Contractor Blog Series: Change Orders
Last month in "Contracts – The Basics," we covered the fundamentals of contracts and what it means to be a “Contractor.” In this second installment of our Contractor Blog Series, we take a look at “Change Orders”.
Change Orders happen on many construction projects. A Change Order is work that is added or deleted from the original work of the Contract which impacts either the original contract amount or the time for completion. Contractors should be aware of how to address Change Orders to get them paid and to avoid a future issue with the Owner.
First and foremost, Change Orders always have to be in writing. There is a temptation on projects large and small, to work things out by way of informal discussion in the field. While I always counsel clients to amicably resolve field conditions if possible, a Contractor who expects to receive additional compensation or extend the project duration must have the Change Order in writing. Further, the Change Order must be in writing before the Contractor performs work under that Change Order. The axiom “an ounce of prevention is worth a pound of cure” comes to mind. Parties on a construction project may trust what is verbalized during conversation on the job; however, memories fade and positions can change. Contractors are advised to send a written Change Order as soon as the issue arises. Finally, Change Orders must be authorized by the Owner or Owner’s representative. Perhaps, after receiving a Contractor’s written Change Order, the Owner may consider the pricing to be incorrect or the duration unacceptable. Contractors must know what their clients have agreed to accept.
Change Orders will happen for a number of reasons. One of the most prevalent is an Owner Request Change. This often happens based on a site discussion. Perhaps the Owner wants an aesthetic change or a quality upgrade. It is possible that the Owner’s request is due to a Contractor suggestion. Through the normal, natural course of any job, such changes can happen. If the Owner wants the upgrade, whether the idea originates with the Contractor or not, the Owner will be obligated to pay for the upgrade. This happens by way of a fully executed Change Order. Unforeseen conditions also precipitate Change Orders. If, during the course of the work, the Contractor encounters an unexpected condition which impacts the work, the Contractor does not bear the burden of increased scope and cost of the work. Contractors are advised to document the condition as soon as it arises. Other conditions that can give rise to a Change Order are building inspector requirements or errors and omissions in the design documents. As soon as the Contractor becomes aware of these issues, notice should be provided to all pertinent parties and a written Change Order should be prepared.
It is imperative for Contractors to be aware that the underlying Contract may have a mechanism for Change Orders. The Change Order process can sometime be complicated, requiring a specific set of steps to be satisfied if the Contractor is to be paid. Contractors must know their Contract and, if there is a “Change Order” section, the Contractor has to comply with that which is outlined in the parties’ agreement. As example, some contracts have “notice” provisions wherein the Owner must be notified in writing within days of the Contractor becoming aware of a condition which may give rise to a Change Order. Contractors have to know the form to be used on the written Change Order, who must receive the written Change Order, and what backup materials must be provided along with the Change Order. Even if not delineated in the Contract, Contractors are advised to have “backup” to any Change Order, provide that backup to the Owner, and keep a segregated file with the backup to the extent the Contractor needs it at a later date.
By appropriately preparing written Change Orders with appropriate backup as soon as the Change Order issue arises, a Contractor is more likely to be paid. In most circumstances, the Owner, design professional, and/or Construction Manager will understand and agree to the necessity of the change. If no agreement can be made, it is important for a Contractor to know that from the outset so the Contractor can determine if it is necessary to seek legal counsel.
There are numerous issues that arise in the Contract process and the foregoing merely touch on a few. Your specific circumstances will require specific advice and counsel. Please contact Joseph Petrillo at jpetrillo@hoaglandlongo.com or call 732-545-4717 for more information, and be sure to check in next month for "Retainage" - the next installment of our Contractor Blog Series. Stay tuned!