- Three questions central to the changes concept
- Federal contract changes clause
- Respects in which contract cannot be unilaterally changed
- General scope of the contract
- Change order, change directive, change notice
- Formal change to the contract
- Equitable price adjustment
- No pay without signed change order
- Two-part change to the contract
- Oral change orders
- Constructive changes
- Change element
- Order element
- Constructive change notice requirement
- Cardinal changes
- Forward-priced changes
- Retrospectively priced changes
- Force account
- Extended contract performance situations
- Breach damages not limited by changes clause
- Impact costs / Time-related impacts / Loss-of-efficiency impacts
- Change order payment disputes
- Current judicial attitude to payment disputes
- Conditions likely to result in payment for changes
- Proper contractor reaction to oral or written directives
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:
- 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
- In the specifications (including drawings and designs);
- In the method or manner of performance of the work;
- In the Government-furnished facilities, equipment, materials, services, or site; or
- Directing acceleration in the performance of the work.
- 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.
- 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.
- 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.
- 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.
- No proposal by the Contractor for an equitable adjustment shall be allowed if asserted after final payment under this contract.
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.
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.
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.
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.
How Are Price and Time Adjustments Determined?
Interestingly, this is one area where the changes clause in the federal contract is silent, saying only that there shall be an equitable adjustment to the contract price and time. Changes clauses in other contracts usually state precisely how the change in price will be determined, often specifying several alternate methods. If the owner and contractor do not agree on the price change, the changes clause usually prescribes that payment will be made by the force account method, the details of which are spelled out in the clause. The force account method of payment is more fully discussed later in this chapter.
“No Pay Without Signed Change Order” Language
Most changes clauses contain language intended to strictly limit the contractor’s right to payment to only those changes authorized by the owner prior to the change being undertaken. Usually, the clause will require that the authorization be in writing.
Some especially restrictive clauses require that the actual formal change to the contract, stating the agreed price and time for performance, be executed prior to performance of the change. Such provisions are unworkable today. Even in the most efficient owner’s organization, it takes too long administratively after the change has been ordered to agree on price and time and to prepare an appropriate formal change to the contract. The project would grind to a halt in the meantime. The problem is exacerbated because large jobs commonly involve several hundred or even several thousand changes.
It is a different matter when the changes clause merely says there shall be no payment without a signed change order (also called change notice or change directive) in hand prior to performance of the change. This at least permits the work to be completed while the price and time changes are negotiated and the formal change to the contract prepared, although this procedure requires the contractor to carry the financial burden of performing the change in the interim. To solve this problem, some contracts provide for a two-part change to the contract, in which the contractor is promptly paid demonstrable costs under a Part I change to the contract prior to finalization of the change under a later Part II change to the contract.
Sometimes, change orders are written on a “price not to exceed” basis. Under this arrangement, the contractor is assured payment up to the not-to-exceed limit, although payment normally is not received until a formal change to the contract has been executed by both parties.
In practice, contractors are given many oral change orders (the federal contract mentions the words “oral order”). After the contractor has performed the changed work, owners sometimes refuse to make payment, claiming that the work was not authorized by a written change order. Sometimes the refusal to pay is based on a claim that the person who issued the oral order was not authorized to do so or that person will deny that he or she issued the order. The attitude of our courts toward payment disputes of this type is discussed later in this chapter.
A constructive change is a change that is not acknowledged by the owner as such when it occurs, but which nonetheless is a change. In this situation, the owner takes the position that whatever the contractor is directed to do or is prevented from doing is not a change, but rather is required or prohibited by the original contract, as the case may be. In these situations, the contractor is required to proceed according to the owner’s instructions but is free to assert and later attempt to prove that the owner’s instructions constituted a change order. If the contractor is correct, courts will deem that a constructive change has occurred, and the contractor will be awarded the costs incurred plus a reasonable profit thereon.
Two elements must be proved to establish a constructive change. First, the change element must be proved. Proof hinges on the facts of each particular case. The court must be convinced that a true change occurred in the work or requirements of the contract. Second, the order element must be proved. This is established entirely by the owner’s acts or words, both written or oral. It is not sufficient that the owner made a “suggestion” that something be done or an “observation” that something might be a “good idea.” There must have been an actual order or directive to the contractor or a course of conduct by the owner that had the practical effect of such an order or directive.
