surety, the project architect further rejected the change order because gasket cutting was part of the specification requirements.  (Duh! What else was the architect going to say?  It was not going to concede there was an omission that resulted in a change order to the owner, right?)

Importantly, the subcontract agreement stated that, “If a dispute arises between the Contractor and the Subcontractor regarding the Scope of Work, or in the interpretation of the Contract Documents, and the parties hereto do not resolve that dispute, the decision of the [Architect] shall be final.”   As it pertains to this provision, while the appellate court noted the enforceability of the provision, it found that it did not apply because there was not a scope of work dispute between the general contractor and its subcontractor.  The general contractor agreed that this resulted in a change order condition, i.e., that there was a change to the subcontractor’s scope of work, and submitted a change order to the owner for the scope of work change.  Ouch!  The payment bond surety was on the hook to pay for this change order.

A few things that I find noteworthy.

First, the opinion does not include a lot of discussion on language in the subcontract. This tells me that there may not have been great language in the subcontract dealing with the subcontractor’s scope of work.  It is not uncommon to hear that a specification does not include every single detail so if the subcontractor was always required to cut gaskets in performing its scope of waterproofing work then there may be an argument there is not a scope of work change.  Either way, detailing the scope of work in the subcontract is important to account for the inevitable scope of work dispute.

Second, I understand the logic from the general contractor’s perspective of having the architect decide scope of work disputes between a general contractor and subcontractor because the architect is going to naturally disfavor scope of work changes or changes of work associated with its plans and specifications.  This will benefit the general contractor as a rejection of a scope of work change will support the denial of a change order.  With that said, I am generally not in favor of the finality of such a decision from an architect, particularly when addressing the scope of work dispute may warrant a detailed analysis of the governing subcontract. Also, the court in this case seemed to dismiss such language because the general contractor supported the subcontractor’s change.

Third, just because a general contractor supports a subcontractor’s change order request does not mean that it and its surety should automatically be bound by the change and finance the change.  Again, there was little discussion as to language in the subcontract and it does not appear the surety tried to make an argument under the pay-when-paid clause. While such defense is generally not applicable to payment bond sureties, the (creative) argument could be different when dealing with a change order to preclude the effect of a surety and general contractor being on the hook for every change order submitted to the owner that the owner rejects.

And, fourth, this opinion does not address how the general contractor handled or pursued this with the owner.  That is important because if the general contractor agreed and supported the change, there should have been an effort to collect this amount from the owner.  This leads to another important consideration.  In this scenario, the subcontract could include language that any claim the subcontractor initiates stemming from a dispute involving the owner should be stayed pending the resolution of the dispute with the owner.  On the other hand, if the general contractor elects not to pursue the dispute with the owner but recognized the change, then it having to pay for the change makes sense based on the business decision it made.

What are your thoughts?

When is A Cardinal Change “Cardinal”?

Henry Goldberg | Moritt Hock & Hamroff | November 13, 2019

A cardinal change is a rare event in construction. However, when it “provably” occurs, it can turn the relative rights of the parties to a construction dispute upside down. A recent New York case bears this out.

A general contractor on a New York City School Construction Authority project subcontracted to a masonry subcontractor. The subcontract called for the performance of a “complete masonry installation” at a purchase price of $5,320,000.

The subcontract also specifically excluded “out of sequence work operations, except for coordination with other trade installations, and premium/overtime/extended shifts unless required due to subcontractor’s fault.”

In addition, the subcontract provided that the general contractor, “at any time, in any quantity or amount… without invalidating or abandoning the contract, may add or delete, modify or alter, the work to be performed under this agreement, including, without limitation, ordering changes or extra work.”

Finally, the mason was not allowed to perform any change in the work unless it received a duly signed change order or field order from the general contractor.

While the work on the project was ongoing, numerous disputes arose between the general contractor and masonry subcontractor about delays in the mason’s work and their causes. The mason eventually made claims for an additional $500,000 for “increased manpower, supervision, and additional summer shifts in order to complete the work as originally scheduled.”

In response, the general contractor issued an “Addendum #3” to the subcontract that deleted a substantial portion of the masonry work.

At that time, the mason had only completed approximately 30% of its original subcontract work. Addendum #3 deleted approximately 30% of the subcontract price, including the claimed change orders. Accordingly, following Addendum #3, approximately only 35-40% of the masonry’s work remained.

The mason responded to Addendum #3 by notifying the general contractor that it would immediately stop working on the project. The general contractor replied, taking a “you can’t quit, you’re fired” approach, that it was terminating the subcontract due to the mason’s material breaches and “abandonment” of the project.

In response, the mason commenced a lawsuit. In doing so, it alleged that the general contractor had interfered with its work and wrongfully deleted an excessive portion of the subcontractor’s work in material breach of the subcontract. In other words, in its defense it asserted the “cardinal change doctrine.”

While clauses in a contract that permit the deletion of work are commonplace and clearly enforceable, courts have construed such clauses to permit deletions in contracts only so long as they do not alter the “essential identity or the main purpose” of a contract. An owner’s right to make changes under a changes clause is limited by the general scope of the work described in the contract. An owner may not make changes of such magnitude that the essential or main purpose of a contract is altered. If it does, a cardinal change has occurred and the contract has been breached by the owner. The use of a “changes and/or omissions” clause requires a finding that such changes or omissions were reasonable and fair.

