What Is A Change Order?
In order to keep a project on track, the parties need to have a mechanism by which changes to the scope of work may be made without unduly interfering with or delaying the project’s anticipated completion date. The parties to a construction contract will often leave themselves room to change the terms of their original contract in order to account for such unanticipated factors as incorrect initial estimates, updates in code requirements, extreme weather conditions, or changes in the cost or availability of building materials. A provision in the contract allowing for change orders is one of the most frequently used ways for the parties to give themselves flexibility to adapt to changing circumstances.
A change order is a change to a contract. It typically addresses one or all of the following three things – the scope of the work, contract price, or time. But there are other things that can be modified with a change order. You can add or remove terms to a contract by using a change order. It can be written, but it also can be oral, meaning that you can receive a verbal directive to proceed with a change that is a valid change to a contract. However, this depends on what your underlying contract says. Many contracts state that only written signed change orders are valid. If that’s the case, be aware that if someone tells you to do something without a written change order, you may be hard-pressed to prove that it is a valid change order. It is better to have it in writing to avoid any confusion later about what the parties intended to be part of the change.
It is therefore commonplace for a construction contract to include a requirement that any change to the scope of contemplated work be in writing. However, once a project is underway, fluctuating and unpredictable conditions on the job may result in the parties either overlooking or choosing to ignore such a requirement.
Is a change order enforceable?
While these provisions to document changes in writing are generally enforceable (assuming that the parties have otherwise complied with the other terms of the applicable contract), they can also be waived. As such, notwithstanding a general rule of enforceability, written change order requirements in a contract can be waived based on the parties’ conduct or a verbal understanding (even though the original contract itself is in written form). Ironically, then, a contractual provision stating that the contract’s terms cannot be waived may itself be susceptible to being waived. If the parties verbally agree to modify a written contract, such an agreement will be enforceable even though the written contract itself states that such a modification is impermissible. In layman’s terms, just saying a change order has to be in writing will not necessarily make it so.
What Is Missing From That Change Order?
The most common thing that we see missing from almost every change order is time. It is rarely used and often ignored until it’s too late. Most people realize they need to add time to their change order too late in the process, and when they try to add time to their change orders, that change is typically not accepted. What we typically see is people leaving the time section in the change order blank (which under the law generally means zero), or they specifically write zero, or they write N/A. In all three cases, it means no more time is added to the contract.
Why is it so critically important, and why should you make it a point to add time every time you submit a change order? I would argue that time is the most valuable resource on the project, even more valuable than the materials, labor, and the dollars. The reason is that under no circumstance can you ever get it back. So, you need to make sure that you protect this resource. When you sign a contract that requires you to do some things within a certain amount of time, you either have a specific amount of time or a specific end date to complete the task. Know that the date is not moving so you need to move it. You do that is by adding time in your change order.
Time related to changes
It is important to add time related to changes, even when it may not otherwise be needed. This is because it allows you to bank some time without the added pressure of the job already being late. For example, let’s assume you’re on a project and it’s supposed to last 18 months and you start to obtain some change orders very early on in the course of the project. You can add some extra time now so that you can be assured you can have enough time on the project. You are going to get a lot less pushback when you do this at the beginning of the job when the job is still on schedule.
So, it’s conceivable that you can bank several days or weeks with routine change orders that are likely to be readily accepted. Look carefully at the change orders that you are submitting. They inherently could add time to the scope of your work. Sure, the contractor and the owner have to agree to the additional time, but if you do it early on in the course of the job, it is much more likely to be approved than if you wait until the end of the job when the project may be behind schedule. A few days here and there will add up in the course of the entire job.
What are some best practices?
Make sure you review and negotiate the change order language before you sign any contract. What is the process that this contract is going to require you follow in order to obtain changes. Importantly, your team in the field needs to understand what it takes to obtain a change order and be sure to follow the right procedure.
Drafting a change order
When drafting a change order, it is sensible to include the date, an adequate description of the work to be performed, the price of the change (or, at a minimum, a method for determining the price), a description of how long the work is estimated to take and any exceptions or objections as to what is being resolved by the change order.
