10 / 11 / 2016

Understanding Change Orders in Construction Contracts

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Change orders have been called the biggest cause of disputes between contractors and their clients. By their very nature, change orders represent added time, cost, and labor to an already complex project.

Legally speaking, a change order is:

“a written agreement entered into and between an owner and a contractor, with written consent of the surety, covering modifications or alterations beyond the scope of the original contract, and establishing any necessary new contract items, any other basis of payment, and any time adjustments for work affected by the changes.”

Change orders must adhere to the appropriate building codes, just like any other construction, and they take legal precedence over construction industry custom or trade practices. Also, they only apply to lump sum contracts, not cost-plus or time and materials (T&M) contracts (unless there is a guaranteed maximum written in).

Change orders are not the same as change directives or construction changes.

Common Elements of a Change Order

Contractors may be required to provide a written formal notice of an anticipate change to the scope of work to obtain an authorized change order. This documentation is separate from the change order, itself, and is an instrument that allows the owner to investigate, correct, and accommodate a change effectively and reducing the impact to costs and the project schedule.

The change request typically contains elements describing the change and other documentation.

  • Description of the requested change compared to the original contract or bid
  • Documentation of any subcontractor costs (itemized)
  • Summary by the contractor of the total costs of the proposed change
  • Statement of contractual basis for the requested change and its impact on project completion date

Change orders should be signed by the primary contractor, the owner, and a third party that is affected by the change such as the construction lender or the bonding or surety company.

Common Causes of Change Orders

Change orders come about most often when the owner makes design changes after the project has begun, deletions are made to the plan, or when a contractor determines that extra work will be needed over and above the contracted scope of work (constructive change). Sometimes new instructions from the field can create the need for a change order; the instructions may be from the site superintendent, an architect, or the owner’s representative.

Change orders may also be required when:

  • parts do not fit together as planned
  • if the drawings are ambiguous
  • there are unforeseen conditions at the jobsite (within reason), or
  • workers or materials do not arrive or come late to the site.

Sometimes, early in the project, a minor alteration is made to accommodate a light difference in conditions that winds up causing an unintended need for larger changes and more money down the road that are significant enough to need a change order authorization.

If the material specifications, shop drawings, installation requirements, or a detailed plan are not known when the bid is placed, you can be relatively certain change orders will be needed during the course of the project.

Problems Caused by Change Orders

Since change orders are directives for work outside the original scope, there can be wide-ranging issues that result from the additional work. The most obvious are the impact to the project timeline and the budget. New permits may be required for the changes.

The biggest problems occur when there is a dispute over the change, often due to a disagreement between the contractor and the owner about the need for additional payment.

Contractors who believe they will not get paid for extra work may threaten a work slow-down or stoppage. Owners, on the other hand, may believe the contractor “should have known” about unknown conditions, extra features, and unexpected items and factored it into the bid price; therefore, the owner should not have to pay more than originally agreed.

Controlling Change Order Proliferation

Owners may try to be proactive by requiring a pre-site or pre-bid inspection and walk-through before bidders can submit a proposal, giving them an idea of the scope of work to be done and the site conditions.

With a pre-site inspection, contractors understand the building plans better and can stage the project more efficiently while meeting the owner’s expectations better.

Contracts

The best way to control the change process is through the initial contract. In it, you can specify the steps required of a contractor before additional work or a reduction in work is authorized.

By requiring contractors to obtain a written change order as a condition of additional payment gives the owner the authority and opportunity to approve any changes in the original scope of work, eliminating surprises. For contractors, it may be a good practice to document anything that could be perceived as being out of scope to avoid the charge of failing to comply with contractual stipulations regarding change orders.

The contract can require the contractor to notify the owner in writing even when a change will not incur additional costs.

As part of the requirements for change orders, time limits are often placed on when the document must be submitted, typically within a certain period of time after learning about the need for a change. In addition, the contract should make clear that work is not to be done prior to obtaining a change order signed by all required parties. You may also need to submit a claim before work is begun, itemizing the extra costs.

Breach of Contract

To deter work-stoppages and slow downs by the contractor and crew, the contract should include a liquidated damage clause that goes into effect if work is stopped. This clause is a penalty that is defined as the amount of money the contractor agrees to pay or forfeit in the event of a breach of contract.

The amount to be paid or forfeit is not fixed as a pre-estimate of probable damages; it is set as a punishment to be threatened to prevent a breach from occurring. For example, the contract may include the starting and projected ending dates of the project and specify liquidate damages will be set at $1,000 per day for each day of delay past the scheduled completion date.

conclusion

Change orders can be seen as addenda or changes to the contract for the purpose of providing written agreement for the change from all parties and to provide additional time and resources when the project does not proceed according to the original plans.

The contract is the best place to set out the change order process and formalize it to avoid future legal issues. Without written requirements, you open the door to more than a delayed project; you may find yourself in the courtroom as well.

If your construction business needs help with change orders, contact the business lawyers at Vethan Law Firm. 

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