Think back for a moment to some trip that you had planned. Did the undertaking unfold exactly as envisioned? Probably not. Now suppose that you had been compelled to carry out the plan exactly as originally conceived, regardless of the circumstances encountered, the additional expense, and the impracticality of adhering to the original plan. Such a situation would obviously be far from desirable, especially if a flight were canceled or a bridge washed out!

This analogy can be applied to construction contracting in which change is virtually inevitable. Even small, simple projects normally involve necessary or at least desirable changes, whereas large, complex projects sometimes involve thousands of changes. Without an agreed-upon, orderly procedure for making changes to the contract that are desired or necessary, a construction owner would be placed in a similar situation as you were on your trip.

Contract Change Procedure

After accepting the reality that changes are inevitable in construction contracts and procedures for handling such changes are necessary, those drafting construction contracts must consider these central questions:

• Will the owner have the right to unilaterally make changes to the work?
• Will the contractor be compelled to carry out changes made by the owner?
• After performing changed work directed by the owner, will the contractor be entitled to payment for the additional costs incurred?

From a contractual point of view, answers to these questions cannot be implied. They must be clearly stated in the written contract. A well-drafted changes clause explicitly answers each question in the affirmative and provides detailed language defining the entire contract change procedure.

Federal Contract Changes Clause

A changes clause is not an exculpatory clause excusing the owner from liability for changes. Rather, the clause provides for a structured way for the owner to direct changes and for the contractor to perform them and be properly compensated. The federal contract changes clause states:

1. The Contracting Officer may, at any time, without notice to the sureties, by written order designated or indicated to be a change order, make changes in the work within the general scope of the contract, including changes
   1. In the specifications (including drawings and designs);
   2. In the method or manner of performance of the work;
   3. In the Government-furnished facilities, equipment, materials, services, or site; or
   4. Directing acceleration in the performance of the work.
2. Any other written order or an oral order (which, as used in this paragraph (b), includes direction, instruction, interpretation, or determination) from the Contracting Officer, that causes a change shall be treated as a change order under this clause, provided, that the Contractor gives the Contracting Officer written notice stating (1) the date, circumstances, and source of the order and (2) that the Contractor regards the order as a change order.
3. Except as provided in this clause, no order, statement, or conduct of the Contracting Officer shall be treated as a change under this clause or entitle the Contractor to an equitable adjustment.
4. If any change under this clause causes an increase or decrease in the Contractor’s cost of, or the time required for, the performance of any part of the work under this contract, whether or not changed by any order, the Contracting Officer shall make an equitable adjustment and modify the contract in writing. However, except for an adjustment based on defective specifications, no adjustment for any change under paragraph (b) of this clause shall be made for any costs incurred more than 20 days before the Contractor gives written notice as required. In the case of defective specifications for which the Government is responsible, the equitable adjustment shall include any increased cost reasonably incurred by the Contractor in attempting to comply with the defective specifications.
5. The Contractor must assert its right to an adjustment under this clause within 30 days after (1) receipt of the written change order under paragraph (a) of this clause or (2) the furnishing of a written notice under paragraph (b) of this clause, by submitting to the Contracting Officer a written statement describing the general nature and amount of proposal, unless this period is extended by the Government. The statement of proposal for adjustment may be included in the notice under paragraph (b) above.
6. No proposal by the Contractor for an equitable adjustment shall be allowed if asserted after final payment under this contract.^[1]

The words change order as used in the federal clause mean a directive from the contracting officer (the owner) or designated representative to make a change in the work within the general scope of the contract, including

• Changing the details of original work
• Adding new work
• Deleting original work
• Changing the method or manner of performance of the original work, which could mean changing the times in the day, or days in the week, month, or year, during which work may be performed
• Shortening the time period allowed for completion of the work (acceleration)
• Slowing the rate at which the work may be performed
• Changing the commitments of the government with respect to materials, facilities, equipment, services, or the site conditions to be furnished to the contractor

Although this list of potential changes is very broad, federal contracts cannot be changed in two respects. The government cannot unilaterally change any of the general conditions (“General Provisions” in the federal contract) and cannot unilaterally make changes that are beyond the general scope of the contract.

For instance, clauses such as the differing site conditions clause, the suspension of work clause, or the changes clauses itself cannot be unilaterally changed or deleted.

