J.D. Holzheauser | Construction Executive
Construction projects are almost inevitably subject to changes in the contract. A fundamental understanding of construction changes, how those changes are governed and what is necessary to ensure a complete change are of paramount importance to all parties involved in a construction project. This article is not a treatise on construction contract changes; rather, it provides advice on actions a contractor can take during construction that will help the contractor recover time or money when a contract’s schedule or scope of work needs to be changed.
CHANGES DEFINED
Changes to a construction project affect two broad spheres—timing and scope of work. Changes usually present themselves as either a change order or a change directive. Each may go by a different name depending on the contractual scheme in the project’s prime contract, but they essentially have the same characteristics.
The difference between a change order and a change directive is one of agreement. A change order (in the owner-prime contractor context) occurs when the contractor and the owner agree to a change in the timing or scope of work in the contract. Normally, the change order is a written agreement to change the contract and is executed by the contractor and owner.
A change directive is used when a change in the contract is warranted, but the parties cannot agree on the change. The American Institute of Architects A 201 Construction Contract contains a typical clause for a change directive. Section 7.3.1 states that a change directive “is a written order prepared by the Architect and signed by the Owner and Architect, directing a change in the Work prior to agreement on adjustment, if any, in the Contract Time or Contract Sum, or both.” In this situation, the adjustment to the contract sum or time will be assessed at a later date.
AUTHORITY TO MAKE CHANGES
Knowing who has the authority to agree to changes is one of the more important legal issues for a contractor. The person with the requisite authority to agree to changes binds their party to that change. Any person who does not have the requisite authority may not legally bind their party.
A typical construction project will indicate who has the authority to make changes to the contract. An architect or engineer of record might have authority to make changes. But it is essential that every contractor know who has the authority to make a change to the project. The first step in making that determination should be to look to the contract. If the contract does not explicitly identify the person with authority, or the conveyance of authority is vague or confusing, confirm with the owner in writing who has the authority.
Confirming authority to make changes is very important from a legal perspective. A contractor could find itself in a legal battle over extensions of the contract time, additional general conditions, or liquidated damages based solely on the fact that it did not engage the person with the proper authority to make changes. Legal battles can be largely diminished or altogether avoided by heeding the proper authority.
DOCUMENT, DOCUMENT, DOCUMENT
The typical clauses providing the procedures for change orders require an agreement in writing by the contract parties. If the process goes smoothly, an executed change order is the product.
But unknown and unknowable issues, occurrences or personalities can derail the smooth operation of the change order process. Documentation is necessary to record these events. Documentation is equally, if not more, important because any contract with a change clause will likely require several steps of the change order process to be recorded in writing. A contractor not following the change order clause procedures could find itself in a bad position.
A good example is the decision in PYCA Industries, Inc. v. Harrison County Waste Water Management District out of the U.S. Fifth Circuit Court of Appeals1. In that case, the court held that the general contractor was not entitled to delay damages because it had not provided the written notices required by the contract in order to recover those delay damages. The court held that the contractor’s failure was a waiver of its right to recover damages, even though the owner was not adversely affected by the contractor’s conduct.
The circumstances of every contract are different, but the legal principles applicable to construction contracts are generally applied uniformly in each jurisdiction. Far better for a contractor to protect itself on the front end than to convince a judge or jury it is entitled to damages despite failure to abide by the contract. Legal decisions similar to PYCA Industries, above, are common across the U.S. in both state and federal jurisdictions.
Every contractor, including their project managers, project engineers and superintendents, should be aware of the importance of documenting events that can and do lead to the need for a change order. Transmitting correspondence in the method as authorized by the contract to the owner or its authorized representative which records the events giving rise to the change should be standard operating procedure. Though each project and each contractor likely have a slightly different definition of standard operating procedure, the procedure should include, without exception, the directive to record events or issues that could have a pecuniary or temporal impact on the contractor or project.
Documentation is of heightened importance in a situation that involves a change directive or similar unilateral change. Documenting the events should be done contemporaneously or as soon as possible after each event occurs.
Contemporaneous documentation of events related to a unilateral change are very valuable to a contractor at a later date when the contractor is negotiating with the owner to account for the unilateral change.
IMPORTANCE OF DOCUMENTING CHANGES
Most construction projects encounter some event that requires a change in the contract and some culminate in some informal negotiation between the parties to close-out the project. While many projects are completed without any significant disagreements between the parties, some number result in formal dispute resolution proceedings such as litigation or arbitration. Typically, in those situations, changes to the construction contract will be necessary and be a part of the end-of-project negotiation or dispute resolution process.
Possession of documented evidence that demonstrates the contractor’s compliance with change order procedures and supports a contractor’s request for a change to the contract or compensation for a change directive is extremely valuable to the contractor. Another example of the importance of contemporaneous documentation in compliance with the contract is found in Razorback Contractors of Kansas, Inc. v. Board of County Commissioners of Johnson County by the Court of Appeals of Kansas2.
In that decision, the court held that the contractor was required to comply with the contract’s notice provisions at the time the contractor became aware of a condition that required a change in the contract. The contractor was not able to recover additional compensation from the owner because the contractor had not notified the owner of the conditions requiring a change as required by the contract.
There are many examples that illustrate the value of documenting events on a project. Not all failures to properly document conditions by a contractor, nor the need for a change, have pecuniary or temporal impact for the contractor. The owner’s conduct in those situations is equally important in a court’s decision. But contractors can avoid circumstances where formal dispute resolution is necessary to recover money associated with a change by knowing and adhering to the contract requirements.
Proper documentation is not important in legal settings only. A contractor places itself in a better negotiating position at the end of a project if it has documented evidence to support its position. Papering the project is beneficial in the end, whether that end be project closeout or a formalized dispute resolution process. It eases the project closeout when changes are needed and helps to reduce legal fees if formal dispute resolution is necessary.