The following cases illustrate court determination of three different types of constructive change. In the first case, a contractor constructing an underground parking garage for the federal government recovered extra costs when earlier permission to alter excavated slopes was rescinded by the government after the majority of the slopes had been excavated. The project specifications required slopes for the exterior berms to be excavated at a one-foot vertical to two-foot horizontal slope and also required an excavation bracing system. During performance, the contractor requested and received permission to cut the slopes at the steeper ratio of 1 to 1.5. After most of the slopes had been cut and a new bracing system designed based on the steeper slopes, the government rescinded its earlier approval of the steeper slopes. The contractor asserted a constructive change for the extra costs of reverting to the original system. The government argued that it had the right to rescind earlier permission and to insist on compliance with the excavation slopes specified in the contract. The U.S. Claims Court (now the United States Court of Federal Claims) agreed that the government could rescind its earlier approval but ruled that the contractor was entitled to an equitable adjustment for the extra costs caused by the rescission. The equitable adjustment awarded the contractor not only the additional construction costs of revising the slopes back to one-foot vertical on two-foot horizontal but also included the costs incurred for redesigning the bracing system to accommodate the originally specified slopes.
In the second case, the Armed Services Board of Contract Appeals ruled that a government contracting officer’s refusal to allow the contractor to use its intended method of performance was a constructive change. The contract work involved installing a telephone switching system at an Army ocean terminal. New cable was to be installed along three miles of wharves, but the contract documents did not indicate where or how the cable was to be attached to the wharves. The contractor had planned to strap the cable to the guardrails, but the contracting officer required that the cables be installed underneath the wharves, which required drilling 15,000 bolt holes through reinforced concrete. When the contractor appealed the contracting officer’s denial of the contractor’s claim for a constructive change, the board ruled for the contractor, holding that:
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.
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.
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.
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.
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.
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
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.
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 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.
Application of Force Account Provisions to Extended Performance Situations
If the force account markup percentages are too low compared to the contractor’s actual overhead costs, the contractor will receive less than an equitable cost adjustment. This is particularly true when the contract performance time has been extended because of changes directed by the owner or, as frequently occurs, because the contractor encounters differing site conditions (see Chapter 15). In these situations, the contract time and price adjustments are more equitably determined using the force account records as the best evidence of the time of contract performance change as well as for the direct cost portion of the contract price change. Then, the indirect cost portion of the contract price change is also determined on the basis of the contractor’s actual indirect costs which take the extension of contract performance time into consideration. In addition, the contractor is allowed a reasonable profit.
Use of Force Account Records in Determining Breach of Contract Damages
The provisions of the changes clause, including the force account provisions, are contractually prescribed procedures that parties to a contract should follow for matters falling within the purview of the contract. However, when the contract has been breached, the proper determination of the monetary value of the breach damages is not limited by the changes clause in the contract. For instance, if the owner has breached the contract, the contractor is entitled to be paid all costs resulting from the breach, both direct and indirect, plus a reasonable profit. If force account records have been kept, they are the best possible evidence of the contractor’s direct costs. However, the contractor’s actual indirect costs should be paid in lieu of the force account markup percentages, and a reasonable profit on both direct and indirect costs should be added to make the contractor whole. This is true whether the contract performance time has been extended by the breach or not.
Costs flowing from the change in addition to the proximate costs (meaning the direct labor, materials, and so on, actually incurred at the time of performing the change) are impact costs. These consist of (1) the time-related costs that flow from the change and (2) the effect that the change may have on the efficiency of performance of the original unchanged work.
The time-related costs usually consist of extended job overhead and extended home office overhead costs because the project took longer to complete as a result of the change. They also frequently include labor and material escalation costs and the higher cost of performing work in inclement weather. All of these kinds of costs are associated with the original work on the project being performed later than it would have been if the change had not occurred.
For instance, suppose the project was scheduled to be completed in a northern city by mid-September and was proceeding on schedule when a large quantity of extra work was directed to be performed in April of the project’s final year. The extra work extended the completion of all following original work four months past September into a severe winter. Also, ready-mix concrete prices and craft labor rates both increased on October 1. Clearly, additional costs would be incurred for winter protection, concrete cost increases, and increases in craft wages.
