The Catch 22 of Construction Change Orders

March 07, 2011

When a construction company first places a bid on a project, it spells out the services and materials to be provided in the construction contract. This contract also outlines the specifications for the project and the projected final outcome including terms of payment. If problems arise during the construction process or the owner modifies the project, a change order form must be completed. The change order form details the new plan, including services, materials, and costs, which are agreed upon (or to be agreed upon) by the owner and the contractor. The change order form then becomes the valid contract by which the owner and the contractor must legally abide.

Sometimes in life and in law there are easy answers. When it comes to construction change orders, the only easy answer is the basic definition of the change order process above. Most construction contracts contain some form of change order provision that sets forth the method for handling changes including determinations of additional time and compensation for changed or extra work. Change orders authorize the contractor to do the extra work and obligate the owner to pay for it. Without a signed change order, a contractor risks nonpayment. However, most contracts also contain a provision that allow the owner to require the contractor to do the additional work even if the change order is unsigned. The subcontractor frequently faces a recurring quandary – do the work without a signed change order and risk nonpayment or don’t do the work until a change order is signed and risk breaching the construction contract.

Change order provisions fall into three basic categories requiring either (a) written notification within a certain period of time, (b) a signed written change order before the work is done, or (c) submission of a claim before the work is started with an itemized breakdown of additional costs. Construction contracts typically provide that a change in the contract amount or time must be described and submitted in writing, must be submitted so many days in advance of the work (or so many days after the owner’s request), signed by authorized people, and reviewed and approved within so many days of submittal. The strictest versions state that a signed written change order is a condition precedent to payment.

By far the most common change request comes when the parts don’t fit, the drawings are unclear, unexpected surfaces or conditions are discovered or workers or parts don’t show up on time. More disputes and more adversarial positions arise because of actual or perceived changes in a construction project than for any other reason. Subcontractors may threaten slow-downs and work stoppages if they don’t get paid. Owners, architects and/or prime contractors will insist that unknown conditions, extra features, and an expanded project are covered by the original bid price.

Most Texas courts will find the written change order provision to be valid and binding upon both parties. An exception exists where the owner authorized or directed the work, the work is actually extra work and the contractor relied upon representations made by the owner or general contractor. A subcontractor is likely to recover where the changes were clearly extra work and the owner made assurances of payment. However, waiting until the end of a project to request payment on a disputed change order reduces the likelihood of recovery.

Disputes frequently arise over what actually constitutes extra work outside the scope of the original contract. The general rule is that a contractor is only required to do, and thus is only entitled to payment for, the work stated in its contract. A determination of what is or is not extra work is a factual issue that will be decided by the courts on a case-by-case basis which leaves a lot of uncertainty for contractors. To offset this uncertainty, contractors should carefully review the plans and specifications to be able to identify what is extra work and comply with the change order provisions in performing such work.

Change order work will often cost 10 to 15 percent more than the original bid. Because of this, contractors should attempt to negotiate favorable change order provisions at the beginning of the project and each time a change is requested. For example, a contractor may be able to secure a stated markup to cover change costs or reserve its right to pursue an impact claim for its cost of performance. Contractors should also timely submit change orders in a separate invoice with a cost breakdown as soon as the extra work is requested. The more documentation there is to reflect that the change is extra work at the owner’s request, the more likely payment will be received.

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Shelly Levick Masters

Segal McCambridge Singer & Mahoney, Ltd.

Shelly Masters is a Shareholder in the Austin office of Segal McCambridge Singer & Mahoney, Ltd. With over ten years of experience, she maintains a varied trial practice that focuses primarily in the areas of complex business litigation, general litigation, construction, employment, insurance coverage and products liability. Ms. Masters is a frequent author and speaker on a variety of legal topics for city, state and national events and publications. She is the Co-Leader of the firm’s Construction Practice Group and one of the creators and editors of LegalBuild, a legal newsletter for the construction industry. Her experience includes all aspects of pre-trial and trial work before state and federal courts, as well as mediation and arbitration. She has acted as primary trial counsel involving cases pertaining to construction defects, breach of contract, insurance coverage, property damage, wrongful termination, sexual harassment, personal injury and corporate matters. She has provided legal representation in all aspects of commercial and residential construction, including liability defense, contract disputes and interpretation, OSHA compliance, premises liability and indemnity issues on public, private and federal projects. She currently represents commercial and industrial product and equipment manufacturers in environmental and toxic tort product liability litigation. Her practice also includes corporate risk assessment, insurance coverage analysis and business organization planning and implementation. Segal McCambridge Singer & Mahoney is a full-service, national law firm with offices in Illinois, Maryland, Michigan, New York, New Jersey, Pennsylvania and Texas.
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