August 21, 2018
Author: Joseph C. Staak
Organization: Smith, Currie & Hancock LLP
Under common law, a contract is an agreement between two parties for an identified undertaking. Each party agrees to perform specific contract duties in exchange for identified performance by the other party. Once an agreement is reached, the terms of the agreement define and limit the responsibilities of each party.
Normally, neither party has the right to unilaterally change or modify an existing contract. If changes or modifications are necessary, the parties have to reach a separate agreement incorporating these changes. Depending on the facts, courts may recognize a second contract covering only the changes, or a new contract supported by new consideration and intended to replace the original contract. M.W. Buttrill, Inc. v. Air Conditioning Contractors, Inc., 158 Ga. App. 122, 279 S.E.2d 296 (1981). Under either event, both parties have to agree to the modifications. Crowley v. Ford Motor Credit Co., 168 Ga. App. 162, 308 S.E.2d 417 (1983); OCGA § 13-4-4.
This common law rule of contract clearly makes sense – contracts are founded on mutual agreement. Nevertheless, this principle creates practical problems in construction. Changes in construction are inevitable. Rarely are construction plans free of omissions or errors. Small details left out of the work scope can affect the practical use of the entire project. Requirements and needs change during the course of a long construction project.
Under common law rules for contract modifications, the owner and contractor would have to negotiate a new agreement to add, delete or change the work. Either party could refuse to modify the original agreement. Unless agreement was reached, the owner would be in breach of contract if it prevented the contractor from performing the contract as originally entered. Out of practical necessity was born the concept of a changes clause.
II. WHAT IS A CHANGES CLAUSE?
A changes clause authorizes the owner (or the contractor, when dealing with a subcontractor) to require alterations in the details of the work or conditions of construction. In consideration of any such changes, the contractor is entitled to receive fair compensation. A changes clause gives the owner the necessary flexibility to adapt actual conditions to the end product sought and to make adjustments as requirements and available technology change over time. The only limit is that a change must fall within the general scope of the work contemplated in the original contract.
A changes clause is not inconsistent with the common law principle that all modifications must be agreed to by the contracting parties. A changes clause reflects an agreement between the parties that changes within the general scope of the project may be necessary and that one of the parties (i.e., the owner) may initiate such changes. The legal consideration supporting such a requirement is the contractor’s entitlement to compensation if the change affects the costs of or time for performance.
A typical changes clause will detail the procedures to follow in issuing a change and the methods to use in determining the compensation due the contractor. Modern day changes clauses can go into great detail concerning the procedures for implementing, pricing and finalizing a change. These clauses identify who has the authority to order a change, whether the change must be in writing, and the specific methods to compute or determine the compensation due the contractor.
Changes clause also may identify when the contractor must proceed with the changed work. This can be immediately upon receipt of a written directive from the owner (and before agreement is reached on compensation that may be due the contractor). Most changes clauses allow the owner to issue “change orders.” A change order is a written directive requiring the contractor to proceed with implementing identified changes, alterations or deletions from the original contract work. Depending on the wording of the change order, the contractor may be required to proceed immediately with the changed work. In those situations questions over compensation are to be resolved only after the contractor proceeds with the change or once the changed work is performed. These change procedures help avoid any stoppage of work while compensation issues are negotiated.
The AIA Document A201, General Conditions, (2007 ed.) allowing an owner to unilaterally require a contractor to proceed with a change in the scope of work pursuant to a Construction Change Directive or “CCD”. Under the AIA A201 contract, the owner would be obligated to pay the contractor additional compensation as determined by the provisions found in Section 7.3.
Some changes clauses address how the contractor should respond if or when it receives an order or instruction from the owner (or its representative) that the contractor believes to constitute a change.
A change may be either bilateral or unilateral. A bilateral change is a change that is agreed to by both parties prior to the work being performed. There are situations where an owner will want to negotiate a bilateral change order to confirm in advance the exact cost impact for implementing the change before authorizing the change to proceed.
Typical changes clauses provide that compensation for changes will be determined by an agreed lump sum, on a time and material basis, or by established unit prices.
A changes clause does not give the owner the unbridled power to make any changes it may want. To be valid under contract law, a change must fall within the general scope of the original work. For example, an owner contracting for the construction of his new home in Macon cannot issue a change order requiring the contractor to build a beach house on the Georgia coast. The parties would have to reach a separate agreement on the beach house. However, the owner could, through a change order, require the contractor to build a garage behind the new Macon home.
The general rule is that changes beyond the scope of the project are outside the realm of the changes clause. While the law will enforce a changes clause covering changes within the scope of the original agreement, it will not enforce changes that could not have been contemplated at the time the original contract was signed. At some point, the nature of the changed work can depart so drastically from the original undertaking as to make the change beyond the scope of the changes clause. While it is easy to sense this distinction, as a practical matter it can be very difficult to draw the line.
