Know How to Handle Change Orders or Risk Project Derailment

Nashville Business Journal



Change-order disputes can derail any construction project.

They occur when something unplanned related to a construction project happens after work has begun.

In an ideal world, the original plans will be clear and unchanged, the weather will be perfect, the work will be performed in a timely manner and everyone will get paid.

However, especially when there are many parties involved - such as architects, owner/developers, bankers, contractors and subcontractors - finger pointing can become the norm when a dispute occurs and while everyone plays the fiddle, Rome - or in this case the project - can burn.

A full 90 percent of construction disputes involve disputed change orders. That's why knowing how to approach problems related to project changes is crucial to preserving rights related to those changes. Here's the best way to do that:

  • Ensure that there is a well-drafted "changes" clause in the contract.

The clause should set forth the method for determining additional compensation for changed or extra work and contain deadlines for written notification when something occurs on a project that one party believes may lead to an order that will increase the costs or impact the schedule.

There should also be consequences if these deadlines are not followed.

  • Practice clear and prompt written communication when the "change" occurs.

It's very simple: He who documents wins. In most cases, the owner and the contractor agree on whether certain work ordered by the owner constitutes change or adds extra work.

The question comes down to whether the work was within the scope of the original contract or was specifically called for in the plans and specifications which were incorporated into the contract.

Each situation is unique, but the general rule is that a contractor is required only to perform in accordance with the original construction agreement.

That means if the owner orders work that is beyond what was required in the contract, it falls under the changes clause and it should entitle the contractor to additional compensation or a time extension or both.

The problems usually occur when change work is performed prior to the formal change orders being negotiated and signed.

Almost every change clause provides that contractors shall not proceed with extra work until a formal change order has been issued. Otherwise, the contractor proceeds at his peril.

There are disturbing court decisions about recovery under such circumstances. However, no one - especially the owner - wants the contractor to stop work for days or weeks, while a formal change order is being processed.

This simply raises the question of the extent to which a contractor can justifiably rely on representations from the architect, engineer or other owner representative that the change order will be approved and payment will be made.

Change-order disputes, if not resolved, can bring a project to a grinding halt. The lawyers then get involved and the domino effect occurs: financing issues, loss of pre-sales, delays - all of the things that can turn a great project into a literal money pit.