Change Clauses, Notice, Extra Work and Reservations of Rights

 

INTRODUCTION

Directing performance of extra work on a construction project was once little more than a rudimentary task for the architect or resident engineer. Unfortunately, such simplicity is no longer the order of the day. Contractors and subcontractors alike are becoming increasingly reluctant to proceed with extra work without complete assurance that all direct and impact costs will be paid. Absent such assurance, they are insisting that the extra work proceed reserving the right to reimbursement for additional time and costs if warranted. Conversely, owners and architect/engineers are equally reluctant to direct additional work if the time and financial aspects are not firmly established. With such an atmosphere, the extra work/change order process in construction has become ripe for controversy.

 

 CHANGE CLAUSES

Traditional contract laws permit the parties to modify their contract by mutual agreement. The construction contract is unique in that it allows the owner to unilaterally direct changes without the contractor’s consent, provided that the change is within the general scope of the original contract work. Therefore, nearly all construction contracts today contain some form of change clause. Typical of many change clauses is as follows:

CHANGES IN THE WORK

Without invalidating the Agreement and without notice to any surety, OWNER may, at any time or from time to time, order additions, deletions or revisions in the Work; these will be authorized by a Written Amendment, a Change Order, or a Work Directive Change. Upon receipt of any such document, CONTRACTOR shall promptly proceed with the Work involved which will be performed under the applicable conditions of the Contract Documents.

 

Typically, a change clause will also require that the cost of the change order be agreed upon before the work is started and that the change order be reduced to writing. Additionally, in instances when, in the absence of an owner directed change, the contractor encounters work that it believes to be “extra work” the contract usually requires that notice be timely provided.

 

In this process, several issues that occur with great frequency on construction projects can result in controversy and disputes:

 

  • Failure on the part of the contractor to provide the owner notice that the work is considered extra.
  • A contractor’s failure to secure a change order in writing to cover the extra work.
  • Acceptance of a change order by the contractor without a reservation for additional time or costs.

 

FAILURE TO PROVIDE NOTICE

Contractual requirements for timely notification of perceived extras are not employed for exculpatory or punitive purposes. If an owner is going to be held liable for a contractor’s additional costs, logic and equity would point to the owner’s right to control or mitigate those costs. Typical contract language such as the following is often used regarding notice:

 

(a)          Any other written order or an oral order (which terms as used in this paragraph shall include direction, instruction, interpretation, or determination) from the Contracting Officer, which causes any such change, shall be treated as a change order under this clause, provided that the Contractor gives the Contracting Officer written notice stating the date, circumstances, and source of the order and that the Contractor regards the order as a change order.

 

(b)          If the Contractor intends to assert a claim for an equitable adjustment under this clause, he must, within 30 days after receipt of a written order or oral order submit to the Contracting Offer a written statement setting forth the general nature and monetary extent of such claim.

 

Although compliance with a notice provision may do little to provide the contractor with immediate compensation, it satisfies a fundamental contractual duty – the duty to protest. This duty extends to both directed and constructive changes.

 

Exception to the notice requirement is often considered when a constructive change has as its cause a defective specification. The correction of a defective specification may result in a dispute as to whether or not it is a directed change. If the owner directs a change in the specifications (despite the fact that the owner may consider the revised specification to be part of the original contract), the contractor is advised to lodge a protest as quickly as practical so as to provide the owner time to reconsider or maintain the said direction. The duty to provide notice has had substantial attention which in general has resulted in court decisions upholding that duty. It is a basic principle of all construction contracts that whenever the owner orders work performed which the contractor thinks is in violation of the contract, or in addition to its requirements, contractor is required to protest against performing the work, or to secure an order in writing before performing the work.

 

Three defenses most commonly employed by contractors to circumvent failure to provide notice are:

 

  • The owner’s position or options were not prejudiced by lack of notice.
  • The specifications were defective resulting in a constructive change not subject to the notice requirements set forth in the changes clause.
  • The owner knew or reasonably should have known that a claim would be forthcoming.

 

In both the first and second of these potential defenses, the matter of owner being prejudiced by lack of notice bears consideration. Constructive changes, even if caused by defective specifications, will often be subject to the prejudice argument prohibiting contractor recovery for costs which may have been avoided or mitigated had the contractor given timely notice.