Mutual agreement on the change order
Most change order clauses in ‘owner to contractor’ and ‘contractor to subcontractor’ contracts are generally broken up into two sections. The first is the mutual agreement on the change order. For instance, you as a subcontractor may propose to the contractor or owner a change order, or the contractor may tell you to proceed with a particular change. You would then generate a document that would indicate the changes in scope, price, and time. Once the contractor signs, you can start the work. However, it hardly ever happens that way. More often than not, you would be informed of the change in the field or with an email, or with a set of clouded sections in a drawing. You would then be told to move forward with the job without any delay. Understand that if you had signed a contract that stated before you do any changed work, you must have a signed change order, the work will be considered done within your scope and at no additional cost. You run the risk of not getting that change order approved and paid for if you deviate from what the contract says. Keep that in mind; the mutual agreement is typically the first section of a change order provision.
What is a change directive?
The second section of most change order provisions is what’s called a change directive. This means that the contractor or the subcontractor can direct you to carry out a change, and you agree that you’re going to keep segregated records on time, costs, material deliveries, and invoices for this change to the work. In this case, the cost of the change order is going to be your actual labor and materials plus some agreed percentage, or some other method of calculating what you’re entitled to. The distinction between the first section where we have mutual agreement and the second where you agree on a price later is the segregated records requirement.
Maybe you have five guys in the field doing the change order work with records separate from the other twenty people doing the base contract work. If you don’t segregate the time it took to do the change order work, you won’t be able to say at the end of the job how long this change order work actually took to perform. That’s why you segregate the records. Otherwise, you’ll not be able to break down what tasks your crews were doing on each day, and you won’t be able to put the records together to support this change directive. Most change directive paragraphs will say that if you cannot provide the segregated and detailed records of the actual man hours, labor and material costs for this change, then it won’t constitute a change. Typically, that is the way it works, and you need to have your team understand this so that you can follow the rules and get paid. Alternatively, if you have some other process that you want to employ when dealing with change orders, then you need to negotiate that into your contract.
Add a stop-work provision
Another thing you should consider doing is adding what I would call a stop-work provision in your contract. This is because most contracts say that under no circumstances can you stop work even if there is a dispute, or you haven’t been paid, or you don’t agree on the scope of the work and the changes. Without a stop work provision in your contract, you have to follow the dispute resolution process, but you cannot stop the work. This means you would be accumulating expenses on labor and materials without getting paid on the job. That’s a recipe for disaster. To avoid this, you can add a stop work provision into your contract. It could read something like this.
“Subcontractor may slow or stop work without liability or penalty if it has not been paid its draw request within 30 days of submission to the contractor.”
It doesn’t say that you don’t have to do the work. It just says that if you are not getting paid, you shouldn’t have to keep working. This stops the bleeding at the very least if you are not getting paid. That’s what you’re looking to add into your contract. Know that if an owner or general contractor hands you a contract, it is much more likely than not that you will not have the right to stop working. And know that if you signed it, you need to live by it.
It’s critical that you document everything that’s happening on the job. Are you making comments at the weekly meetings that are being notated in the meeting minutes? Are you sending emails highlighting any issues you are having on the job? Do your daily job, or do your daily reports show that these issues are impacting your work? Are you taking photos of the areas that are impacting your work? If you’re not doing those things, you will have problems when disputes arise and you don’t have the backup to support your position of why you ended up where you are on the job.
These are best practices in dealing with change orders but do understand that the most critical issue in crafting change orders is time. Add it correctly and it will surely pay off.
How to deal with change order challenges
Time is the most valuable resource on a project, and you’ll have less as time goes on. Still, many if not most fail to add time to their change orders. Some leave this blank, while others add “0” additional time or write “not applicable.” The need for more time is nearly always applicable!
Because it’s difficult to catch up once behind, always try to add time to every change order. A day here, three days there – it all adds up to relieve deadline pressure. The change order may not get accepted with exactly that timeline. But if you fail to try, there’s no chance of increasing time within your contract. Experience shows that when additional time is written into a change order early on, it’s often ignored or won’t be objected to. Even if things are running smoothly, it’s smart to bank time for later use on a project.
To effectively work with change orders, follow some best practices. First, it’s critical to review and negotiate the change order process outlined in your contract. You need to understand how the process works so you can follow it. A common, substantial problem is a subcontractor being instructed to do additional work and urged to move forward on that work before a change order is prepared and executed.
The change order represents real money. When you’ve already done the work and paid for the labor and materials, you can have potential problems when changes don’t get reconciled until the end of a project. Project leaders can forget there was a change at all. If so, you have no leverage to get paid because all the work is done.
