Change orders: An unhappy necessity

Diligent initial planning can lessen headaches for the building team
August 11, 2010

Change orders present one of the greatest sources of misunderstanding and conflict on construction projects. Owners believe that changes are overpriced, not properly documented and intended to correct the contractors' bidding errors or increase the contractors' profit. Contractors, on the other hand, believe they are not fairly compensated for the true value of changes, and are being held to unrealistic levels of proof to document the changes.

At the bottom of the food chain are subcontractors, who perform most of the changes and have to wait the longest for payment. They believe they are financing the changes and are unduly restricted to unrealistic overhead and profit markups.

In a perfect world, there would be no changes. Many consider a successful project to include changes of no more than 5 percent to 10 percent of the value of the original project. Unfortunately, even this goal is frequently not met.

Most contracts establish a framework for processing change orders. The project, however, can be victimized when the need — real or imagined — to perform the extra work moves faster than the time to complete the paperwork. Typically, payment for change-order work requires the signatures of the owner, general contractor, the architect/engineer and the subcontractor. Often, the work is completed long before agreement on pricing.

The difficulty of pricing

At the beginning of a project, few people can foresee the extent to which change orders will occur. The formula for the pricing of just a few change orders may not be the same as one used for pricing thousands for the same project.

Changes usually are priced on the basis of the direct costs associated with the new work, plus a negotiated overhead and profit factor. Contractors need to be wary of the initial temptation to agree to this formula as their total compensation. There is always a risk that the cumulative impact of a large number of changes will be far greater than what can be measured at the time the early change orders are agreed upon. As the job progresses and the change orders keep coming, the effect on the schedule can be devastating. Moreover, without proper safeguards in the change order language, the monetary effect can be equally problematic.

Insist on waiver and release

The savvy owner, before agreeing to a change order price, will insist upon a stipulation that the agreed upon amount is in full payment of the changed work and the contractor must agree to waive and release any claim for further compensation arising out of the change. As a general rule, where such language is included, courts will enforce it. Thus, contractors should vigilantly reserve their rights to assert cumulative impact costs.

Even in cases where the cumulative impact of a great number of changes may delay a project and increase its costs by disrupting the planned sequence — for example, by extending the project to a low-efficiency cold-weather period or otherwise disrupting planned productivity — a court will not compensate a contractor for these costs without an appropriate reservation of rights.

A contractor's advantage

One advantage contractors have is that waivers and releases usually must be expressly stated. And a change order form's silence may nevertheless permit the contractor to recover impact costs.

If ambiguity exists as to what the parties intended by their contract language, a court may permit an examination of the negotiations leading to the execution of the contract documents. In limited cases, because of some implied agreement to exclude impact costs from the discussion, contractors have recovered impact costs despite waiver language. If the court believes that there were discussions regarding impact costs but never a "meeting of the minds," it is likely the contractor has not waived or released its claim to recover impact costs.

Lessons learned

It would be imprudent for contractors to assume that courts will protect them from their failure to negotiate appropriate language preserving their right to assert impact costs.

The prudent act for contractors would be to reserve their right to claim extended overhead and other impact costs until the full impact of the changed work is fully appreciated. Another alternative would be to include a clause patterned after the federal acquisition regulation that authorizes "an equitable adjustment for changes that cause an increase or decrease in the cost or the time required for work under the contract, whether or not changed by any such order."

Legal columnist Richard A. Stockenberg is a member of the St. Louis law firm of Gallop, Johnson & Neuman LC (e-mail: rastockenberg@gjn.com), where he limits his practice to construction law. No statement here should be acted upon until your attorney assures you that it applies to your situation.

         
 

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