Posted on: 10/2/2012
V. Christopher Potenza, Earl K. Cantwell
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The construction contract between the owner and contractor sets forth the contractor's performance obligations. However, the parties need flexibility to adapt the contract to actual construction conditions. Although traditional contract law permits parties to modify their contract by mutual agreement, in construction contracts the owner needs to be able to change the contract unilaterally to accomplish the underlying purposes of the project. The contractual mechanism for handling contract modifications and related claims for extra work is the "Change Order" ("CO") clause. A CO is a written authorization to a contractor approving a change from original plans, specifications, and other contract documents. A CO often authorizes an increase or decrease in contractor compensation and/or time to perform.
The CO clause entitles an owner to direct changes in the work without the contractor's consent and without breaching the contract, provided the change is within the general scope of the contract. For a proposed change to be "within the general scope" of the contract, the change in work must be regarded as fairly and reasonably within the contemplation of the parties when they entered into the contract. In exchange for the owner's right to direct changes, the contractor is entitled to receive additional compensation for the changes or extra work, or an appropriate deletion.
Article 7 of the AIA A201 General Conditions of the Contract for Construction©:
§ 7.1.1 Changes in the Work may be accomplished after execution of the Contract, and without invalidating the Contract, by Change Order, Construction Change Directive or order for a minor change in the Work, subject to the limitations stated in this Article 7 and elsewhere in the Contract Documents.
§ 7.1.2 A Change Order shall be based upon agreement among the Owner, Contractor, and Architect; a Construction Change Directive requires agreement by the Owner and Architect and may or not be agreed to by the Contractor; an order for a minor change in the Work may be issued by the Architect alone.
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§ 7.2.1 A Change Order is a written instrument prepared by the Architect and signed by the Owner, Contractor, and Architect, stating their agreement upon all of the following
(1) the change in the Work;
(2) the amount of the adjustment, if any, in the Contract Sum; and
(3) the extent of the adjustment, if any, in the Contract Time.
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§ 7.3.3 If the Construction Change Directive provides for an adjustment to the Contract Sum, the adjustment shall be based on one of the following methods:
(1) mutual acceptance of a lump sum properly itemized and supported by sufficient substantiating data to permit evaluation;
(2) unit prices stated in the Contract Documents or subsequently agreed upon;
(3) cost to be determined in a manner agreed upon by the parties and a mutually acceptable fixed or percentage fee; or
(4) as provided in Section 7.3.7.
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§ 7.3.5 Upon receipt of a Construction Change Directive, the Contractor shall promptly proceed with the change in the Work involved and advise the Architect of the Contractor's agreement or disagreement with the method, if any, provided in the Construction Change Directive for determining the proposed adjustment in the Contract Sum or Contract Time.
The AIA© documents identify three different types of possible construction contract "changes": (1) Formal Change Orders, agreed upon and signed by both the owner and the contractor; (2) Construction Change Directives, signed only by the owner; and (3) Field Orders, signed by the architect for minor changes in the work.
ConsensusDOCS© refer primarily to two situations, the Change Order and an "Interim Directed Change" -
§ 8.1 CHANGE ORDER – § 8.1.1 The Contractor may request or the Owner may order changes in the Work or the timing or sequencing of the Work that impacts the Contract Price or the Contract Time. All such changes in the Work that affect Contract Time or Contract Price shall be formalized in a Change Order. Any such requests for a change in the Contract Price or the Contract Time shall be processed in accordance with this Article 8.
§ 8.1.2 The Owner and the Contractor shall negotiate in good faith an appropriate adjustment to the Contract Price or the Contract Time and shall conclude these negotiations as expeditiously as possible. Acceptance of the Change Order and any adjustment in the Contract Price or Contract Time shall not be unreasonably withheld.
§ 8.2 INTERIM DIRECTED CHANGE - § 8.2.1 The Owner may issue a written Interim Directed Change directing a change in the Work prior to reaching agreement with the Contractor on the adjustment, if any, in the Contract Price or the Contract Time.
§ 8.2.2 The Owner and the Contractor shall negotiate expeditiously and in good faith for appropriate adjustments, as applicable, to the Contract Price or the Contract Time arising out of an Interim Directed Change. As the Changed Work is performed, the Contractor shall submit its costs for such work with its application for payment beginning with the next application for payment within thirty (30) Days of the issuance of the Interim Directed Change. If there is a dispute as to the cost to the Owner, the Owner shall pay the Contractor fifty percent (50%) of its estimated cost to perform the work. In such event, the Parties reserve their rights as to the disputed amount, subject to the requirements of Article 12.
Under ConsensusDOCS©, the Owner must pay the Contractor 50% of the estimated cost to complete the disputed work, whereas no such obligation exists under the AIA forms. This is added protection and leverage for the Contractor, but also can benefit the Owner by insuring that the project moves forward while the parties negotiate details.
Federal Acquisition Regulations ("FAR") - § 52.243–5 Changes and Changed Conditions
CHANGES AND CHANGED CONDITIONS - (a) The Contracting Officer may, in writing, order changes in the drawings and specifications within the general scope of the contract.
