The Dotted Line: How construction firms can manage the 'necessary evil' of change orders
This feature is a part of "The Dotted Line" series, which takes an in-depth look at the complex legal landscape of the construction industry. To view the entire series, click here.
Construction projects, like anything else in life, are subject to change. Design blunders, unanticipated revisions to building codes, an owner-driven switch in material selection — all of these events can lead to changes that add a few dollars or create a significant addition to a project's scope and cost.
General contractors and subcontractors have different considerations when faced with a directive to perform work outside of their original contracts. According to industry experts, it pays to be a stickler for the contract, but it also can be worth it to take a more flexible approach at times. Of course, it all starts with the contract.
Details in the construction contract
Instructions for how a general contractor or subcontractor should proceed with changes to its original scope of work can typically be found in the contract's general conditions. Both general contractors and subcontractors should pay close attention to the notice provisions of their contracts because this is where they can find the requirements for getting paid for any changes to the work, according to Andrew Richards, co-managing partner at Kaufman Dolowich & Voluck, LLP.
Many contracts, he said, require the contractor to provide written notice of a change within a specified number of days, or the contractor waives the right to make a monetary or time change request to the contract. The notification period ranges from just a few days to the more generous 21 days in an American Institute of Architects contract, but, regardless, if subcontractor or general contractors do not meet the notice requirements, they could very well end up eating any costs spent on a contract change, according to Richards.
These "all or nothing" type of provisions can be a motivator as well, according to Bill Weber, principal of Gaston Electrical in Norwood, MA. Some of Gaston's customers use that type of clause as a way to keep subcontractors from "dragging their feet" on pricing, but Gaston project managers also use it as a way to "make sure they're staying on top of their jobs," he said.
Different considerations for GCs and subcontractors
General contractors always need to make sure their contract with the owner allows for a few more days to provide notice of a change than their subcontracts specify so that they have time to process the subcontractors' changes to the owner, according to Richards. If the general contractor's notice period is less than the subcontractors', the GC could find itself on the hook for a subcontractor's extra work with no recourse for payment from the owner.
Other than that scenario, however, the subcontractor usually takes on most of the risk of a change order. "(General contractors) are not self-performing any of the work," Weber said. "They're really just putting the general conditions and fees on top of whatever we give them. It's very little risk for them to proceed and a lot of risk for us."
The general contractor has some supervisory costs, Richards said, but he agreed that the bulk of the risk lies with the subcontractor. "They're the ones doing the work, and they have to wait for payment from the owner," he said. The general contractor has liability if the owner never pays for the subcontractor's change, but the subcontractor "has to actually go out of pocket," Richards noted.
And whether changes originate from the subcontractor or GC, contractors must make sure they include not just the cost of the labor and materials necessary to perform change but overhead, insurance, extra time and profit, according to Richards.
Navigating the 'reality business'
Due to the fact that construction change orders can be so costly in time and money, every contractor surely insists on massive amounts of paperwork before proceeding with any change and goes over those contract provisions with a fine-toothed comb, right? Well, not always. As it turns out, change orders almost have as much to do with relationships as they do with legalities.
"Don't forget, people want to do business," Richards said. It wouldn't benefit his clients, he said, if he looked at change orders or contracts in general with only the legal aspect in mind. He has to wear his "reality-business" hat when negotiating on behalf of a client, and he must be mindful of the balance between protecting his clients' legal rights and maintaining good customer relationships, Richards said.
Gaston works with a large percentage of repeat customers, Weber noted, so it's not unusual for the company to begin work on a change and then follow up with paperwork later. "If we've been taken care of in the past, we trust that it will happen again," he said.
However, if the company is dealing with a new customer or an owner that has previously been slow to pay or has tried to negotiate down on the price of its changes, the company will most likely insist on something in writing before proceeding with any change order work. This is also the case with by-the-book public projects. "Why do work at-risk when there's no guarantee that you'll be paid for it?" Weber said.
Taking a proactive approach to change orders
The best way to deal with change orders is try to gauge the potential for them to occur before work on the project even begins, according to Andru Ramker, president of Hawkeye Construction of South Florida. "From a contract standpoint, we're a team, and we want to protect the owner cost-wise, so we try to properly select and prepare our subcontractors so that they understand what the (project) goals and responsibilities are," he said.
Before beginning work, Hawkeye first identifies any issues with the plans and then notifies the owner of each item along with its estimated cost, according to Ramker. Typically, he said, this ends up as part of a discussion with the owner, after which they have a change order agreement. Similar to Gaston, if Hawkeye has worked with the owner before, they'll proceed with the work before receiving a signed change order, Ramker noted. "With owners we don't know or don't have an ongoing relationship with, we don't proceed until they sign a change order. Period," he said.
Ramker said he's found that if his company can prepare an owner for any possible extra costs as soon as possible, "it's more palatable for the owner during the process." However, Ramker added, in the case of a change arising from deficiencies or errors in the original plans and specifications, "This owner took competitive bids, and we bid the documents. We're not code people or design professionals … If something comes up, it comes up."
But it's not always a cost issue when considering moving forward with a change order without all the formal documents in place. "We oftentimes don't have the luxury of being able to wait. It could hold up the job and result in liquidated damages for the GC," Weber said. "If we had to wait for all the formalized signatures to land on the change orders and the approval processes to go through, our jobs would never get done," he said. "It's not every man for himself on the job site. That's for sure."
Responsibility is key to a successful project
When dealing with change orders or any other aspect of the project, Ramker said a successful construction project has three aspects — a responsible owner, responsible design professionals and a responsible contractor. Anyone who enters into a construction contract and thinks that things are not going to change during the course of the project "is not in the real world," he said.
Of course, if Weber had his way, he'd prefer no changes. "My dream job is one that has no change orders. I think we lose productivity because changing work in the field and undoing some things that have already been done can be demoralizing to the field staff," he said. "We'd prefer to do the work that we priced up front and just get it done, but the vehicle of the change order is certainly a necessary evil."
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