Loss-of-efficiency costs in the performance of the unchanged work are additional costs incurred to complete part or all of the original unchanged work on the project due to the disruptive effect of changes made to the changed work. This is particularly important when a large number of changes must be dealt with on a continuing basis. Numerous studies indicate such situations can have a devastating effect on construction costs for a number of reasons, such as crowding of the trades, frequent moving of crews with associated starts and stops, frequent requirements for overtime, the necessity of going through a learning curve more times than would otherwise be necessary, and the general effect on morale due to continual changes and delays.
The National Association of Electrical Contractors has conducted studies to assist in quantifying the loss of efficiency due to these effects. Also, the Business Roundtable has published data illustrating the loss of labor efficiency when excessive overtime is worked on an extended basis.
When the forward-priced method of pricing changes is used, impacts can be included on an estimated basis along with the proximate costs. Otherwise, they and the proximate costs will be determined retrospectively.
Change Order Payment Disputes
Change order payment disputes frequently arise between owners and contractors and between contractors and subcontractors. At least three separate root causes are responsible:
- The owner or, in the case of a subcontract, the contractor, claims that the work was not authorized in advance by a signed change order.
- The person alleged to have directed the work denies directing it, or the owner or, in the case of a subcontract, the contractor, claims that person did not have authority to order the work performed.
- The contractor or subcontractor alleges that the direction received from the owner or contractor respectively constitutes a constructive change to the contract.
Judicial Attitude to Payment Disputes
In some cases, changed work has been performed by the contractor in good faith, and courts have denied payment on the grounds of the absence of a signed change order or other proper advance authorization. However, the current judicial attitude is toward equitable principles to avoid unjust enrichment of the owner in the owner–contractor relationship or of the contractor in the contractor-subcontractor relationship. Courts are heavily influenced by the contemporaneous words, acts, and conduct of the parties and by their past patterns of behavior. Contemporaneous words, acts, and conduct refer to how the parties behaved when changes in the contract work were actually performed. Earlier patterns of behavior means the way in which the parties handled similar changes earlier in the contract. For instance, suppose an owner had consistently paid the contractor for changed or additional work orally directed by the resident engineer throughout contract performance and then refused to pay for a particularly large later change that the contractor performed on the resident engineer’s oral direction. Even if the changes clause said there would be no pay for work performed without a signed change order, a court today would probably hold that the contractual provision had been waived by the owner’s earlier behavior.
The following cases illustrate situations in which the contractor was not paid for performing extra work because the work was performed in the absence of a signed change order. In a 1984 Ohio case, an excavation contractor on a bridge improvement project encountered Brea sandstone in an excavation represented in the contract to contain no rock. Brea sandstone is extremely hard. The county engineer acknowledged that the material excavated was not as represented in the contract and directed the contractor to blast and remove the rock and to keep track of costs for payment purposes. The county engineer witnessed the performance of the work. However, the county commission refused to pay for all but a small portion of the extra work on the grounds that Ohio law requires extra work be authorized in writing and approved by the county commission. When the contractor sued for the balance, a trial court ordered payment but was reversed by the Court of Appeals of Ohio.
Similarly, a contractor in Florida on an airport project failed to secure payment for extra work directed by the owner. The contract contained a changes clause requiring advance written authorization for any extra work. During construction, the owner revised the plans for the underground drainage system, resulting in considerable extra work. No change order was ever issued. When the contractor presented an itemized claim for the extra work after completion of construction, the owner refused to pay. Despite the fact that the owner had ordered the extra work and it was satisfactorily performed, the District Court of Appeals of Florida supported the owner’s position. The contractor was not paid for the work.
However, the following cases illustrate the current trend in judicial attitude. In a 1993 Arkansas case involving the construction of a residence, the topographical information furnished by the owner proved to be inaccurate, which required a large number of changes to be made by the construction contractor due to inaccurate ground elevations. The owner orally directed the changes and paid progress payments systematically for a number of them. Eventually, the owner refused to make a progress payment, alleging that changes had been made without written authorization as required by the General Conditions of the construction contract. The Supreme Court of Arkansas ruled in favor of the contractor on the grounds that the owner was aware of the changes, orally assented to them, made progress payments, and continued to approve changes orally. The owner could not behave in this manner and then rely on the “no pay without written change order” language as grounds for refusing to make payment.