In public contracting, competitive procurement statutes may further limit a public owner’s right to make changes to the work. Generally, public work must be competitively awarded, either through competitive bidding or competitive proposals. Public procurement statutes in many states therefore limit a public owner’s ability to obtain construction services by issuing a change to an existing contract. For example, in Georgia, OCGA §36-91-20(e) provides:
(e) Bid and contract documents may contain provisions authorizing the issuance of change orders, without the necessity of additional requests for bids or proposals, within the scope of the project when appropriate for necessary in the performance of the contract. Change Orders may not be used to evade the purposes of this article.
In many states, a disappointed bidder deprived of an opportunity to bid work that is improperly awarded through a change to an existing contract can challenge the public agency’s action in court.
III. METHODS FOR IMPLEMENTING CHANGES UNDER A TYPICAL CHANGES CLAUSE
The AIA A201 - 2007 form is the most common set of general conditions used in private construction. The changes clause in the A201, found at Article 7, is a good vehicle for examining how a changes clause works. The A201 changes clause provides three methods for a change to be implemented: (1) by change order; (2) by construction change directive; or (3) orders for minor changes.
A. Change Orders
A Change Order under the AIA A201 is used for changes that are negotiated and agreed to by the parties in advance. A “Change Order” must be in writing, issued by the project architect, and signed by the owner, contractor and architect. The change order is to contain the agreed terms including: (1) the specific change to the Work; (2) the amount of the adjustment, if any, in the Contract Sum; and (3) the extent of the adjustment in the Contract Time.
If the parties eventually reach agreement on the compensation due the contractor for a CCD, the AIA clause provides that a CCD will be considered a Change Order. The clause provides that a CCD signed by the contractor indicates the contractor’s agreement with its terms, including compensation. Such agreement shall be recorded as a Change Order. See, AIA A201 ¶ 7.3.6
B. Construction Change Directives
A Construction Change Directive (“CCD”) is the mechanism the owner can use to direct the contractor to make changes when the contractor and owner have not agreed on the appropriate compensation, time adjustment or contract reduction. A CCD is appropriate when negotiations over a proposed change order do not produce an agreement or when the owner wants the revised work to proceed without delay. The CCD provisions will govern the parties’ rights and duties when there is a dispute over the compensation or time due the contractor for the change.
If the CCD justifies an adjustment to the Contract Sum, the adjustment shall be based on one of the following methods:
(1) mutual acceptance of a lump sum properly itemized and supported by sufficient substantiating data to permit evaluation;
(2) unit prices stated in the Contract Documents or subsequently agreement upon. (the A-201 Changes Clause provides that if unit prices are called for in the contract and the quantities are materially changed so that application of unit prices would be inequitable, then the unit prices are to be adjusted equitably);
(3) cost to be determined in a manner agreed upon by the parties and a mutually acceptable fixed or percentage fee; or
(4) as provided in Subparagraph Section 7.3.7. Subparagraph 7.3.7 provides that if the contractor does not respond to or disagrees with the adjustments as offered by the architect, the architect will determine the method and the adjustment on the basis of reasonable expenditures and savings attributable to the change, plus a reasonable overhead and profit. The contractor is required to keep, in such form as required by the architect, supporting data for its costs. These costs include: (a) costs of labor, including social security, old age and unemployment insurance, fringe benefits and workers’ compensation insurance; (b) costs of materials, supplies and equipment, including costs of transportation, whether incorporated or consumed on the job; (c) rental costs of machinery and equipment, exclusive of hand tools; (d) costs of premiums for all bonds and insurance, permit fees, and sales, use or similar taxes related to the Work; and (e) additional costs of supervision and field office personnel directly attributable to the change.
Deductive change orders often can be particularly challenging to resolve. Many changes clauses do not contemplate changes that deduct work from the contract and provide no specific instructions on how to price a deduction. The AIA Changes Clause does provide instructions on how to price a deductive change at ¶ 7.3.8. Credits are to be determined based on “actual net cost” as confirmed by the architect. Moreover, owners are not entitled to a markup over the “actual net cost” for overhead or profit, which would otherwise increase the amount of the deduction. When both additions and credits are involved in a change, any allowance for overhead and profit shall be figured only on the basis of the net overall cost increase, if any, of the change amount. The A201 CCD clause allows amounts, recognized by the architect as being due the contractor for the change, to be invoiced and paid for even though a final agreement on the cost of the change has not been reached. A-201(2007) changes clause states that the contractor may request payment for work completed under a CCD. The architect will make an interim determination of the costs the architect believes are reasonably justified and certify the amount for the monthly payment certification.
C. Minor Changes In The Work
For minor changes to the contractor’s work, the architect, under the AIA A201, can direct the change by written order. A “minor change” is a change which does not involve an adjustment in the Contract Sum or Contract Time.
IV. WHO HAS AUTHORITY TO ISSUE CHANGES?
Changes clauses often identify who has the authority to issue changes to the work. On general construction contracts, the owner usually will reserve this authority to itself, or through an identified representative. In standard contracts issued by the federal government, the contracting officer is the only person authorized to order changes on behalf of the government.
Similar restrictions may be found in subcontracts. However, many subcontracts state only that the “contractor” can issue changes to the subcontractor. In these situations, the best practice is to have a document on record identifying the specific person or persons authorized to issue changes to the subcontractor.
