A problem that often arises with respect to change orders concerns the nature and amounts of compensation that the change order payment is intended to provide. While the contract documents will commonly set forth specific methods for determining the direct cost of extra work, the contract documents may not address whether the issue of impact costs is to be included in the change order or not. It is important to ascertain if the extra work provisions in the contract provides for such coverage, especially in preparing an impact claim after the extra work price has been accepted. Generally, the contractor should make a careful review of the contract documents and follow the methods set forth in the contract for change order pricing.
- 1. Change Order Provisions are Silent as to Impact Damages.
If the change order provisions of the contract do not address the issue of impact damages, then the failure by the contractor to include its impact costs or to make an express reservation of right to later assert such cost may not foreclose later claims for the impact of changes. Courts consistently interpret federal government contracts to allow the contractor to proceed with the later claim for impact damages where the contract does not provide for such costs to be included in change orders and nothing in the negotiation of the change order or adjustment indicates that claims for impact costs were resolved. To be safe however, we recommend that contractors nevertheless expressly reserve the right to additional costs on the face of the change order if impact costs exist.
- 2. Contract Documents Provide That All Costs Shall be Included in the Change Order.
If, on the other hand, a contract provides that all impact profit must be included in the change order or it will be considered waived, failure to include such costs or to make an express reservation may prevent a later claim for impact.
A typical change order clause may read as follows:
Change Order Full Compensation. Payment of the changed work or the granting of a time extension provided herein shall be full compensation for any change or extra work, including payment for all costs of all delays in connection with such change and including full payment for any expenses for inconvenience, disruption of schedule, and/or loss of efficiency or productivity of any nature whatsoever by contractor and/or subcontractors, suppliers, and/or or materialmen of any tier.
Generally, a contractor can determine the direct costs of the change order, but the indirect impacts are often very difficult to ascertain at the time the change order is submitted. In such instances, the contractor should expressly reserve the rights in the change order to claim additional compensation and performance time if and when the necessity arises.
A typical reservation of rights clause is as follows:
Reservation of Rights. This change order is based solely on direct cost elements such as labor, material, and normal markups, and does not include any amount for changes in the sequence of work, delays, disruption, rescheduling, extended overhead, acceleration, and/or impact costs which are not possible to assess at the present time. Right is expressly reserved to make claim for any and all of these related items of compensable cost overrun prior to final settlement of this Contract.
Comment: Owners will often reject change orders that contain a reservation of rights clause. Fortunately, in the state of Washington, a recent statute – RCW 39.04.360 – requires that the undisputed amount of the change order be paid to the contractor even if other amounts are disputed. Thus, if the parties are unable to agree on the reservation of rights language, the direct cost of the work should nevertheless be paid by the owner. Agencies that violate RCW 39.04.360 are subject to assessment of interest at 1% per month, plus attorneys’ fees.