This is the seventh post in our “Top 10 Construction Contract Provisions” series. Prior posts discussed Price and Payment, Liquidated Damages, Consequential Damages – Part I and Part II, Indemnity, Scope of Work, and Flow-Down Provisions.
Today’s topic, Changes and Claims, is a contender for the top spot on our list, for both day-to-day impact on the job and importance in disputes. In fact, these provisions[i] are so variable and are involved in so many reported construction law decisions, that this post will not attempt to survey all their various forms, uses, or potential legal ramifications, but instead focuses on bottom line “best practices”—questions to consider as a general contractor, subcontractor, or owner when drafting, negotiating, or managing the Changes and Claims provisions of a contract. There is no “ideal” here, and the changes and claims procedures should be suited to the project, owner, contractor(s), likely issues, and other project-specific considerations. Key considerations include the following:
- 1. How prescriptive is the Change Order process? At one end of the spectrum, a Change Order provision may include requirements for written direction and request by the owner and formal response by the contractor, with pricing and specific supporting data or documentation, in addition to strict timelines for response, execution, and performance, precise methods to determine the resulting contract adjustment, limits on the type or extent of adjustment, or terms defining the effect of a signed Change Order, e.g. to what extent related claims or impacts might be extinguished. At the other end of the spectrum, the Change Order provision might simply recognize that the owner may direct changes, and the parties intend to document the directions and resulting compensation in a Change Order, with no further elaboration. There is no universal ideal on this spectrum. A highly defined and prescriptive process may be appropriate for a complex, high value, multi-stakeholder project on which significant changes are likely. The same process would be an inefficient waste of resources on a small and simple project where significant changes are unlikely and the parties would be unlikely to comply with more formal procedures.
- 2. Is an executed Change Order required before extra work is performed? There are benefits and risks to each party in such a requirement. Some owners and upstream contractors view a strict pre-work Change Order requirement as insurance against claims for extra work coming after the work is completed, when they cannot avoid or mitigate the issue. Conversely, downstream contractors and subcontractors may view the same clauses as a potential trap where they might perform time-sensitive extra work in good faith based on clear direction, but ultimately be denied fair compensation. In other cases, however, strictly requiring executed Change Orders prior to the work can protect the downstream contractor from being directed to perform extra work without prior agreement on the cost and time adjustments. More often, a middle ground approach is best, requiring advance Change Orders where feasible but providing alternative processes for owner-directed changes, differing site conditions, and other issues that may ultimately be resolved as Claims.
- 3. Are “Change Orders” distinguished from “Change Directives”? Related to the points above, in many cases it is beneficial to specify a procedure for situations where extra work is required but terms cannot be agreed upon in advance. The AIA A201 form contract, for example, provides for a “Construction Change Directive” process, specifies how compensation will be determined for a CCD, and dovetails with the Claims provision.
- 4. What are the contractor’s obligations if a Change Order or CCD is not executed? While the answer to this question may be found in the Change Order provisions, it is also frequently specified in the Claims procedures. Is the contractor required to perform extra work without a Change Order or CCD? Is the contractor at risk if it performs without formal direction? Most contracts require the contractor to perform as directed, but in many cases the contractor may insist that the owner issue its direction in a contractually-prescribed form.
- 5. What Notices are required, and in what form? A frequent point of dispute in Washington following the Mike M. Johnson decision,[ii] it is crucial to identify all required notices, timeframes, and contents. For what issues must the contractor issue a notice? When must the notice be issued? What information, statements, or documents must the notice include? Requirements may be found in the provisions for Change Orders, Claims, Differing Site Conditions, or elsewhere. During contract drafting and negotiation, there should be special attention tailoring the types of notice, times for submission, and content requirements to match the needs and expectations of the parties and project. Strict compliance is often required, so notice provisions should remain a central focus in contract management.
- 6. Are there express waiver provisions? What happens if the contractor does not strictly comply with the Change Order provision, or a requirement to submit a particular notice in a specific form within a required timeframe? With the Mike M. Johnson case on the books in Washington, and if the contract provides that failure to strictly follow the defined procedures will trigger a waiver, the answer may be that imperfect notice paperwork could block an otherwise valid claim, even if the owner knows about the extra work. A middle ground we often recommend is a provision that failure to provide notice will not trigger a waiver except to the extent such failure causes material prejudice or harm to the other party. Such a provision protects the upstream party (owner or GC) if it is harmed by late or improper notice, while protecting the downstream party (GC or subcontractor) from waiving valid claims due to what could be described as procedural technicalities.
- 7. What limitations and restrictions are in place? Does a signed Change Order automatically waive all related rights and claims? What about cumulative impacts that only arise or are only identifiable when Change Orders become excessive? Is there any limitation on the time or money the contractor may receive for certain types of changes? Again, these are important considerations when drafting or negotiating the contract that become even more important when managing the project.
Comment: Every project is different, and the Changes and Claims provisions should match the needs of the project and parties. During contract negotiations, the above questions should help guide the process of tailoring these key terms to suit the circumstances. During performance under the contract, knowing the answers to these questions is crucial to ensure compliance and reduce the risk of disputes, or even an unwitting loss of rights.
[i] This post addresses “Changes” and “Claims” jointly, though they are often separated in the contract documents and address different rights and obligations. Generally, “Change Orders” are agreements to adjust the contractual scope of work in exchange for a corresponding adjustment in price and/or time, whereas “Claims” are requests by the contractor for extra time or compensation based on an event, occurrence, or condition not included in the contract price or schedule. However, their uses often overlap, the “Claims” process frequently begins with the contract’s “Change Order” procedures, and many of the key considerations in negotiating or managing these provisions are the same, so this post addresses them together.
[ii] Mike M. Johnson, Inc. v. Spokane County, 150 Wn.2d 375, 78 P.3d 161 (2003).