 

It is nonetheless a highly risky proposition for a contractor to fail to follow the contractual notice requirements and base his chance of recovery on these defenses. Absent a showing of Waiver, parties to a contract will be deemed to be bound by the plain terms of the contract. In a setting where extra work is being directed, the contractor should simply pose the question to himself: Why take the risk and proceed with the extra work without giving notice?

 

In State v. Omega Painting, Inc., 463 N.E. 2d 287 (1984), failure to provide notice proved fatal to an otherwise valid claim. In that case, a painting contractor was verbally directed to sandblast several steel bridge spans to a higher standard than contractually stipulated. The contractor proceeded with the work without providing written notice that such work was considered to be extra work. Accordingly, the contractor was denied recovery by the court:

 

The specifications state, in pertinent part:

 

If the Contractor deems that additional compensation will be due him for work or material not clearly covered in the contract or not ordered as extra work, as defined herein, he shall notify the Engineer in writing of his intention to make claim for such additional compensation before he begins the work on which he bases the claim. If such notification is not given and the Engineer is not afforded proper facilities for keeping strict account of actual cost as required, the Contractor shall make no claim for such additional compensation.

 

Neither party contends that additional blasting was covered by the contract or ordered as extra work. As such, any claim for additional compensation must fall within the parameters of section 105.-16. That section is clear and unambiguous. Absent the requisite written notification, the contractor is without recourse. Where the terms of a contract are plain and clear on the face of the document, such terms are conclusive as to the meaning of the contract and this court will apply the contract’s provisions according to the plain language of the document.

 

 FAILURE TO SECURE WRITTEN CHANGE ORDER

Many of the arguments applied to the issue of timely notice are equally applicable to the circumstance when a contractor proceeds with extra work prior to obtaining a signed authorization, namely a change order. Similar to the usual contractual clause for timely notice, an executed change order is a typically a required precedent for payment:

 

ARTICLE II-CHANGE OF CONTRACT PRICE

 

11.1 The Contract Price constitutes the total compensation (subject to authorized adjustments) payable to CONTRACTOR for performing the Work. All duties, responsibilities and obligations assigned to or undertaken by CONTRACTOR shall be at his expense without change in the Contract Price.

 

11.2 The Contract Price may only be changed by a Change Order or by a Written Amendment. Any claim for an increase or decrease in the Contract Price shall be on written notice delivered by the party making the claim to the other party and to ENGINEER promptly (but in no event later than thirty days) after the occurrence of the event giving rise to the claim and stating the general nature of the claim. No claim for an adjustment in the Contract Price will be valid if not sub­ mitted in accordance with this paragraph.

 

A contractor may be at considerable risk if he elects to proceed with extra work in advance of receiving a signed change order. In federal construction contracts, a contractor may not be precluded from receiving additional costs for work performed at oral direction of the contracting officer who provides assurance that a written change order is forthcoming. However, the various courts and boards are not consistent in their assessment of such oral direction, however.

 

A distinction can also be drawn in those instances where the owner fails to grant a change order because of unwillingness to recognize that the work is extra. In such an instance, the contractor will not be denied additional compensation assuming that timely notice was provided. In the non-federal contract arena, more care should be exercised in proceeding with work which was not authorized in writing. In a situation where the contractor proceeds with the extra work on the verbal promise that a change order will be issued, the contractor may be able to suspend work on the extra if a change order is not forthcoming. Such an action may be vital so as to avoid waiving the right to additional compensation.

 

 CHANGE ORDER ACCEPTANCE ABSENT RESERVATION OF RIGHTS

Perhaps the most vigorous dispute often arising from the performance of change order work is that of acceptance and waiver. In a typical dispute scenario the contractor protests the requirement to perform extra work. The owner and contractor then enter a negotiation leading up to an agreement as to the cost for the extra work. A change order is prepared and executed and seemingly all issues are resolved. Later, the contractor submits a claim for additional time and monetary compensation to cover the impact cost of the change. Obviously, the owner disagrees. Who prevails? In general, a contractor will be barred from asserting a contract claim if the agree upon change order is deemed to constitute full settlement and agreement. This will be particularly true if the change order contains specific language to the effect that acceptance of the change order constitutes full agreement as to its expressed conditions and that any claims of additional costs associated with the change are relinquished. In any event, it is acutely important that a contractor not inadvertently waive or release its right to receive compensation for all of its perceived extra costs. A simple statement on the change order which cites that the payment accepted is solely for the direct costs and that the contractor reserves its rights for time extension and impact cost is will usually suffice. A generic example of such a reservation is:

 

We hereby give notice that the pro­ posed change order provides consideration solely for the direct time and costs of the changes referred to therein and expressly does not provide time or financial consideration to the effects these proposed changes may have on the original contract work and/or other changes to the contract issued before or after the above noted changes. These potential impact or ripple costs and/or additional extensions of time are expressly reserved until such time as they can be ascertained.