The general scope of the contract means the size, type of construction work, and the intended purpose of the work to be contracted for, as contemplated by the government and the contractor when the contract was signed. Changes outside this intended general scope are not permitted. For instance, adding the construction of a boiler house for a steam heating system to an original contract for the grading and paving of a parking lot would be a change beyond the scope of the contract, whereas simply changing the configuration of the parking lot on the same site would not be. Adding quantities of paving would not normally be a change beyond the scope of the contract, nor would changing design details for the paving. However, if such changes were made in quantities that doubled or tripled the contract price, the general scope of the contract would probably be judged to have been exceeded.

Specifics in Changes Clauses

The federal contract changes clause is broadly regarded as the model clause in the industry. It is comprehensive, fair, and has stood the test of time. Although the federal clause has been widely copied, clauses in other contracts vary. Following are some important points to note when examining an unfamiliar changes clause.

Distinctions Between Contract Change Terms

There is an important distinction between the terms change order as previously discussed and formal change to the contract, which does not even appear in the federal clause. Change order means a directive from the owner or designated representative to the contractor to make some change (see the preceding examples). Formal change to the contract means the written modification to the contract which describes the change and states the increase, or decrease in the case of a deletion, in total contract price and total time for contract performance. Formal changes to the contract are written legal documents executed by the owner and contractor at some time after the change order has been issued. Other terms often used in lieu of change order are change directive and change notice.

Who Is Empowered to Make Changes?

The changes clause addresses the issue of who can make changes in different ways, depending on the contract. The specific language in the contract must be carefully read to obtain a definitive answer. Note that the federal clause mentions only the “contracting officer,” a person defined in the federal acquisition regulations. After the contract has been awarded, the contractor is always formally advised of the name of the contracting officer. In practice, the contracting officer frequently designates others as authorized representatives to issue change orders to the contractor.

Contractors who perform changes ordered by persons without authority under the contract run the risk of not being paid for the change. For instance, a contractor providing construction services to the government under a fixed-price contract discovered that payment would not be made for the extra work of attending meetings, performing inspections, and providing other services not included in the contract that had been directed by a government official bearing the title of “project coordinator.” The role and authority of the project coordinator were not defined in the contract. The Veterans Administration Board of Contract Appeals ruled that, although the contractor had performed the work in good faith, the contract provisions requiring authorization of changes by the contracting officer would be strictly enforced. In the Board’s words:

It is long been a tenet of Federal contract law that employees without actual authority cannot bind the government. … It is the duty of the contractor, when ordered by an unauthorized Government employee to perform work obviously beyond the contract requirements, to promptly register a protest with the Contracting Officer.^[2]

Similarly, a contractor constructing a building for the Postal Service found that specification relaxations approved by the government inspector were not binding on the government. The inspector believed he had authority to approve “minor changes,” and the contracting officer did not learn what had occurred until after the work had been completed, at which point he refused to ratify the change. The Postal Service Board of Contract Appeals ruled that, although there may have been an honest misunderstanding, the inspector could not alter the contract. The Board said:

Although Mr. Hale agreed to relax the specifications, his agreement was not binding on the government, as he lacked authority to change the specifications. The notice to proceed, after designating the Contracting Officer Representative, gave notice to Appellants that changes were reserved to the Contracting Officer. Mr. Hale’s misrepresentation as to his authority did not create any right in Appellants to avoid the contract’s express terms.^[3]

A more difficult question arises when the person ordering the change has “apparent authority.” This apparent authority can be created by previous actions of the owner, such as readily paying for previous changes ordered by that person, which create the impression that the owner intended that person to have such authority. The point is illustrated by a North Carolina case where the issue became the apparent authority of the prime contractor’s field superintendent. A subcontract agreement for excavation and grading work provided that the subcontractor would be paid extra for rock excavated, the quantity to be measured by the general contractor’s engineer. During contract performance, representatives of the subcontractor and the prime contractor’s field superintendent agreed that rock measurements would no longer be required to be made by the prime contractor’s engineer. Rather, other prime contractor on-site personnel could take the measurements. This agreement was confirmed in writing by the subcontractor in a letter to the prime contractor. Subsequently, the prime contractor refused to make payment because their engineer had not performed the measurements for the rock quantity excavated. At that point, the subcontractor abandoned work and sued the prime contractor, alleging breach of contract. The prime contractor countersued for the extra cost of obtaining another subcontractor to complete the work. A trial court ruled in favor of the subcontractor. In affirming the trial court decision, the Court of Appeals of North Carolina said that the “dominant question” was whether the prime contractor field superintendent “had authority to modify the contract with subcontractor by dispensing with the requirement that ADC’s engineers measure the rock…. ” Trial evidence indicated that there were other occasions when the prime contractor’s field superintendent had orally ordered additional work to be performed as changes to the contract, all of which were subsequently paid. Evidence also indicated that substantial quantities of rock were excavated on the project without the prime contractor’s engineers being sent to the site to do the measuring and that the prime contractor knew that the measuring was being done by other site personnel and initially continued to pay the subcontractor’s invoices. For these reasons, the Court of Appeals concluded that the prime contractor’s field superintendent had authority to orally modify the written subcontract.^[4]

When the changes clause makes clear where the authority lies, problems such as those just described are more easily avoided.

