CH-CH-CH-CHANGES How to Avoid the Strain: The Owner’s Perspective on Change Orders

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July 19, 2018

The Parties to a large construction project, public or private, should endeavor to make, affirm, and maintain good working relations. If they do, and can rely on each other, the odds are the project will be successful. Owners now have been provided with legislative tools for public projects that allow them to apply responsibility and responsiveness criteria to select the Contractor (and deselect undesirable contractors).

No matter how positive the relationship is between Owner and Contractor, when a significant change occurs, it may result in severe relationship strain. Owners feel the strain when having to justify more funding from lenders, voters and auditors. Contractors feel the strain when a significant change in the work must be done at no additional cost due to a failure to properly and fully comply with the contract change and notice provisions. Both Parties feel the strain when a change claim ends up being litigated publicly where both Parties rack up significant legal and expert fees and both may be dissatisfied with the result.

Due to human error, the Parties to a construction project should always assume that changes will occur during the project, changes in the scope, cost and duration. Changes occur because construction projects are almost always unique and each involves differences in location, design, workmanship, materials and complexity. For many projects, the Parties have never worked together before and, during conception, bidding and preconstruction, they will likely make mistakes that will be the genesis for change orders, long before the prime contract is fully executed.

So, deviations or defects in design, work, materials, and cost should be expected. How the parties address the risks is the subject of the many contract provisions that allocate the risk of change orders.

It should be expected that a given contract change will be based on an event or condition that modifies the work as defined in the contract documents. Change orders can be either additive or deductive. A change may involve something minor such as a change in similar materials. Changes may involve minor corrections of specifications or drawings. More likely, these result from an act or omission of the owner, designer, contractor, or subcontractor which impacts the contract schedule and the cost of the work.

Depending on the cost and who it is allocated to, these changes can result in enormous claims, extend the duration of the project, and trigger other provisions such as liquidated damages.

How the Parties defined a “change” will vary depending on the type of contract the parties are using. For Washington, for private and public projects, many owners use the AIA or Consensus contracts. Under the A-201 general conditions, most of you are familiar with Article 7 changes in the work. Depending on your background, some of you may also be familiar with the Federal Acquisition Regulations on changes and change conditions. If you are with the State of Washington, you would be familiar with the Standard Specifications for Road, Bridge and Municipal Construction, Washington State Department of Transportation Article 1-04.4 Changes.

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Regardless of the generic contract format you start with, it is likely that the changes clause, along with many other contract clauses, has been heavily modified. The fundamental purpose of the changes clause, however, remains consistent. The changes clause operates to provide Owners the unilateral right to demand changes in the work to meet the Owner’s needs and to have the flexibility to take advantage of advances in construction technologies, products, and methods of performance; and it allows the contractor the empirical means to propose changes in the scope and cost of the work to facilitate the Owner’s goal. It provides power to the owners and their representatives and designers to authorize changes without conflicts in other related clauses in the contract, and, finally, it provides a legal basis for the parties to process claims through the changes and dispute-resolution clauses in the contract.

For this seminar topic, we will dispense with Owner-issued change orders. We will also assume that the Contractor is proposing a change order that is unilateral and therefore disputed. Under these facts, the Owner’s representative, upon notice of the contractor’s notice of a change order, should immediately turn to the applicable sections or articles in the contract dealing with changes in the work and related notice provisions. A typically well written contract will require proposed change orders to be in writing, that they identify the cost of the work and any impact on the schedule, and that they comply with the time limitations and the contract claim notice provisions. In addition to the contract provisions, the Owner’s representative should also review the original bid invitation or RFP because in many cases the RFP is incorporated into the contract and both contain requirements related to the contractor’s awareness of existing conditions related to the site, the soils, the conditions of existing structures, traffic, and other on- and off-site conditions that could impact the work.

Many Owners’ contracts require the bidder-Contractor to make a pre-bid examination of the site, existing drawings, or expert reports, in order to familiarize themselves with any conditions that could impact the work and its costs. Owners should have records of the bidders that responded and took advantage of these site inspections as well as documentation to the extent they did not. A Contractor’s failure to inspect may provide the Owner with a defense to the claim.

A smart and responsible Contractor will rise to the task, will have walked the site, scoured all materials provided by the Owner, including consultants’ and engineers’ reports and drawings. The responsible Contractor will attend all pre-bid or post-bid examinations of the site in order to familiarize itself and anticipate conditions that could impact the work and/or that could lead to a change.

After notice of the Contractor’s change order, the Owner’s representative should also rigorously examine the contract documents to determine what responsibilities were allocated to the Contractor for errors, inconsistencies, or omissions within the contract documents. These clauses should have been carefully worded to require the Contractor to study and compare the contract documents in order to discover any errors, inconsistencies, omissions, variances in laws, codes, ordinances, and, that upon discovery, the Contractor was to report these findings to the Owner’s representative, in writing, prior to submission of their bid. This same general language was incorporated into the prime contract for consistency and for review of the project documents existing as of that date to determine if the Contractor fulfilled its obligations or used the resources available to it, to anticipate and avoid the change order at issue.