In a Wyoming case involving a guaranteed maximum price (GMP) contract for the conversion of an existing building to a restaurant, the contract required changes in the work to be authorized in writing by the owner as a condition for adding their value to the guaranteed maximum price. To meet the owner’s schedule, the contractor was repeatedly asked to make renovations that were beyond the scope of the original contract. All extra work performed was by oral direction of the owner. When the owner refused to increase the guaranteed maximum price by the value of the extra work, the contractor sued. In ruling for the contractor, the Wyoming Supreme Court held that
The habitual disregard of a provision which requires that change orders for extras be in writing, if determinable as a matter of fact, can amount to a waiver of the contractual requirement. It is apparent from the record that the parties ignored the writing requirement and frequently orally agreed to “extras.” The record also clearly demonstrates that the provision requiring written approval of all changes in the work was waived by the words and conduct of the parties.
A 1994 Missouri case resulted in the same holding. The framing subcontractor on a large apartment complex in Kansas City assisted the concrete and plumbing subcontractors at the prime contractor’s request in order to expedite the work and were paid for this extra work. At that point, the general contractor instructed the subcontractor not to include extra work in future payment requests because it created a problem with the owner and construction lender. The subcontractor was directed just to keep track of the extra work which was to be paid separately. When the subcontractor continued to perform extra work orally directed by the prime contractor and separately billed for it, the general contractor paid for part of the work, but not all. The subcontractor eventually filed a mechanic’s lien on the project for the value of the unpaid extra work. The project owner and general contractor then argued that, in the absence of written change orders, the subcontractor was not entitled to payment and should not be allowed to maintain a lien. The Missouri Court of Appeals found that the general contractor, through the words and deeds of its site representatives, had waived the written change order requirement. The court said:
All of the extra work performed and the extra materials supplied for buildings 12 through 17 were furnished either at the direction or under the supervision of Mr. Ryan or the agents of Ryan’s Construction. Based on the action of Ryan Construction concerning the extra work performed by Henley on buildings 12 through 17, the general contractor’s conduct concerning extras in general, and the large scale of the extra work, the trial court could reasonably infer that Ryan Construction either expressly or by acquiescence waived the written change order requirement with regards to the claim for extras on buildings 12 through 17. The trial court did not err in including these extras in the mechanic’s lien.
As the preceding cases indicate, waiver of a contractual right occurs when the parties’ behavior is inconsistent with the enforcement of that right.
Orders for Payment of Disputed Changes
Regardless of the literal wording of the changes clause, the following conditions usually result in a court’s order for payment for changes:
- The owner, or contractor in the case of a subcontract, approves the work being done;
- The owner or contractor authorizes or allows the work to proceed; and
- The owner or contractor knows that the contractor or subcontractor respectively expects to be paid for the work.
Proper Contractor Reaction to Oral or Written Directives
When oral or written instructions or directives are received from the owner that the contractor believes constitute a change order, the proper reaction is as follows:
- Promptly request a written change order.
- If a change order is not received, proceed only after written advice to the owner that the instruction or directive received constitutes a change to the contract and that the work is being undertaken in expectation that payment will be made for the change.
- If the owner maintains that the directed work is not a change, but, at the same time, insists that the instruction or directive be carried out, the contractor must proceed with the work. However, this should be done only after advising the owner in writing that the work is being performed under protest and that all rights under the contract or subcontract are reserved.
- File a claim for the costs and time involved in performing the changed work and proceed under the disputes resolution provisions of the contract.
If the contractor’s position is contractually proper, the chances of eventual recovery of costs and time for performing the work according to oral or written directives is greatly enhanced by following this procedure.
This chapter highlighted the concept and operation of contract changes clauses. One reason that construction contracts, particularly heavy construction contracts, undergo changes is because the contractor encounters differing site conditions, the subject of the following chapter.
Questions and Problems
- What three interrelated rights and/or obligations are central to the concept of contract changes? What would happen in today’s contracting world if construction contracts did not contain changes clauses? Is a changes clause an exculpatory clause? If not, what is the purpose of the clause?