Who Is Empowered to Make Formal Changes to the Contract?

Executing a formal change to the contract on behalf of the owner is different from ordering the change to be made. Both should be formalized in writing, with a clear, unambiguous description of the change, and the formal change to the contract should also include the agreed-upon change in contract price and contract time extension (if any). A person possessing authority to act for the owner in increasing the contract price and the time allowed for contract performance always possesses the authority to order changes, but the reverse is often not true—that is, the person with authority to order the change may not possess the authority to change the contract price or the time for performance. It is, therefore, helpful if the changes clause makes clear which representative of the owner possesses the authority to perform each separate function. In some jurisdictions, defining respective functions and designating who is empowered to perform them is governed by statute.

By disapproving appellant’s proposed method, the Government required appellant to employ a more expensive and time-consuming method of installing the cable on the wharves and thereby constructively changed the terms of the contract. The appellant is entitled to additional compensation and performance time for that constructive change.^[6]

In the third case, the federal government had awarded a contract for construction of a new auto repair shop at a naval air station. The contract specified that the new shop was to be built during the first phase of the project, during which time the existing shop on the site was to remain in operation. The second phase of the contract consisted of demolishing the original shop. The contractor intended to grade and pave the entire site around the existing shop during the first phase and so indicated this intention on their critical path method (CPM) schedule which the government approved. When the government refused to give the contractor access to the entire site to perform the intended grading, the contractor asserted this refusal was a constructive change. The Armed Services Board of Contract Appeals concluded that the contractor’s interpretation of the contract was reasonable, in that, although the contract required the existing shop to remain operational, it placed no restrictions on access to the site. Further, the board said that the government’s approval of the contractor’s CPM schedule was evidence of the reasonableness of the contractor’s expectation. Since the contractor had incurred considerable additional costs and delay due to performing the site work in two separate phases, the board ruled that the contractor was entitled to an equitable adjustment for a constructive change to the contract.^[7]

Constructive Change Notice Requirements

A contractor who believes a constructive change has occurred must give prompt written notice of the constructive change to the owner. Notice is crucial to preserve the contractor’s rights of recovery for the additional costs and extra contract time associated with the change. Without such notice, it can later be argued (rightly or wrongly) that the owner was unaware that the contractor regarded the owner’s instructions to constitute a change to the contract for which the contractor expected payment.

It should be noted that the federal contract changes clause refers directly to the constructive change situation and to the importance of notice in the second full paragraph of the clause.

Cardinal Changes

A cardinal change is a change to the contract that, because of its size or the nature of the changed work, is clearly beyond the general scope of the contract. It is beyond the reasonable contemplation of the owner and contractor at the time of contract formation. Additive cardinal changes are illegal on public contracts, even if both owner and contractor agree to the change, because such a large addition of work violates public bidding statutes guaranteeing free and open competition. On private work, such a change is not illegal and not improper if both owner and contractor agree to the change. However, even in private work, a cardinal change cannot be forced upon the contractor.

These principles are illustrated by a recent decision of the United States Court of Federal Claims. The Department of Energy had awarded a performance specification contract for the construction of a fabric filter particle collection system (that is, a “baghouse”) of an open-end design to accommodate potentially explosive conditions. Among other performance specifications, one specification called for an inlet gas operating range of 0.6 to 1.6 psi. The contractor interpreted this specification to mean that gas entering the baghouse would exert a pressure of 0.6 to 1.6 psi at an imaginary line separating the inlet pipe from the baghouse, whereas the government insisted that a constant internal operating pressure must be maintained throughout the baghouse within that range. During construction, the contracting officer demanded written assurances from the contractor that the baghouse would maintain a constant internal operating pressure in the range of 0.6 to 1.6 psi. The contractor refused on the grounds that, given the government’s open-end design, it was impossible to comply with the contracting officer’s demand. The government terminated the contractor for default.