The court observed that the written stated purpose of the subcontract was a “complete masonry installation.” Addendum #3 had the effect of altering the essential identity and main purpose of the subcontract. The court further stated that a contract provision could not be construed to allow the general contractor to take 35-40% of the work from the plaintiff-masonry subcontractor and then, at the same time, attempt to compel the plaintiff to complete the balance of the original scope. As such, the general contractor did not establish, as a matter of law, that the mason materially breached the subcontract by stopping work on the project in response to Addendum #3.

MHH Commentary

Reasonability has its limits.

The financial health of a subcontractor may not be “eviscerated” by a general contractor’s change orders and deletions. Conversely, a subcontractor must only assert a cardinal change with care. Doing so, as a predicate to “walking off” a job, is fraught with risk.

To compel the subcontractor to finish only a minority portion of its original subcontract is problematic. Contract work, of course, can be deleted, but only so long as it does not alter the essential identity and purpose of a subcontract. Compelling the mason to complete only a minority of its work could directly frustrate the “benefit of the bargain” for the subcontractor. Subcontractor overhead and profit margins would be directly and negatively impacted by compelling it to complete only a relatively small portion of its work while its “full-project” overhead continues without being adequately absorbed by the balance of the contract price.

As always, “the devil is in the details.” Under the Constructive Change Doctrine, both quantitative and qualitative analyses must be made regarding the nature of any changes and deletions. The question does not solely depend upon a precise percentage of work or cost involved, but on the character of the work as well.

The standards for finding a cardinal change are imprecise; courts have wide discretion. What, in fact, is the “essential identify” and “main purpose” of your contract? Here, the court failed to find the subcontractor in breach for walking off the job.

Is this a safe option? Typically, no. But, as this case demonstrates, under the right circumstances, a contractor can defend its interests in the face of abusive changes and/or deletions, both quantitatively and qualitatively.

One further consideration: In public construction, acceptance and performance of a cardinal change may result in a contractor losing its right to be compensated for the changed work. If the change is cardinal, it may be barred by applicable competitive bidding statutes. While this could certainly be the topic of its own in depth article, for now keep in mind that a public owner may order changes within the general scope of the “work” of a project, but it may not make a different or new contract without complying with competitive bidding statutes.

Can’t Get a Written Change Order? Document, Document, Document

Todd M. Heffner | Smith Currie | August 20, 2018

Most construction contracts require that any changes to the work be made formally, in writing, via a change order, work directive, or similar written document. Frequently, however, changes to the work or extra work are communicated orally by the architect, engineer, or owner’s representative, instead of in writing. What is the contractor to do in such a situation? The best option is follow the provisions of the contract and demand a written change order before performing changed work. Unfortunately, the realities of construction sometimes make it impossible to get the changes in the proper format in a timely manner. Savvy contractors will maintain schedule and produce written documentation of the change in lieu of a formal change order or directive. But many contractors will simply proceed with the changed work, relying on the owner, architect, or engineer to do the right thing and stand by their oral instructions.

So what happens if changes are communicated orally and a dispute over the changes arises? The general trend is for courts to allow a contractor to recover for the extra work that was performed. But there are still certain jurisdictions and situations in which contractual requirements for changes to be in writing will be strictly enforced. Even in jurisdictions where contractors have been able to recover, it is an expensive and time consuming challenge to convince a court to ignore the plain language of a contract.

Relying on the good will of the owner, architect, or engineer is rarely a good idea, even for contractors who have a long working relationship. If the work must proceed without formal authorization, it should be possible to obtain informal documentation. For example, the contractor can send an email to whoever is directing the work requesting clarification of what is to be done. The email chain will provide written evidence that the contractor did not proceed as a volunteer or consider the changed work to be in the original scope.

Even if the owner, architect, or engineer refuses to respond to an email request for clarification, the contractor can still create written documentation of the oral directive to perform extra work. This can be done initially by sending a long email documenting exactly what was directed and why it constitutes a change to the work. Any such email should be followed by a letter sent via certified mail. Both email and letter should give the owner, architect, or engineer a limited time to disagree, e.g., “We will proceed with this work in x days unless you direct otherwise.”

If the party directing the work is unwilling to send something informal in lieu of whatever the contract requires, the contractor must proceed very cautiously. Why the reluctance to put the changes in writing? Whatever the reason, this is not an enviable situation to be placed in, as most contracts will also impose penalties if work is delayed or stopped. Along with producing its own written documentation, the contractor can point out that it was the owner who put the requirement for written documentation in the contract, while also noting that it is mutually beneficial to have a common understanding of the required work at the time the work is to be performed. Any misunderstanding is far easier to address contemporaneously rather than months or years after the work is complete. This issue also affects subcontractors. Subcontractors who rely on particular general contractors for repeat work will especially benefit from a conciliatory approach. Many subcontractors simply cannot afford to bring a lawsuit because there was misunderstanding about a verbal change to the work.

Another contract clause to be aware of in this context is what can generically be called an “anti-waiver” clause. An anti-waiver clause is one that claims to invalidate the waiver of any contract provision, unless the waiver is expressly in writing. In other words, an anti-waiver clause could require written confirmation that the verbal change at issue does not need to be provided per the terms of the contract. Generally speaking, anti-waiver clauses are no more effective than the changes clauses. The legal principles that would allow a contractor to overcome not following a written change requirement are the same legal principles that would allow it to overcome the anti-waiver clause. That said, it is always better to follow the terms of the contract to the greatest extent possible. If this is impossible—document, document, document.