Any construction contract worth its salt includes provisions for modifying the agreement, either by agreement or by unilateral action. The most common modifications increase or decrease the contract scope, contract dollar amount and time. Commonly referred as a “change order”, when used correctly and consistently, this instrument works to avoid disputes when payment becomes due, the project seems untimely or the budget is exceeded. They can also become a double-edged sword if not carefully reviewed and understood in the context of the contract language requiring their use.
Before signing a change order, it must be read in conjunction with the contract it is modifying. Most agreements mandate that changes be in writing and signed only by authorized individuals. Similarly, if extra work is performed without a written order, then no claim exists for that changed or extra work and is done at the contractor’s or subcontractor’s expense.
Scope & Completeness
It is very common for contracts to state that the execution (signing) of a change order waives all other claims for costs or time based upon such a change. Likewise, the change order itself may broadly waive unrelated claims “through the date of the change order.” Projects that are poorly designed, managed or frequently modified naturally generate extra work and many change orders. Be careful! Courts frequently enforce unambiguous, formal, notarized change orders even if such waivers and releases would otherwise be disfavored. Never assume that a change order that increases price automatically provides additional time for performance – or vice versa. That would be unusual.
More often than not, contracts place the burden upon the contractor for notifying the owner that extra work (outside the original scope) is required. This is true even if it is the owner that initiates or proposes the extra work or causes increased costs or delays. Contractors and their subcontractors must be vigilant to document and timely issue change order requests each and every time they realize an extra-contractual event affecting price or time has or will occur.
Continuation of Work
Not infrequently, the party paying the bill disputes the proposed revisions to the contract’s scope, price or schedule. Typically, the contract permits the upstream party to direct changes in the general scope of the agreement and requires continued performance in the event of a dispute. Ideally, the contract also requires the contractor to maintain accurate cost records for all extra work and sets forth a methodology for computing payment for the extra work.
Field Agreements and Directives
The primary goal of field superintendents and foremen is not the generation of paperwork. Usually, they want to complete the job and satisfy the owner by timely delivering a quality product. Because the goal is completion, it is very common to ignore written change order requirements and instead opt for handshakes and oral promises to be made concerning payment. The law recognizes several exceptions to the requirement that changes be reduced to writing. The most common include waiver, breach of contract, quantum meruit, oral agreement and promissory estoppel. However, the applicability and availability of all of these turn on the facts of individual cases. Recovery under an exception is never guaranteed. Therefore, the safest thing for the contractor is to follow the change order clause as closely as possible. Blank change order forms should be readily available.
Sometimes it proves impossible to get anything in writing from the other party due to time pressure, mismanagement or avoidance. When this occurs, the party performing the extra work should confirm the oral directions in writing by sending self-serving correspondence. Your letter should outline the work, the promise that adequate payment would be made, that you will immediately commence work unless directed otherwise and that you will expect your contract price to be increased. Important letters and notices like this should be sent in a manner that establishes that the notice has been sent and received. For example, send your letter via fax and retain the fax confirmation page or use certified mail.
Whether your project is large or small or your owner is sophisticated or not, hands down the best practice is to document all changes that occur on the construction site by timely modifying the contract with a written change order. If the owner provides the change order, it must be read carefully to make certain that it does not include broad waivers for existing claims. All change orders must be considered in light of the existing contract and should reflect not only changes to price but also to the project schedule.