by Lee Brumitt, Esq., Dysart Taylor Cotter McMonigle & Montemore, P.C.
There are seldom projects that don’t have some measure of change or different site conditions requiring adjusted compensation to a subcontractor or a change in scheduled date of completion. The change order process doesn’t begin when a potential change is encountered. The process starts before a bid is submitted and long before a contract is delivered for signature.
Almost all subcontracts contain the following provision:
The Subcontractor represents and agrees that it has carefully examined and understands this Agreement and the other Contract Documents, has investigated the nature, locality and site of the Work and the conditions and difficulties under which it is to be performed and that it enters into this Agreement on the basis of its own examination, investigation and evaluation of all such matters…
Thus, the change order process must always start with a detailed review and complete understanding of the work site or description, drawings, specifications, contract documents, and time limitations. The conscientious subcontractor should look for and bring any design errors to the attention of the GC and architect so that supplemental instructions can be provided—preferably before a bid is submitted.
In developing a bid, make prices contingent upon written assumptions about the time and conditions allowed for performance of the 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. Identify the labor billing rates and mark-up on materials which you will use to price extra work encountered on a project.
One of the biggest mistakes made by subcontractors is assuming that the scope of work and written assumptions defined in a bid have been carried over and are the same as the work defined in the subcontract. When a subcontract is presented, it should precisely define the scope of work being undertaken along with the scope of work not undertaken in such a way that parties can determine whether work encountered after commencement is within or outside of that scope and, therefore, compensable as extra work. Provide a detailed description of the scope of work included in the bid and provide a complete list of work, materials, equipment, and services excluded in your bid and carry over in writing the written assumptions contained in your bid about time and conditions as well as labor billing rates and mark-up on materials.
Even if a subcontractor identifies the precise scope of work in the subcontract, the right to an increase in contract price can easily be lost through ignorance of or failure to follow the time frames lurking in the shadows of a subcontract to notify the GC of a condition requiring a change. The following subcontract provision is encountered frequently:
Subcontractor shall provide Contractor with written notice of any circumstance or direction given by Contractor which Subcontractor may regard as a change, addition and/or omission … within 5 days of the receipt of the direction or the occurrence of the event giving rise to such a request. Such written notice shall provide a full explanation of the circumstances or direction and the extent of the increase and extension sought, including a detailed breakdown and analysis supporting such request. Failure of the Subcontractor to provide such written notice shall constitute a waiver of Subcontractor’s right to any such increase or extension.
Even a diligent subcontractor can miss a five-day window. The requirement to include a detailed breakdown and analysis makes this unreasonable provision seem almost impossible to meet. Regardless of the time frame, it is critical for a subcontractor to train field personnel to immediately contact the project manager when (1) a site condition is encountered which is inconsistent with the plans and specifications; (2) the GC directs performance of work which is outside the scope of work; (3) more time is needed to complete work for any reason; (4) costs have been incurred due to the delays or performance of other subs, the GC, the design professional, or the owner. Moreover, it is critical to train project managers to immediately and aggressively document and notify the GC of any condition requiring an increase in contract price or more time to complete. Better to err on the side of caution than to waive the right to assert a change order.
Assuming time frames have been met and the GC acknowledges the need for a change, the next step in the change order process is arriving at an equitable price and/or a fair extension to complete work. Beware of the following provision commonly found in subcontracts:
Should the parties be unable to agree as to the value of the work to be changed, added or omitted, the Subcontractor shall proceed with the work promptly under the written order of Contractor from which order the stated value of the work shall be omitted, and the determination of the value of the work, if not resolved in the normal course, shall be addressed pursuant to the dispute resolution procedures…
Beware of having to comply with yet another time frame set forth in the dispute resolution provisions. Many such provisions contain a short period by which notice has to be given to the GC of any disputes. Thus, a subcontractor could comply with the time frame for notifying the GC of a condition requiring a change but miss the notification period contained in the dispute resolution provisions.
This leads to the cardinal rule of change orders. Change orders should be signed by the GC before a subcontractor should commence any extra work. Never perform work on a verbal assurance that payment will be made. The subcontractor which performs change order work without receiving an executed change order runs afoul of an even more common provision:
If extra work is ordered by [GC] and Subcontractor proceeds with same but did not receive a written order, Subcontractor shall be deemed to have waived any claim for extra compensation.
The subcontract with these seemingly irreconcilable “damned if you do, damned if you don’t” provisions requires caution. The best rule is to proceed with extra work only if a signed change order is in place and, barring that, only if you are provided 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. 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 to the GC describing the extra work you have been asked to perform, confirming the party’s refusal to sign a change order or Change Order Directive, and stating that the extra work is being performed under protest and with full reservation of rights to seek an increase in the contract price and additional time to complete the subcontract upon completion of the extra work when all information regarding the consequences of the extra work is known.
Once the extra work commences, 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. Many GCs will reject any change order work not acknowledged and verified in the field on a daily basis.
Lastly, after painstakingly making your way through the change order maze, be careful not to waive change order claims through the lien waiver process. Many lien waivers contain a forfeiture of lien rights for work performed prior to a date stated in the waiver. The unresolved change order that is included on any pay application or hasn’t been presented by the date in the lien waiver can be waived. Reserve your rights to get paid for change order work by stamping or writing the following on any time-based or unconditional lien waiver:
This release shall apply only to work for which payment has been received in full; shall not apply to retention; shall not apply to unbilled changes or to claims which have been asserted in writing or which have not yet become known; and shall be conditional upon receipt of funds.
Lee Brumitt is a director and shareholder with the Kansas City law firm of Dysart Taylor Cotter McMonigle & Montemore, P.C. He has more than thirty-four years of experience in construction law and litigation. He represents subcontractor trades and specialty contractors on public, commercial and residential projects. He currently serves as the attorney for the Kansas City Chapter of American Subcontractors Association. Lee can be reached at (816) 714-3027 or lbrumitt@dysarttaylor.com.
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