#50: Change Order Disputes
Owner and contractor sign a contract for performance of a defined scope of work. The owner changes the scope in a way that will increase the contractor's costs. The contractor pulls out the contract, looks at the “change order” clause, and follows the stated procedures for getting extra compensation. Sounds simple, doesn't it?
In practice, it rarely is that simple. There can be disputes over whether the initial scope of work has really changed. There can be disputes over who is responsible when the contractor is obliged to alter his planned means and methods of construction in order to accommodate unanticipated circumstances. There can be disputes over pricing.
To speak of a change “order” smacks of owner discretion and control, but from a legal perspective the focus is usually on the contractor's rights. “A change order is a charge for work not included in a contract's scope of work.” H.E. Contracting v. Franklin Pierce College, 360 F.Supp.2d 289, 292 n.3 (D.N.H. 2005). The “change” part arises from an alteration of either the work initially designated or the means of performing it. The “order” part arises from an actual or implied directive to perform the altered task, but in the latter case “order” is a bit of a misnomer – the common terminology of change orders being “issued” by an owner or architect doesn't quite fit. An owner or architect will not issue a change “order” he doesn't agree with, yet the courts often indulge in the fiction that he has done exactly that.
Many owners attempt to protect themselves from this result with contract language specifying that no change orders are allowable unless agreed on by the owner in writing. In the H.E. Contracting case, the contract stated “No claim for extra work or cost shall be allowed unless the same was done in pursuance of the written order of the Engineer, approved by the owner.” The Court ruled that such provisions are enforceable “unless the owner has actual knowledge of the additional work and is not prejudiced by the contractor's failure to comply with the writing requirement.” Id. at 294. This suggests that if the work truly is “additional,” and the owner is paying reasonable attention to what is happening on site and does not step in to stop it, the additional work will generally be compensable even if the owner never picks up a pen. The legal principle here is familiar. Like all contract modifications, change orders must be agreed to either expressly (typically demonstrated by signing a piece of paper) or impliedly (typically shown by a direction to the contractor to perform the change under circumstances that yield a reasonable expectation of extra compensation). Resolution of change order disputes almost always boils down to a search for those circumstances, and hence for that implied consent.
This does not mean that owners are at contractors' mercy whenever there are scope changes. From the owner's perspective, if a change is to have a price tag associated with it, the owner wants to know what that price will be before blessing the change. It is common to find contract provisions for submission of a claim before the additional work is started, with an itemized breakdown of additional costs. Such provisions are enforceable. So are provisions for how change orders will be priced in the event of disagreement on the amount (e.g., unit prices stipulated in advance, or documented time and materials charges with a markup stipulated in advance). Owners are not expected to issue blank checks for extra work.
Conversely, change orders can embrace more than the raw cost of constructing the new or altered work. Suppose that an owner's indecision or change of mind causes delays to the job, leaving the contractor with extended general conditions and additional time on the job for which he seeks compensation through the change order process. More often than not, the courts will award compensation for these as well, unless specific contractual language excludes them.
The common thread here is that contractual provisions matter – but so does fairness to both sides.