Change order basics — Part 2

A common belief among owners is that contractors love changes so they can mark up costs to whatever the market will bear to make up for low initial bids. Contractors, on the other hand, often believe that owners use the change directive process to get a lot of extra work without having to pay for it or at least not without first putting contractors through the wringer. Yet changes are almost inevitable. They are so engrained in our industry that people don’t often step back and consider the whole concept of changes, to see that they don’t necessarily have to be a “given” and that contractors could exercise more control over how these are used in construction. Keep reading to find out what the seven myths and misunderstandings are about them.

First, let’s start with the fact that there is no law that says that you have to have changes, or change orders, in a construction contract. I have seen contracts (generally prepared by the lawyer for the owner hiring the contractor) that do not provide for changes. In such a case, the owner has no right to insist that the contractor do anything that was not part of the original scope of work. Although I assume that this language was deliberately chosen by owners who felt burned by changes in the past, it is terrible idea. Until the perfect set of plans and specifications is produced, some flexibility has to be allowed or an owner could end up with plumbing on the wrong side of the walls.

Second, there is no law that says that a construction contract has to provide for change directives or force accounts or any other means by which an owner can direct a contractor to do work now and argue about whether it is an extra or how much time or money is owed for it later. I have seen a growing number of contracts (again, prepared by the owner or its lawyer) that seem geared to maintaining control by not allowing any changes unless they are agreed, in writing, in advance. This gives the contractor a perfect excuse to not perform the change, and can produce the same result at having no changes clause at all: giving the owner no right to order changes.

Third, there is no law, or even logic, that the contractor has to be the one to finance changes until the end of the job. Contractors are not banks, yet they are routinely used as such by owners who order changes, but refuse to execute change orders which can then be billed. Some form contracts provide that 50% of the estimated value of the change will be billed provisionally, so that both sides will have some risk/reward in the process, but this is still by far the exception.

Fourth, there is no reason why all of the undisputed parts of changes can’t be billed and paid as part of the next payment application. Many form contracts now contain this language, but it is frequently crossed out by owners. I have yet to hear a convincing explanation from an owner’s lawyer as to why this is fair. With both the third and the fourth points, the contractor has to be careful not to give up any rights in monthly lien waivers, another reason why postponing reconciliation and payment ends up hurting the contractor.

Fifth, who says that contractors and subs have no business contacting the owner’s lender before performing large changes? Some form contracts contain provisions that allow the contractor the right to see that financing is in place before performing work. There is no reason why a subcontractor shouldn’t be able to see it too (especially in states where general contractors are allowed to insert “pay-if-paid” clauses in subcontracts). Lien rights are good to have, but never as good as getting paid on time in the first place. Many lenders actually insist on knowing about and approving changes because they don’t want to end up with an upside-down project either. Transparency is a great thing when it comes to construction financing.

Sixth, there is no reason that the parties can’t agree on unit prices or alternates in advance, so that if and when there are changes, there is no need to have disputes over what they should cost. The more potential issues that can be negotiated in advance, such as unit price adjustments if quantities are significantly changed, the quicker a contractor can get its money.

Finally, there is a legal limit to how many changes an owner or general contractor can make. No matter (well, almost) what the contract says, if the amount or type of changes made end up being “beyond the contemplation of the parties” a court may well not enforce them. A plumbing contractor can’t be forced to do electrical work, for example, that has nothing to do with it scope, for which it is not licensed and has no experience. A $5,000 contract can’t be converted to a $5,000,000 contract through change orders — unless the parties both want it that way.

Michael Callahan is a partner at Stinson Morrison Hecker LLP (the same firm as long-time columnist Susan McGreevy) where he assists clients with all aspects of their construction law needs, including litigation.