 

Owners typically balk at the inclusion of such language, so the contractor is advised to use it in only those instances where there, indeed, may be time or additional cost impact effects. Credibility may be lost when a contractor reserves his rights on clearly miniscule changes.

 

During the negotiation leading to an agreed change order, a contractor cannot initially accept a change order as full payment and settlement and then later at the completion of the project submit additional costs for the previously settled extra work. In Huber, Hunt & Nichols, Inc. v. Moore, 136 Cal. Rptr. 603 (1977) the court barred additional recovery by the contractor:

 

In the final analysis what Contractor actually complains of is that the amount of money which Owner paid Contractor under the 25 (change orders) and the time allowed for the changes or additional work was not sufficient to reimburse Contractor for its total cost and total delay. Contractor argues that somehow the total result exceeded the sum of the 25 parts. Assuming without deciding that such a result is within the realm of logical possibility, we think that the responsibility for the result lies with the Contractor, not with the Architects. It was within the Contractor’s legal power to compute estimated change order costs in a manner which would compensate Contractor for its total loss. It failed to do so. Architects are not legally responsible for that failure. So far as we can tell from this record, Contractor was paid in almost every instance what Contractor requested on the 25 (change orders) issued. Contractor simply did not request enough on those (change orders) which were authorized. A factor of 10% or 15% for administration and overhead was obviously too low if Contractor’s present claims are accurate.

 

 CONTRACTUAL PROVISIONS TO MINIMIZE CONFLICTS

Frequently, the problems discussed herein have their origin not in a fundamental lack of understanding, but instead on the use of unclear and/or contradictory language in the contract documents. During the formation of the general conditions, the following three items would be well worth serious consideration:

 

  1. The Owner (not the Contractor) may direct changes in the work by issuing a Change Order. Keep it that simple; do not add “any other written order or an oral order … shall be treated as a change order”. This just adds to the confusion as to what is a change order and who issues it. To be a valid change it must be directed by the Owner and issued in the form of an official Change Order. Changes or extras requested by the Contractor are an altogether different matter; but, if granted, still must be documented by a Change Order issued by the Owner.
  2. All Change Orders must be in writing. Do not allow oral orders which are subject to controversy and hard to prove after-the-fact. Use a predetermined Change Order form and include it in the Project Manual. This becomes the only form of communication by which the Owner directs a change to the Contractor.
  3. Decide upon the cost and time compensation when the Change Order is issued – before the work is done. If exact price and time is unable to be determined before the work is done, then at least agree upon the terms for measurement and payment in the form of unit prices or time and materials plus mark-up. Include this information on the Change Order form.

 

By following these three principles the spec writer can a) eliminate any question as to what constitutes a Change Order, b) keep the Owner in control of project cost and time and the directing of changes, c) insure that the Contractor gets compensated for his extra work, and d) keep the Owner, Contractor, and A/E working together as an effective team by eliminating possible sources of conflicts that too often lead to unnecessary time spent at the negotiating table or in the court room.

 

 CONCLUSIONS

Since the necessity for extra work on construction projects is almost inevitable, it is to every­ one’s advantage – owner, A/E and contractor – to understand the applicable changes clause.

 

Particular attention must be paid to timely notice requirements as well as to any language which may address whether (or not) a contractor can proceed with extra work prior to receipt of a signed change order.

 

Lastly, a contractor must pay close attention to the extent to which he has priced the change. Acceptance of a change order which expressly denotes that it is full and complete payment for the extra work may well bar subsequent time extensions and cost recovery. If the potential exists for delay or subsequent impact or ripple effect costs because of the changed work, an expressed reservation of rights should be noted prior to acceptance of the change order.

 

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