November 2018
by Joe Katz, Esq., Huddles Jones Sorteberg & Dachille, P.C.
In my construction litigation practice I have seen virtually every trick in the book concerning change orders practice: the good, the bad and the ugly. I want to highlight what to watch out for, and the work-arounds you should incorporate within your change order routine.
First, What Is a Change Order?
According to R.S. Means, a change order is “a written authorization provided to a contractor approving a change from the original plans, specifications, or other contract documents, as well as a change in cost.” Practically, change orders are most commonly caused by design errors, differing site or project conditions, incomplete drawings at the time of bid, and owner changes. Other, less common sources of change orders include scope gaps, a particular instruction as to means and method or the sole sourcing of manufactured items, project delay, acceleration and the accompanying added labor force (or overtime). In other words, virtually never the cause or fault of the subcontractor. Moreover, when played correctly, the subcontractor maintains tremendous leverage in the change order process, and should both be mindful of that leverage, and use it wisely.
Pricing
A change order should always include pricing to account for the direct costs of the change, as well as the indirect costs. Direct costs include extended manpower (always include the labor burden) and extended equipment (from heavy equipment to scissor lifts and even the company vehicles), as well as the additional material or sub-subcontractor costs, if any. Indirect costs seek to value the less tangible cost impact of the change, and include field supervision (extended project management, superintendent costs), field overhead (extended trailer, on-site personnel and related costs), and extended main office overhead. For large changes or delays, the greater impact of the change should also be calculated—this generally involves utilizing a claim methodology such as the total cost method, measured mile, or other impact tracking formula beyond the scope of this article. Finally, be sure to capture the miscellaneous “reimbursables” such as fuel, lodging, tolls, bond, insurance, etc.—while not separately recoverable in a fixed-fee contract, these costs should always be tracked, captured and priced within a change order request.
| Practice Tip #1
View all project occurrences through a “change order lens” by assessing the suitability of a change order in virtually any scenario. If the field crew is instructed to wash down the steel because it was provided dirty by others, or kept waiting because the trade ahead of it is not ready, a compensable change order should be priced using the above methodology. Realize, of course, that this requires precision coordination between the field, estimating, and the back office to perceive the change order through the fast-paced chaos of a busy construction site—which should be going on in any event. |
The Subcontract as an IED
Once a subcontract is signed, virtually every imaginable situation is governed by the provisions of the subcontract, including the potential for changes orders and additional compensation for changed or extra work. Understand that subcontracts are drafted to reduce and shift as much risk as possible away from the general contractor and onto the subcontractor. Think of an unmodified subcontract as an improvised explosive device, just waiting to explode when necessary.
For example, many subcontracts will include a pre-existing obligation to perform change order work even without an agreement on price, or agreement whether such work is even a change. This is compounded when a pay-if-paid provision is in use, which will also apply to change order payment—if the owner does not believe the work is a change, it will most certainly not be paid for! Adding insult to injury, many subcontracts will include a generic no-damages-for-delay clause, and/or a waiver of consequential damages—which will preclude many of the indirect pricing strategies outlined above.
| Practice Tip #2
All subcontracts should be modified as necessary to reflect, at minimum, (i) the subcontractor’s option not to perform change order work in the absence of an advance, mutually agreed price or pricing methodology, (ii) payment for change order work is not dependent on owner payment, (iii) delay damages may be awarded for change order work, or, at minimum, that the subcontractor is vested with all the rights the general contractor maintains against the owner. |
Overbroad Scope
Regardless of the subcontractor’s proposal and its specific inclusions and exclusions, standard subcontract language will typically include language similar to the following: “The Subcontractor’s Work includes everything necessary to complete the ____________ scope of work.” Disagreements between what was included in the subcontractor’s price and what was not are one of the most common disputes surrounding change orders—but faced with the above language, the subcontractor will usually not have a leg to stand on. After all, it committed to perform everything necessary, didn’t it?
| Practice Tip #3
Be absolutely sure you incorporate, at minimum, the proposal’s scope of work within the subcontract. This should be done using language that provides “Notwithstanding anything herein to the contrary, Subcontractor’s proposal is adopted and incorporated herein by reference.” In this way, the proposal can at least be considered on par to the subcontract, and not subservient to it. And in preparing your proposal, be crystal clear what is included within the quoted price, and what is excluded. |
Pass-Through Claims
Many subcontracts will permit the subcontractor to make a claim for changes or extra compensation directly to the owner, through the “pass-through” provision. This clause obligates the general contractor to pass-through claims submitted by a subcontractor for consideration by the owner, when the responsibility for the excess costs is attributed to the owner. However, it is a doubled-edged sword, because it often completely frees the general contractor from responsibility to the subcontractor unless and until payment is made by the owner.
I often encounter subcontractors who did not pass through viable claims because they perceived it as too difficult, too expensive or too speculative. Remember, however, that many changes are only an extra cost to the subcontractor, and not the general contractor. If the general contractor does not stand to make any significant money on the subcontractor’s claim, there is little incentive to actually pass it through unless the subcontractor has formally triggered the pass-through requirement.
Recently, a client of mine was hit with thousands of dollars in backcharges for supplemental labor. He readily admitted to me he was unable to provide sufficient manpower for the second phase of the job, and the backcharges for supplemental labor were justified. But when I dug deeper, asking how is it that he had the manpower for phase one but not phase two, I learned that there was a differing site condition that had to be remedied in between phase one and two, setting the phase two work back by several months. During that time period, my client’s union employees took other jobs and he could not get enough qualified labor back when phase two was actually ready to begin. Putting my change order glasses on, we drafted a pass-through claim in the amount of the backcharges, representing the increase labor costs on account of the differing site condition encountered at the job.
| Practice Tip #4
Pass-through claims should be initiated as a matter of course. Any claim, including a request for change order, can double as an official “pass-through” claim by identifying it as such, and if necessary on a state or federal job, including the certification language as provided under the Contract Disputes Act or similar state law. This will shift the burden to the general contractor to formally pass the claim through to the owner, where it will hopefully be given the consideration it deserves. |
Partial Releases Are Anything But!
Beware of the “partial” release used, ostensibly, to ensure that a corresponding amount of each monthly progress payment is released from lien, bond and breach of contract claims. The partial release, however, will often be so broad as to include within it retention, and the work performed since the date of the last pay application through the date of the release, whether billed or not. Pending change orders, and even approved but unpaid change orders, would also be caught in the dragnet of such broad release language.
| Practice Tip #5
All releases, even “partial” releases, should be modified to include language similar to the following: “Notwithstanding anything herein to the contrary, this release shall not apply to retention, unapproved and/or unbilled change order or other extra work, and work performed since the last pay application for which this payment is made.” I have commissioned a rubber stamp with this language that I send to my clients with instructions to stamp on every release they sign. |
Joe Katz, Esq., Huddles Jones Sorteberg & Dachille, P.C., based out of Columbia, Md., has practiced construction law exclusively for nearly 15 years. Katz regularly represents subcontractors and suppliers on federal, state and municipal construction projects. He is experienced in all facets of construction litigation, including mechanic’s liens, Miller Act payment bond claims, arbitration, and civil actions in both state and federal court. He can be reached at (410) 499-2615 or katz@constructionlaw.com.
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