Deleting 'good stuff' from a subcontract

All contractors know that some kinds of work are more difficult and expensive to do than other work. When a contractor prepares a lump-sum price for a bid that contains different types of work, the individual prices get lost in the process, unless there are unit prices for adds or deductions.

On a number of occasions, I have seen unhappy contractors and subcontractors who have had owners or general contractors exercise their rights under a “Changes” clause or “Termination for Convenience” clause to delete all the work on which a contractor would make money. The contractor is left with only the expensive work to do, taking away the benefits that made the contract appealing in the first place.

I thought of their plight when reading a recent decision from a Georgia court of appeals. In Savannah Airport Commission, et al. v. Higgerson-Buchanan Inc., 519 S.E.2d 475, the passed-through general conditions provided that the owner “reserves and shall have the right to make such alterations in the work as may be necessary or desirable to complete the work originally intended in an acceptable manner.” (519 S.E.2d at 476).

The 580-acre airport site varied a lot, with 75 acres of swamp, 165 acres of heavy woodland, 235 acres of light woodland and 105 acres of grassland. The clearing and grubbing subcontractor had bid $1,635 per acre, while the actual price varied from $100 per acre for grasslands to $2,250 per acre for the parts that were swampy. The sub was only allowed to clear 460 acres, and all the deleted work was the easily cleared areas.

The court would not let the owner delete the lucrative work. It ruled that: “The Commission has failed to refute the contractor’s evidence that this was not a change order as provided by the contract, and that the refusal to allow the contractor to complete the work was done for the purpose of giving the Commission an economic advantage to the detriment of the contractor.” 519 S.E.2d at 477.

The court said that the contractor was entitled to the lost profit on the work not done and sent the case back to the trial court to figure that out.

Although the court didn’t cite any authority to support its decision, it sure makes sense. To rule otherwise would encourage a “bait-and-switch” approach, whereby contractors are induced to give lump-sum prices on the belief that the less profitable work will be balanced out by the more profitable work, but the profitable work is later taken away. It is nice to see a court understand this reality of business.

It makes a big difference how the contract is worded, however, as to what rights the contractor will have. Although you can try to protect yourself by qualifying your bid as an “all or nothing” one, usually you will be required to sign a contract that says otherwise, and your original bid qualifications are deleted.

Most form documents (AIA, AGC, EJCDC, Federal FAR clauses) specifically give the owner the right to make changes, or even to delete work.

If a contractor or subcontractor has, in fact, agreed in its contract to allow work to be deleted and set out the terms for how the price will be adjusted, there may not be much that a court is able to do later to help him. For this reason, a contractor proposing an “unbalanced” bid should look at these clauses very carefully, and either try to change them or rethink his bid.