The court found that the government’s insistence on a constant internal operating pressure of 0.6 to 1.6 psi was a constructive change to the contract because the specifications did not stipulate any particular internal operating pressure. Further, the court ruled that the government’s directive constituted a cardinal change to the contract. In converting the default termination to a termination for the convenience of the government, the court said:

If the requirements that the government imposed on Airprep, in this case, were in the general scope of the contract, then Airprep was obligated to perform, even if the government misinterpreted the contract. A contractor has no right to stop work if the project to be constructed is fundamentally the same as the one contracted to build. A contractor is not, however, obligated to undertake “cardinal changes”—drastic modifications beyond the scope of the contract work… changes that alter the nature of the thing to be constructed.^[8]

No universal standards exist to determine precisely how large or how unusual the change must be to constitute a cardinal change. In some cases, courts have ruled that an extraordinary number of changes, each of which was not excessive in itself, amounted to a cardinal change. In one such case, a private owner awarded a guaranteed maximum price (GMP) contract for the modernization of a paper mill. Once contract performance started, the owner issued a steady stream of drawing revisions, in most instances ignoring the contract requirement for written change orders. More than 16,000 manhours of redesign effort were expended by the owner, resulting in such an excessive number of changes that the California Court of Appeals determined that the degree of change was far beyond the contemplation of the parties at the time the contract was entered into and that by issuing excessive revisions and radically altering the scope of the work, the owner had abandoned the original contract. In the court’s words:

When an owner imposes upon the contractor an excessive number of changes such that it can fairly be said that the scope of the work under the original contract has been altered, an abandonment of contract properly may be found. In these cases, the contractor, with the full approval and expectation of the owner, may complete the project. Although the contract may be abandoned, the work is not.

Since the work performed benefitted the owner and was performed with their approval, the contractor was entitled to recover its total direct costs plus a reasonable overhead and profit.^[9]

Fortunately, relatively few contracts result in such massive change.

As a general operating principle, a contractor should refuse to perform a change believed to be a cardinal change, except under the threat of being placed in default of the contract by the owner. Even then, the contractor should proceed only after notifying the owner in writing that the directive to perform the work is a cardinal change and that performance is being compelled under protest. This principle holds on both public and private contracts, unless the contractor on private work is willing to perform the cardinal change.

An architect/engineer or construction manager who compels a contractor to perform a cardinal change on either public or private work has committed a tortious act and may be sued in tort (see Chapter 1) even though privity of contract does not exist. This would be in addition to whatever contractual remedies that the contractor has with respect to the owner.

Price and Time Adjustments for Contract Changes

Forward Pricing

If the contractor and owner agree on the price and time requirement for the changed or additional work before starting performance of the change, the change is said to be forward priced. Under fixed-price contracts, the contractor assumes the full financial risk of performance in the same manner as for the original contract when changes are forward priced. For this reason, the adjustment to contract price and time should include, in addition to a reasonable profit, an allowance to cover the risk that the contractor is assuming. Depending on the nature of the change, the price and time adjustment to the contract will be greater than if the owner were assuming the risk.

Once agreement has been reached on a forward-priced change order, the payment terms may not be altered. This principle is illustrated by a Corps of Engineer Board of Contract Appeals decision on a mass transit contract. The contractor had negotiated a forward-priced lump sum change order with the resident engineer whom the contract documents had designated as the authorized representative of the contracting officer. Following the contractor’s completion of the work covered by the change order, the contracting officer would not agree to the negotiated price, demanding instead that the contractor provide proof of the actual costs incurred. The court ruled that since the resident engineer, acting within the scope of his contractual authority, had negotiated the forward-priced change with the contractor and the contractor had performed the change in good faith, the contracting officer could not require an after-the-fact accounting of actual costs.^[10]

Retrospective Pricing

When price and time adjustments to the contract are not determined until after the changed or additional work has been completed, the change has been retrospectively priced. In this situation, the basis of the price and time adjustment normally will be job records maintained by the contractor or owner, or both. If the contractor and owner cannot agree on the proper price and time adjustments, the dispute must be resolved under the dispute resolution provisions of the contract. In any event, the price and time adjustment is determined retrospectively, either by the contractor and owner, or by others.

Force Account

Force account is a particular form of retrospective pricing in which the contract spells out a specific procedure for arriving at the price adjustment when the contractor and the owner fail to agree on the price by forward pricing. Force account is also widely used to determine price adjustments for miscellaneous minor added work.

When force account is used, daily records are kept of labor, material, and equipment usage expended on the changed work by the general contractor and all subcontractors involved. The records are agreed upon daily and signed by representatives of both owner and contractor. When the work has been completed, the records are used as the basis for computing the direct costs associated with the change. The force account provisions then state fixed percentages of labor, materials, equipment operation, and subcontract costs that are allowed for overhead and profit markups, regardless of what the contractor’s actual overhead costs may be.