- Are all changes clauses more or less the same, or are they different? What seven broad kinds of changes provided for by the federal changes clause were listed in this chapter?
- What is the difference between a change order (change directive, change notice) and a formal change to the contract?
- Explain the differences in legal empowerment required by an individual in the owner’s organization to order changes and to authorize formal changes to the contract.
- Why is it important that a contractor who has been directed to perform a change be certain that the person from whom he received the order had proper authority to order changes? What is apparent authority? How can it be created?
- What does the federal contract changes clause have to say about the change in contract price resulting from changes? What are some other methods for determining change order pricing?
- What is the intent of the “no pay without signed change order” language? What would be the effect in today’s construction world of a clause providing that a formal change to the contract be signed before actual work on the change could begin?
- Explain the concept of two-part formal changes to the contract, including why such a procedure is often utilized.
- What is the danger to the contractor in performing added or changed work on the basis of an oral change order?
- What is a constructive change? Explain the nature of the two necessary elements to establish that a constructive change has occurred.
- Explain the importance of the contractor giving prompt written notice of constructive change. What argument might the owner later make if notice is not given?
- What is a cardinal change? Why are cardinal changes illegal in public work? Can a contractor properly be forced to perform a cardinal change in private work? Do universally accepted precise standards exist to define when a cardinal change has occurred?
- Explain the difference between forward-priced changes and retrospectively priced changes.
- What is force account? Explain typical force account provisions.
- Explain how application of force account provisions might result in the contractor receiving less than an equitable adjustment in contract price after performing changed work. How is this possibility of inequitable payment affected when the changed work extends the period of contract performance?
- Explain why the provisions of the changes clause, including the force account provisions, do not apply when determining breach-of-contract damages. Explain how force account records can still be helpful when determining such damages.
- What are impact costs? Name three separate examples of time-related impact costs.
- What are loss-of-efficiency impact costs? Name five general causes for these kinds of extra costs.
- What is the current judicial tendency in dealing with change order payment disputes?
- Why are words, acts, and conduct of the parties to the contract and their earlier patterns of behavior important when a court seeks to resolve a change order payment dispute?
- What three conditions, when met, will usually result in a court ordering that payment be made in cases involving change order payment disputes?
What four-step procedure was outlined in this chapter that a contractor (or subcontractor) should follow to ensure eventual payment for changed work when the owner (or contractor) denies that his (or her) directive constitutes a change to the contract but insists that the directive be carried out?
- F.A.R. 52.243-4 48 C.F.R. 52.243-4 (Nov. 1996). ↵
- Appeal of Bud Rho Energy Systems Inc., VABCA No. 2208 (December 31, 1985). ↵
- Appeal of Henry Burge and Alvin White, PSBCA No. 2431 (May 19, 1989). ↵
- Son-Shine Grading, Inc. v. ADC Constr. Co., 315 S.E.2d 346 (N.C. App. 1984). ↵
- Baltimore Contractors, Inc. v. United States, 12 Cl. Ct. 328 (1987). ↵
- Appeal of Communications International, Inc., ASBCA No. 30976 (October 23, 1987). ↵
- Appeal of West Coast General Corporation, ASBCA No. 35900 (April 14, 1988). ↵
- Airprep Technology, Inc. v. United States, 30 Fed. Cl. Ct. 488 (1994). ↵
- C Norman Peterson Co. v. Container Corporation of America, 218 Cal. Rptr. 592 (Cal. App. 1985). ↵
- Appeal of Excavation Construction, Inc., ENGBCA No. 4106 (December 27, 1985). ↵
- Cleveland Trinidad Paving Co. v. Board of County of Commissioners of Cuyahoga County, 472 N.E.2d 753 (Ohio App. 1984). ↵
- Southern Road builders, Inc. v. Lee County, 495 So.2d 189 (Fla. App. 1986). ↵
- Hempel v. Bragg, 856 S.W.2d 293 (Ark. 1993). ↵
- Huang International, Inc. v. Foose Construction Co., 734 P.2d 975 (Wyo. 1987). ↵
- T. D. Industries, Inc. v. The Lakes Project Investors, 883 S.W.2d 44 (Mo. App. 1994). ↵