(b) The Contractor shall promptly notify the Contracting Officer, in writing, of subsurface or latent physical conditions differing materially from those indicated in this contract or unknown unusual physical conditions at the site before proceeding with the work.
(c) If changes under paragraph (a) or conditions under paragraph (b) increase or decrease
the cost of, or time required for performing the work, the Contracting Officer shall make an equitable adjustment (see paragraph (d)) upon submittal of a proposal for adjustment (hereafter referred to as proposal) by the Contractor before final payment under the contract.
(d) The Contracting Officer shall not make an equitable adjustment under paragraph (b)
(1) The Contractor has submitted and the Contracting Officer has received the required written notice; or
(2) The Contracting Officer waives the requirement for the written notice.
(e) Failure to agree to any adjustment shall be a dispute under the Disputes clause.
Elements for Recovery
Even if a CO or change directive is executed, recovery for extra work may be barred unless the contractor can show that it in fact performed work in excess of what was required under the original contract. The contractor must generally establish the following points to obtain additional compensation for extra work: (1) the work was outside the scope of the original contract, (2) the extra items or changes were ordered at the direction of the owner, (3) the owner either expressly or impliedly agreed to pay extra, (4) the extra items were not furnished voluntarily by the contractor, and (5) the extra items were not required or made necessary through any fault or omission of the contractor. Duncan v. Cannon, 561 N.E.2d 1147 (Ill. App. Ct. 1st Dist. 1990).
Notice & Timing
The typical CO clause requires written authorization for the change before commencement of changed work. The general rule remains that a contractor who performs work without a written directive to do so when the contract requires a written CO may not have a legally enforceable claim.
However, written approvals and general directions to proceed may be sufficient to sustain a claim even if strict change order protocol was not followed. See, e.g., ASA of New York, Inc. v. Anchor Construction, Inc., 21 A.D.3d 836, 801 N.Y.S.2d 308 (1st Dept. 2005). The key points of proof would be to establish the owner's request/direction to change the work, and (b) agreement to pay for extra work. See, e.g., Duncan v. Counnon, supra.
However, any "waiver" of the contract CO procedure may be disputed, unclear, and subject to a very high level of proof. See, e.g., Travelers Casualty and Surety Co. v. White Plains Public Schools, 2007 U.S. Dist. LEXIS 98510 (S.D.N.Y. 2007). Oral changes and modifications may be enforceable even if a contract has a clause precluding oral modifications. EMCO Tech Construction Corp. v. Pilavas, 2008 N.Y. Misc. LEXIS 8360 (Sup. Ct. Nassau Co. 2008); But see, Carolina Conduit Systems, Inc. v MasTec North America, Inc., No. 3:11 CV 133 (E.D. Va. 2011).
One drafting consideration from the owner's perspective is to include a requirement that the contractor commence and continue performance, including any changed work, pending modifications or amendments to contract price or time. Standard contract language typically provides the owner with the right to order the contractor to proceed with disputed work, unless the work is so far beyond the scope of the contract as to constitute a "cardinal change."
From the contractor's perspective, it is important to articulate who has authority on behalf of the owner to direct and approve changes in the work. The contract should include a clear designation of authority, and a mechanism that permits the contractor to verify authorization of a change or extra work order without violating any contractual duty or direction to proceed with or stop disputed work.
Standard of Proof
Some courts have held that a contractor's extra work claim must be proven by a higher evidentiary standard – clear and convincing evidence. Duncan v. Cannon, supra.
There Must Be Extra Work
Labor and materials which are incidental and necessary to performance of the contract cannot be regarded as extra work for which a contractor or builder may recover. Likewise, "general" or undocumented discussions may be inadequate to prove and present a CO claim.
Time May Also Be Affected
The presence or absence of COs may have a bearing not only on price and cost, but may also affect time of completion and shorten or extend time allowed for substantial completion and final completion of the work.
Change Order or Change Directive?
Be attentive to proposals or plans originally presented by a party as a CO, for which mutual agreement is required, but if agreement is lacking the same or similar work and changes are then re-cast as a "Construction Change Directive" or an "Interim Directed Change."
Does Extra Work Allowance Include Contractor Overhead and Profit?
Be sure to review and determine whether the CO provision, and any CO proposed and agreed upon, includes allowance for contractor overhead and profit (added or deleted), implicitly or explicitly.
Reservation of Rights
An owner, architect or engineer in charge may issue and approve a CO with a reservation of rights. Sample language would state that, "Neither this Change Order nor the extension of time of performance granted hereunder, constitute an admission that Owner is responsible for any delays or hindrance to past or future work under the contract." Travelers Casualty and Surety Company v. Dormitory Authority – State of New York, 2010 U.S. Dist. LEXIS 88320 (S.D.N.Y. 2010).
V. Christopher Potenza
Earl K. Cantwell, Esq.
Hurwitz & Fine, P.C.
Buffalo, NY 14202
V. Christopher Potenza & Earl K. Cantwell are members of the Buffalo law firm Hurwitz & Fine, P.C. and practice in the firm's Business & Commercial Litigation Department. They handle a wide range of construction industry litigation matters.