Change Order Do’s and Dont’s

3D Dos And Donts Button Click Here Block TextThree things are certain in life: death, taxes, and change orders. There are very few projects that don’t have some measure of change or different site conditions which should result in adjusted compensation to a contractor and a change in scheduled date of completion. The change order process doesn’t begin when a potential change is encountered. In fact, the process starts before a bid is submitted and long before a contract is delivered for signature. When a contract if finally signed, it should precisely define the scope of work being undertaken in such a way that parties can determine whether work encountered after commencement is within or outside of that scope. The following Do’s and Don’ts take this reality into account and provides tips to follow to both avoid change orders and assert the right to a change order:

Bidding, Contracting, and Planning for Change Orders

  • Do review and have a complete understanding of the work description, drawings, specifications, time limitations, and anticipated contract terms and look and account for errors in design when preparing a bid.
  • Do bring design errors to the architect or engineer’s attention and prior to submitting a bid.
  • Do provide a detailed description of the scope of work included in your bid and provide a complete list of work, materials, equipment, and services that are excluded in your bid and, ultimately, your contract.
  • Do make bid prices contingent upon written assumptions about the time and conditions allowed for performance of your work and build in protections for seeking adjustments in contract price, time of completion, or right of termination in the event of delays or other conditions out of your control.
  • Do identify the labor billing rates and mark-up on materials which you will use to price extra work encountered on a project.
  • Do make certain that the scope of work defined in your contract is accurate and does not exceed the scope of work defined in your bid.
  • Don’t sign a subcontract which does not accurately describe your scope of work and any exclusions to that scope of work and which does not match the scope of work defined in your bid.

How to Handle the Change Order Process When A Change is Encountered and Identified

  • Do request a change order immediately and in writing when:
    • you come upon a site condition which is inconsistent with the plans and specfications and/or you are directed to do work which is outside of the scope of your work;
    • you need more time to complete your work…for any reason;
    • you have incurred costs due to the delays or performance of other subs, the GC, the design professional, or the owner.
  • Do present a timely written claim for adjustment to the subcontract amount or time of completion before commencing any extra work, if the contract requires a claim to be made within a certain time frame.
  • Do require a written change order to be signed by the other party before commencing extra work.
  • Do proceed with extra work if no signed change order is in place if you are provided you with a Construction Change Directive or similar order to perform extra work, which:
    • is in writing
    • acknowledges that the work is extra work requiring additional compensation and/or additional time, and
    • is provided by an individual authorized by the party to authorize extra work.
  • Don’t worry about “rocking the boat” by refusing to perform any extra work before receiving a change order signed by the GC or receiving a Construction Change Directive or an Order to proceed.
  • Do proceed with extra work if the party with whom you have contracted refuses to sign a change order or a Construction Change Directive or similar order to perform extra work under extreme caution and only if:
    • you prepare and send a written Change Order Memorandum describing the extra work you have been asked to perform
    • confirming the party’s refusal to sign a change order or Change Order Directive;
    • stating that the extra work is being performed under protest and with full reservation of right to seek an increase in the contract price and additional time to complete that contract, upon completion of the extra work when all information regarding the consequences of the extra work in known.
  • Do take photographs, prepare a report of the extra work in daily logs and other reports, and maintain detailed daily records of all labor, burden, material, equipment, and other costs incurred in performing extra work and, if possible, obtain the signature of the party with whom you have contracted and/or the owner’s representative on a daily basis.
  • Don’t perform extra work based on verbal assurance that you’ll get paid.
  • Don’t just wait for the GC to announce updates and changes to the project schedule without your input and active participation.

Termination for Convenience is Never Convenient

3D dismissalIt can be a true horror story when you learn that your construction contract been terminated for convenience. All the planning, hard work, anticipation of a “job well done,” and profit are lost due to circumstances completely out of your control. Although impossible to predict or foresee, the risk of premature termination cannot be overlooked.

