New Law Requires Timely Payment of Undisputed Change Order Claims

Originally published by the Daily Journal of Commerce on July 18, 2024.

RCW 39.04.360, effective June 6, 2024, sets forth protections and assurances of payment for contractors, subcontractors, and suppliers that perform undisputed changed or additional work on both public and private construction projects in Washington and imposes payment obligations on public and private owners to the extent the changed or additional work furnished to the project is satisfactorily completed.

Specifically, subsection 1 of the statute requires a public or private owner on a construction project (except private residential projects of 12 or fewer units) to issue a change order for the “full dollar amount of the work not in dispute” no later than 30 days after satisfactory completion of the additional or changed work. Within 10 days of receipt of the change order from the owner, the contractor must in turn issue a change order to any subcontractor “impacted by” the change. If the owner or contractor fails to issue the change order in a timely manner, then the statute imposes interest (1 percent per month) on the dollar amount of the additional or changed work (i.e., work beyond the defined contractual scope) until the change order is issued.

Subsection 2 of the new law provides similar payment protections to subcontractors and suppliers. Here, the contractor must request a change order from the owner no later than 30 days after satisfactory completion of any additional or changed work authorized by the owner. A lower-tier subcontractor must request a change order from the upper-tier contractor “30 days after the completion of the additional work and a request from the lower-tier subcontractor,” but note that the language here does not seem to qualify completion of the subcontractor’s additional or changed work on satisfactory performance or even contemplate that the changed or additional work must be authorized by the contractor, and the language regarding the timeliness of the submission is confusing at best. Indeed, the second sentence of RCW 39.04.360(2) is unclear and inconsistent with the first sentence of the subsection, but the intent is probably to require the lower-tier subcontractor to request a change order within 30 days after satisfactory completion of changed or additional work that is authorized by the contractor.

This subsection next provides that the contractor is not liable for interest on any delayed issuance of change orders downstream to subcontractors if the contractor timely requested a change order for the work from the owner within 30 days of satisfactory completion of the work not in dispute.

And the last sentence appears to limit the rights of a contractor, subcontractor, or supplier to pursue claims of nonpayment against only those with whom those parties have a direct contractual relationship and not against third parties. For example, this probably means that a lower-tier subcontractor cannot invoke rights under this statute and pursue a claim, including interest, against the general contractor with whom it is not in direct contractual privity.

Subsection 3 of the statute provides rights for an “aggrieved party” to pursue an action for “appropriate relief, including interest and reasonable attorneys’ fees and costs.” This provision entitles contractors and suppliers to interest, fees, and costs in the event they prevail in an action based on the statute. However, based on the broad interpretation of “aggrieved party,” it would also appear that owners or anyone against whom an aggrieved contractor or supplier has filed its action could pursue relief for fees and costs under the statute. This portion of the statute aligns with the trend to support an award of interest, fees, and costs under Washington’s prompt payment statutes applicable to public works projects (including RCW 39.04.250(3)) and the recent retainage statute, RCW 60.30.010, applicable to both public and private construction projects.

Given the recent enactment and the (unartful) wording of this new change order statute – which has not yet been subject to judicial scrutiny or interpretation – public and private owners and contractors alike should understand the risks related to the submission, evaluation, processing, and payment of change order requests. Owners must remain wary and exert care in the assessment and processing of change order requests, while contractors must remain cautious regarding the submission of change order requests from subcontractors and suppliers and also ensure that the work subject to change order requests is in fact additional or changed work, is satisfactorily completed, and was authorized by the owner, and that the contractor has not waived the right to request a change order.

Claims will undoubtedly arise in the interpretation of the statute and its interplay with the factually sensitive issues surrounding whether the additional or changed work performed by the contractor (or within its scope) is “undisputed,” and the statute lacks any definition for “undisputed claims” or “work not in dispute.” And the risks associated with these determinations in submitting and assessing the propriety of change order requests are illuminated, if not amplified, when viewed through the lens of statutory entitlement to interest, fees, and costs in favor of the “aggrieved” prevailing party.