Change orders are a fact of life on construction projects. Despite commitments up front to limit or eliminate changes, changes still occur. It is common to have agreed changes that include stipulations on contract price and time. It is also common to see owners, contractors and subcontractors disagree on (1)whether the work in question is really a change and (2) a fair adjustment to the contract price and time when changes are acknowledged. Disputed changes can be minimized by following a few simple steps.
The most important step is to provide notice of the change before any expense is incurred. Changes that originate from the owner typically do not suffer from notice problems, because the changes do not occur unless the owner asks the contractor to make them. This ensures both parties have knowledge of the changes before the work is done. Changes that originate from the contractor or from subcontractors, however, are at greater risk of a notice failure.
For example, a subcontractor foreman may direct the crew to perform the work on the assumption that the work is within its subcontract scope, only to have the project manager realize later that the completed work is outside their scope. Another example is when the contractor performs changed work in a hurry, believing the owner will agree to pay after the fact because the work was necessary.
In these and other scenarios when advance notice is not provided, the owner or other upstream party is deprived of the opportunity to turn down the work, research alternatives, locate better pricing, or explain that the work was not a change in the first place. Many disputes are caused by a failure to provide advance notice.
Notice alone is often not enough to avoid disputes. Even if all parties know that changed work will be performed, they should attempt to agree on price and time impacts before any expense is incurred. Absent price and time estimates in advance of the work, there can be wildly different assumptions between the contracting parties about project impacts, leading to costly disputes.
Sophisticated parties attempt to set change order pricing ahead of time in the underlying contracts. Unit prices, equipment rates, profit margin percentages, daily rates for general conditions expense and other categories of cost can be stipulated in advance, preventing arguments later. While these clauses are helpful and should be included in a good contract, the underlying labor, equipment and material quantities involved with changed work often cannot be predicted at the contract execution stage. This makes it necessary to discuss and agree on quantities and other unstipulated items after contract execution but before the changed work begins.
Finally, despite proper notice and advance discussions over anticipated costs, the parties may still disagree on a fair price and time impact for the work in question. These preliminary disputes can delay implementation of the changed work, and delay the overall project. They can even increase the impact of changed work because the optimal window for completing the work was missed while the parties debated proper contract adjustments.
Your contract can help. First, the contract should provide that all project work, including changed work, must continue without delay despite ongoing disputes, including disputes over appropriate contract adjustments for changed work. Second, the contract should provide a mechanism for funding the disputed work until the parties can later negotiate an adjustment or obtain a third-party decision under the dispute resolution procedures in the contract. Disputed change order clauses provide that each party will fund a percentage of the costs while both reserve all rights to later seek reimbursement of their funded share. This prevents either party from shouldering 100% of the cost of changed work that they believe is not their responsibility, not fairly priced, or not properly accommodated in the construction schedule. This procedure also mitigates increased price and time impacts caused by prolonged change order negotiations that delay implementation of the changed work.
Frequent and timely communication including advance notice, price estimates and anticipated schedule changes will prevent most change order disputes from negatively impacting the project. Having the right contract clauses in place will also ensure minimal disruption when changes inevitably occur.
Originally published as “OP-ED: Effectively addressing changes during a fast-paced job” on Sept. 21, 2018, by the Daily Journal of Commerce.