Termination for convenience clauses (“TFC”) were commonplace in federal acquisition contracts during wartime and can be traced back to the Civil War. TFCs were originally justified based on the unpredictable length of demand for supplies. TFCs are now found in a wide variety of civilian and military federal contracts and are almost universally found in private and state public works contracts.

The first rational response of the terminated is to argue that the work performed is free of defect. Unfortunately, a TFC allows termination even if the contractor has performed well. In other words, the terminator has the right despite the lack of a wrong. But, there are consequences. The terminator does have to pay the cost of the work incurred along with the overhead and profit on those costs. However, TFCs customarily limit the ability to recover profits the terminated party anticipated earning through completion. One notable exception is Article 14 of the AIA A201-2007 which allows the terminated party to also recover “profit on work not executed.” This phrase is often deleted from the A201 frequently leaving the TFC toothless when triggered.

Because of its origin, the main source of guidance regarding TFCs is federal court. Federal law has generally recognized the principle that “good faith and fair dealing” is implied in every contract. Therefore, a TFC is justified so long as the terminator is acting in good faith, i.e., there is a valid reason for terminating the contract and no fraud has been committed. In Edo Corp. v. Beech Aircraft Corp., the Tenth Circuit Court of Appeals applied Kansas law largely using federal cases in finding that Beech exercised good faith in terminating a design contract with Edo and bringing the design work in house.

Missouri courts are likely to follow the “good faith” standard. In Danella Southwest, Inc. v. Southwestern Bell Tel. Co., the federal district court for the Eastern District of Missouri found that S.W. Bell could lawfully terminate an excavator’s contract after three years despite the significant start-up costs expended by the excavator which had calculated its investment would not be recovered until six years of work. The excavator could not recover its front end costs nor could it recover lost profits.

To lessen the shock and consequences of a TFC, make sure you know whether your contract contains such a provision and attempt to delete or modify the TFC before you sign it. If deletion or modification is not an option, you can always step away from the project or have a contingency plan in place in the event of a TFC.

Missouri Reforms Retainage Laws on Public Works Contracts

piece of pie chartFollowing the trend around the country regarding retainage practices, Missouri Governor Jay Nixon recently signed into law modifications to the Missouri Prompt Payment Act, §34.057 R.S.Mo. These revisions become effective August 28, 2014.

The revisions specifically address public works contracts and cap the amount of retainage that can be withheld at 5 percent. Public owners and their architect or engineer have been stripped of their previous statutory discretion to determine to withhold more than 5 percent “to ensure performance of the contract.” The sole instance in which public owners may withhold 10 percent is on contracts of $50,000 or less where surety bonds are not required.

The modifications extend prompt pay protections to professional engineers, architects, landscape architects and land surveyors. Like general contractors (GCs) and subs, the public owner must now pay engineers, architects and surveyors within 30 days following receipt of invoice. If payment is not made in a timely manner, interest of 1.5 percent per month accrues on the unpaid invoice.

The law requires the owner to pay out 98 percent of the retainage to the general contractor upon substantial completion. The GC must likewise pay such retainage to subs and suppliers in a timely manner after substantial completion. If the owner determines that the work is not substantially complete, the owner must give a written explanation to the GC within 14 days. The GC must give the explanation to the subcontractor responsible for the work. The law reduces the amount the owner may withhold on incomplete work from 200 percent of the value of each item remaining to 150 percent. All unpaid retainage must now be included with the final payment and paid no later than 30 days after the due date. To the extent any progress or final payment is withheld for rejected work or materials, the law requires the owner to provide a written explanation to the GC, and responsible subcontractor or supplier, effectively doing away with the practice of holding money without explanation or justification.

Missouri’s Private Construction Act, §436.300, R.S.Mo., is not affected by this revision and still allows 10 percent retainage to be withheld unless a higher amount is required “to protect the owner’s interest.” On other side of the state line, the Kansas Fairness in Public Construction and Fairness in Private Construction Acts require retainage of 5 percent, but still allow the owner to withhold up to 10 percent “if necessary to insure performance.” Stay tuned as retainage reform continues to make its way through state legislatures.