Most Washington-based Contractors that first discover a condition that could be the basis for an equitable adjustment in time or money will immediately provide formal written notice of a change. Most good Washington construction contracts will require formal written notice. The contract will typically define the notice requirements and specify a claim notice time period anywhere from a tight seven days, up to the generous unmodified AIA 21 days.

In addition to timely notice, the Owner’s representatives should also look at all other claim-submission requirements, which, in a well-drafted contract, should include the required breakdown of the labor and material costs and the impact on the contract time. The Owner’s representative should also review the contact provisions that deal with the Contractor’s failure to satisfy the requirements for timely notice, to provide complete documentation of the claim, and to incorporate all of the related claim provisions into a draft letter before getting the Contractor’s response.

Owners’ representatives, while awaiting the Contractor’s response, should be furiously working to analyze what the potential total cost of the Contractor’s claim should be in terms of scope, alternate means and methods, dollars and time (impact to the schedule). In larger projects, the Owner’s representative should go to the project engineer, who in most cases should be able to calculate a range for the reasonable cost for the Contractor’s claim. The Owner’s representative can use this information to analyze whether the Contractor’s proposed change order exceeds the reasonable cost or the scope of that particular work.

In the event that the Contractor’s claim is based on alleged differing site conditions, depending on how the allocation of the liability was established in the contract, the Owner’s representatives must be aware of whether or not the Owner can legally disclaim responsibility for the differing condition. Generally an Owner can allocate the risk of unforeseen conditions to the Contractor, but that may not apply to all claims and situations.

Owners’ representatives must also carefully analyze the merit of the Contractor’s claims based on the insufficiency or inadequacy of information conveyed in the contract. The Parties to a construction contract should understand that the law generally requires the Owner of a construction project to warrant the adequacy and sufficiency of project plans, details, and specifications, and the contractor is entitled to rely on the Owner’s warranty, absent clear enforceable contract provisions drafted to reasonably place the burden on the Contractor. This is commonly known as Spearin Doctrine. Beware that on the Federal level, there have been trial court decisions to the effect that where the Owner has superior information about the project site conditions, but fails to wholly disclose that information, that failure to disclose can constitute a breach of the contract by the Owner and render useless any contractual defense to the Contractor’s claim.

To the extent there are Owners’ reps in attendance contemplating projects involving extensive excavation of soil, which commonly gives rise to differing site conditions claims, you can propose that the cost of the work be a guaranteed maximum with a project line item contingency that covers any possible differing site condition reasonably anticipated and agreed to by the Parties. While the contingency should have a cap, there should be change order categories with sub-caps and an additional agreement for unit price work at a known cost. This strategy of allocating and setting aside funds for contingencies also reduces the cost of disputed claims and the high costs of litigation. When or if a dirt subcontractor makes a claim, have the geotechnical consultant analyze the subcontractor’s proposed means and methods; an alternative method may mitigate or prevent any delay.

A good construction lawyer should make it a practice to help clients by offering practical suggestions for both Owners and their Contractors to manage the risks of change orders and differing site conditions at all stages of the project. For Owners, to mitigate claims in general, disclose all known and adverse conditions prior to the submission of bids, and provide opportunities for bidders to review the site, the interior and exterior of any buildings, and all drawings and consultant reports. Then include all the exculpatory clauses that place liability on the Contractor for the failure to anticipate site conditions or subservice conditions. Where the Owner desires to disclaim existing drawings, consultant reports, and other information provided to bidders, make sure the contract clearly limits the contractor’s reliance on that information. Then, when the Contractor presents a claim based on a change involving a differing site condition, Owners, make sure that your project staff completely understand how the contract allocates that risk, so they can properly respond to the Contractor, citing the applicable contract provisions related to notice, claims, differing site conditions, and alternative dispute resolution.

A good responsible Contractor should make it a practice that, prior to bidding, it carefully reviews the contract to ascertain how it assigns the risk of differing site conditions. Research the contract for exculpatory clauses or contract disclaimers related to the accuracy of site information reflective in the bid documents and later in the contract. A good Contractor should not be content to just rely on information that is being provided to you by the Owner. A good Contractor should perform its own reasonable site investigation and make written and photographic records of what is there, noting the physical characteristics of the surrounding property. The Contractor should go to the local building department, make a FOIA request and get copies of any prior contracts and drawings. There is a lot of other information you can gather about a project site, its prior uses, and the general characteristics of surrounding property. The

Contractor’s due diligence may pay for itself if or when the Parties encounter conditions that could support a change order for differing site conditions. The responsible Contractor should also make absolutely sure that its project team carefully understands and strictly complies with all of the contract notice provisions. The Contractor’s superintendent should wait for instructions from the Owner’s representative before disturbing the site conditions and then carefully document and separate its records to establish all allocable additional costs flowing from this potential differing site condition claim.

Finally, for Owners, to the extent that during larger phased contracts there is often turnover of key personnel among the Owner team, enclosed in the written materials and the power point presentation are outlines that can help Owners develop project checklists, so in the event your Contractor presents a notice of claim, you and your staff can use the checklist to better respond to the Contractor’s notice of claim. Good luck and happy contracting.

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