Proactive Change Order Management
The only certainty regarding changes on a construction project is that there will be changes. Construction bid requests often lack clearly defined bidding instructions describing how additional costs will be incorporated into the contractual agreements as a result of project changes. Failure to address this issue before signing the contract may lead to extensive change order negotiations, resulting in an adversarial relationship between the parties, which can be detrimental to the successful execution of a project and unnecessarily increase costs.
This failure to address and resolve in detail how change order pricing will be handled before the execution of an agreement is a major flaw in construction contracting. Following are a few points to consider involving change order provisions when negotiating your contract:
Include a provision requiring the owner to timely process change orders. Unprocessed and unpaid change orders can create project delays and disputes with subcontractors. Provided the general contractor and subcontractor have furnished the owner with reasonable documentation to support the change order request, the owner should agree and covenant to promptly process and pay for change order work. If the owner fails to fulfill this obligation, the general contractor should have the contractual right to stop work until the pending change orders are processed.
As all contractors know, Construction Change Directives ('CCD") can quickly add up. Negotiate a maximum dollar amount of CCDs that can be issued on the project.
When reviewing and negotiating the contract, be sure to check the force majeure clause. Force majeure is, essentially, an unexpected act of God that results in a loss that could not have been anticipated. However, oftentimes force majeure clauses are defined so broadly that they eliminate almost all rights to seek payment for extra work or changed conditions. As such, a critical review of the entire contract, not just the specific change order provisions, is critical to ensure your rights are adequately protected.
From the general contractor's perspective, a subcontractor’s portion of the pricing for proposed changes typically comprises 80%-90% of the increased cost, and the impact to the owner’s bottom line resulting from subcontractor charges can be significant. As such, many owners include contractual provisions that impose limitations on subcontractor markup for overhead and profit. It is, therefore, critical that general contractors include thoroughly drafted flow-down provisions in subcontract agreements.
When preparing and negotiating change orders, the failure to document and request adequate time extensions is a persistent problem. If the changed or added scope of work is going to impact the project schedule, it is critical to document and negotiate the necessary time extension at the time the change order is executed. Attempting to argue after the fact that a previously negotiated change in the work delayed the project is an issue contractors face. The best time to negotiate an extension to the completion date is when the underyling work is being discussed.
Virtually all construction contracts require change orders to be in writing in order to be enforceable and entitle the contractor to payment. As such, contractors should take advantage of the leverage they have by requiring the change orders to be processed and executed before performing any changed work. Simple compliance with this common contractual provision would eliminate a significant amount of post-project disputes.
The time and cost investment in creating a fair and reasonable construction contract before construction is a much better investment that the cost of litigation after construction.