Usually, a change order provision lays out that if you do work without a change order approved in advance, you don’t have to be paid for that work. So, having that change order submitted and approved first is important. Could that be a timing challenge for your work? Yes. But it’s worth taking a time-out, reminding the contractor that the contract dictates a change order must be signed before you can work. If your contract says you can’t proceed, you have leverage. It’s not about whether there’s a will to perform the work, but a will to abide by the contract.
Note the difference between a change order and a change directive. While a change order is fully negotiated between the parties to change the scope, cost and/or timing of a project, a change directive is a demand to do extra work and deal with time and price later. It’s important to put your foot down at the beginning of a project. If you are forced to work under a change directive, and you follow the process, at least there’s no argument to be made about the change. It’s documented. The only thing left to negotiate is what the work is worth. Usually a change directive will spell out how you need to keep your records, in order.to submit proper billing.
Be aware of who has the authority to sign a change order. Most contracts specify who, either by name or by title. If you are getting change orders signed by project superintendent, be concerned. There’s a good chance that’s not adequate and therefore not enforceable.
Also be aware work tickets are not change orders. If you are in the field and asked told to move a pipe from one location to another, someone should sign a work ticket. According to most contracts, this ticket alone isn’t a change order, just recognition you were there doing the work that day. Again, it’s important to carefully read your contract entirely.
Consider adding a “stop work” provision to your contract. This provision means if you aren’t paid within a specified time period, you can stop work. Many are surprised to learn that, without such a provision, they can’t stop work when they aren’t paid. Adding this language can close that loop: “Subcontractor may slow or stop work without liability or penalty if it has not been paid its draw request within 30 days of submission to the Contractor.” Maybe your contractor won’t agree to a 30-day stop-work provision, but perhaps something longer. The important thing is that it’s not never.
Also consider adding a cap on unexecuted change-order work. Consider adding: “Subcontractor shall not be obligated to provide, cumulatively, additional Change Order or Change Directive work, labor or materials in excess of $____________ without said amount first being paid in full.”
Think of this as a running tab. With this provision, if you are asked to do work and haven’t been paid for other work/labor/materials, you don’t have to continue until the balance – or tab – comes down. This keeps you from having to fund a job entirely without getting paid.
Even with these best practices, documentation is critical. Photograph everything happening on the job. If you claim that your work is being impacted by other work or conditions, you must prove it. Documentation is the best route. Take pictures several times a week, inside and out. Keep email, especially any message to the contractor or owner regarding issues in the field. When you attend meetings, are notes of what is discussed being formally kept? These “minutes,” as they are called, should accurately reflect what is discussed. If the minutes have gaps or holes, you should send an email objecting, clarifying or adding items, and keeping a record of those communications as well.
Signing a contract with certain terms and provisions means you’ll be bound by those terms and provisions. You can’t decide, after the fact, that you won’t work until paid. It’s key to understand and implement all terms, especially those change orders.
Are Change Orders and Extras Different?
Because of the length of time it takes to complete a project, the number of parties involved, and the general unpredictable nature of construction work, it is rare that a contract for such work remains unchanged from start to finish. While it is expected that changes to a construction contract may have to be made once a project is underway, no one wants the work to come to a stop while the parties negotiate, estimate, draft and execute changes, especially with workers, equipment and supplies on site, and the ever present need to meet scheduling deadlines.
Is it a Change or an Extra?
Be aware that there is a legal distinction between a change and an extra. A change is a modification to an item that is already contemplated under the contract. An extra, on the other hand, is material or work in addition to that which was addressed under the original contract. Before entering into a construction contract one should determine if the contract addresses changes or extras and if so, whether they treated the same way.
Under AIA documents, there are two types of contract changes. A change order is effectuated where the contracting parties agree to the nature of the work changed and the cost of such work in advance. In other words, there is a change at an agreed upon price and time.
Get Change Orders and Extras In Writing
Whether extras or changes, they need to be in writing to be enforceable. That said, this requirement may be waived based on the parties’ conduct or a verbal understanding. Just saying something has to be in writing will not necessarily make it so. But as in everything else related to construction, having everything in writing is absolutely the way to go.
Identify in writing the specific persons who are authorized to make changes or extras and to bind a contracting party. When drafting a change order or extras, it is sensible to include the date, an adequate description of the work to be performed, the price (or, at a minimum, a method for determining the price), a description of how long the work is estimated to take and any exceptions or objections as to what is being resolved by the change order or extra.
Because it is almost guaranteed that a change order or extra will become part of your construction project be prepared. Get them in writing.