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The Trouble With
Change Orders
Faulty documentation creates an environment of unnecessary finger pointing and
charges of dishonesty
Major disputes can arise
in fixed-price contracts when subcontractors perform work on an unwritten change
order, and both sides can lose big. Not having the change order in writing
makes it hard to prove that the change is not a defect and even harder to get
paid for the work. An owner who doesn’t receive a request for a change order may
be increasing his project costs.
The rule, not
the exception.
More often than
not, a construction contract will be significantly modified before the project
is completed. In fact, one recent industry survey found that the typical
commercial project involves 56 change orders.
Most construction
contracts require that all changes or authorizations for extras be put in
writing, generally before the work is performed. In real life, though, the pace
of work out in the field is often so fast and furious that, in the interest of
completing the project, change orders are approved verbally, with the
understanding that someone will put them in writing when time permits.
One reason for contention
is that unforeseen difficulties, improvements on the plans or even scheduling
hassles can send a project in a new direction. In addition, plans and/or
specifications are notorious for leaving the details up to the subcontractor.
What looks to the subcontractor like a deviation from or addition to the scope
of the work, to the owner or general contractor may appear to be a case of the
tradesman failing to read the plans.
A subcontractor in this
situation faces a difficult choice: to risk not getting paid for failure to get
the change in writing, or to get called on the carpet for not completing work
that the owner or contractor believes was included in the bid. The owner and
general contractor, too, are on shifting sands. The project could be delayed if
the subcontractor refuses to complete work without a change order, or the owner
could end up paying double for some work.
The best contracts
provide for decision making in these situations, by either the architect or the
engineer on the project, who can determine whether the change is new work or
within the scope of the original work.
Waivers.
When everyone
agrees that a written change order is not necessary and the subcontractor will
get paid for unwritten change orders, the writing requirement is waived. But
again, whether the writing requirement was waived is itself at the root of many
change-order disputes.
There are two types of
waivers:
-
a written or express
statement that change orders don’t need to be written, and
-
conduct that
demonstrates that the writing requirement has been waived.
The first one is
relatively clear; the second is considerably murkier and more difficult to
prove.
Some contractors and subs
have tried to argue that waiving one provision of a contract opens a Pandora’s
box that renders the entire contract ineffective. That is not the case. As the
Arizona Supreme Court noted in American
Continental Life Insurance Company v. Ranier Construction Co., Inc., “The
waiver of one right under a contract does not necessarily waive other rights
under the contract.”
Faulty
documentation.
As you may have learned
the hard way, change orders written after the fact – or not at all – can lead to
major disputes, and both sides can lose big money on change orders that lack
proper documentation.
In our experience, more
change orders are implemented in order to correct faults in the original
contract than to achieve an actual change in the plan or design. Generally
speaking, many factors can raise the need for change orders, including:
-
haste or inadequate
planning in preparing the initial contract;
-
a poorly defined scope
of work;
-
compressed project
schedules;
-
unrealistic cost
constraints;
-
time and material
changes; and
-
owner-directed
acceleration.
One of the causes of
change order conflict is that it isn’t easy for most contractors and subs to say
“no” when directed to modify work in the field. As a result, they respond to
verbal instruction, thus taking a big risk as to whose side a court will take if
the owner decides not to pay.
Solutions.
Fortunately, change order
pitfalls can be avoided with precise planning and adherence to sound business
practices.
Putting the change order
in writing benefits all parties, because proving oral change orders is often
difficult. While there may not be time to sit down and draft a written document
when change order work is required immediately, major changes to the contract
should always be authorized in writing before the work is done. The risk of
payment disputes is too great to proceed on an oral change order alone. For
material suppliers, a written change order is absolutely essential if the
contract price, when modified, is $500 or more.
Here are some other
proven, practical methods of avoiding conflicts over change orders and other
documentation:
-
Organize a meeting of
key players in advance, including the general contractor and subcontractor.
-
Conduct an in-house
peer review of working drawings, specifications and other key documents.
-
Scrutinize drawings
closely from project concept to the final stage and invite outside review.
-
Keep communications
open with ongoing, on-site project meetings.
-
Review and revise
critical documents several times during the life of a project.
-
Create
and use functional checklists.
-
Participate in
workshops and training related to improving document quality.
-
Establish
accountability for everyone at every stage of document development.
-
Update any system that
obstructs development of quality documents.
-
Carry out a timely
project post mortem to identify
problem areas.
-
Have a strict company
policy, that no one but the owner can waive, requiring that directives be in
writing before any work will be done that is over and above or different from
what is called for in the contract.
Here are some other
suggestions:
Address the
issue before work is started.
An owner or general contractor ordering a subcontractor to do additional
work should tell the subcontractor whether the work is within or beyond the
scope of the contract. Likewise, the subcontractor should make plain its
position that new work will require a change order before new work is performed.
Be specific.
To avoid misunderstandings, change orders should spell out in detail the
additional work that is requested or necessary, and they should be signed and
dated by both parties. They should always include whatever drawings,
specifications, cost estimates, new deadlines and payment terms are necessary to
complete the additional work.
Don’t agree
to open-ended change orders.
Also known as “time and materials agreements,” these can blow up your budget
and strain contractor/owner relationships since they allow the contractor to
charge for work as it proceeds and materials and supplies as they are needed.
Instead, owners are wise to ask for a fixed sum agreement that obligates the
contractor to perform work for an agreed upon sum. The contractor must absorb
costs if they are greater than estimated or, conversely, can make a greater
profit if costs are less than budgeted.
Subcontractors should reaffirm the hourly rate they will charge for time and
material work.
Unfortunately, disagreements occur even with the best estimating, contracts and
performance. So before trouble starts, videotape your work at different stages,
or photograph it. For financial matters, rely on the written word instead of
oral agreements.
Confirm
conversations with a letter immediately.
If you have to see a lawyer, you will be able to explain what happened with
more than “he said and I said.”
Conclusion.
Most contractors and
subcontractors have high standards for integrity and quality. Unfortunately,
faulty documentation creates an environment of unnecessary finger pointing and
charges of dishonesty.
In the construction
industry, the day of the handshake deal has passed; more than ever before,
ensuring prompt and proper payment requires strict procedures and clear
documentation.
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