There can be substantial risks in proceeding with extra work based on directions received from someone without the necessary authority. In Barge and Co. v. City of Atlanta, 161 Ga. App. 675, 288 S.E.2d 98 (1982), the contract provided that no payment for extra work “unless the work is ordered in writing by the Owner or its Engineer, acting officially for the Owner.” However, a separate provision in the contract stated any change must first be “authorized by the Engineer and approved by the Owner.”
During the course of the job, the contractor invoiced against a Change Order No. 3. The change order had been prepared and signed by the project engineer and approved by the field engineer and the City’s chief of construction management. However, no other official of the City had signed the change order. After a dispute arose, the City argued that the contractor was not entitled to invoice against the change order because it had never been properly authorized by the City.
The court applied rules of construction to resolve the apparent conflict in the specifications over who had authority to issue changes. The court noted that the two provisions were in conflict and then applied a rule of construction to resolve which of the two conflicting clauses should control. The contractor in Barge & Co. nearly lost the case because it did not get the approval of the City Commission and the signature of the Mayor. Change order administration by state and local public bodies always raises the possibility of problems because of the complexity and time it takes a modification to go through the approval process.
Another example of problems a contractor can get into by failing to have proper authorization for extra work is the case of Caribbean Lumber Company v. Anderson, 422 S.E.2d 267 (Ga. 1992). This case involved a significant overrun in the excavation and replacement of unsuitable soils. The project engineer authorized the contractor to proceed with the removal and replacement of the extra quantities and the contractor thereafter billed for the overrun at the unit provided in the contract. While the court acknowledged that the engineer had given authorization, it noted that the owner was only bound by the acts of the engineer which were within the scope of his actual or apparent authority. The court found that the specific scope of the engineer’s authority was defined in the contract and did not include the right to authorize the removal of unsuitable material in excess of 25% over the estimated quantities unless a change order was executed.
Contractors often proceed with changed work prior to final approval because waiting on the necessary paperwork will cause significant delays to the project. However, this course of action creates risk. Under most changes clauses the contractor is not authorized to proceed until a proper written order is issued or final approvals are obtained. Contractors are faced with a Hobson's choice, waiting on approvals and thereby causing delays or proceeding with the work and risking not being paid because someone in authority ultimately objects to the change.
The contractor performing extra work at the direction of someone other than the person designated in the contract has several possible legal theories for obtaining recovery. First, while the person issuing the change directive may not have express authority, he may have “implied” authority to issue the change. Second, the person issuing the order may have “apparent” authority arising from the facts and circumstances of the transaction. Third, the owner may ultimately ratify or approve the decisions or instructions issued by one not having authority.
Finally, the contractor can argue that the parties effectively waived the formal requirements of the changes clause by utilizing a less formal procedure during the course of the work.
A. Implied Authority
The A/E and other owner representatives on the job sites are typically agents of the owner for specified purposes. The contract often defines the authority the representative has. Authority given to an agent in this manner is “express” authority.
The term “implied authority” relates to authority of an agent to do whatever acts are incidental to or necessary for the exercise of that agent’s express authority. For example, if an engineer has the express authority to change the grade of a railroad and direct work according to the change, the engineer probably would have the implied authority to bind the owner to the additional costs to accomplish the work. While an agent needs whatever implied authority is necessary and proper to carry out his express duties, contractors are always at risk when they only have the agent’s implied authority to rely upon.
B. Apparent Authority
Apparent authority arises when the agent acts in such a way to lead the contractor to reasonably believe that the agent has authority beyond what he actually possesses. Apparent authority arises when an agent, including the A/E, seems to take charge in front of both the contractor and the owner with what appears to be the consent and approval of the owner. In that type of situation, the contractor is often lulled into the belief that the owner has given the A/E more powers than he actually has. If a court finds that, in view of the owner’s actions, a reasonably prudent contractor would have assumed that the field agent had authority to order changes, the owner will not be allowed to deny that agent’s apparent authority to do so.
Even in those instances where a field representative or the A/E may not have any type of authority to authorize extra work, it may be possible to establish that the actions of the agent were ratified or approved by the owner after the fact. This theory obviously depends on events that transpire and the actions taken by the owner subsequent to the directive in question.
Parties that follow procedure that are not consistent with the requirements of the changes clause may be found to have waived those requirements. To find that an owner waived the strict terms of the changed clause, the contractor will have to show more than one example of inconsistent conduct. A course of performance may be necessary to show a waiver.
For example, in Biltmore Construction Company v. Tri-State Electrical Contractors, Inc., 224 S.E.2d 504 (Ga. App. 1976) a subcontractor introduced evidence of a variety of different extra work items that it was directed to perform without a change order as contemplated by the clauses dealing with payment for extra work. “[W]here the parties by a course of conduct have departed from the terms of the contract and operated without prior written change orders, there may be a waiver, or oral variation of the provisions of the contract.” Id. at 488. The court found that the evidence of waiver was sufficient to create a jury question. Note that the evidence of waiver must be clear. As one Georgia recently court stated, the waiver of an important contract right must be clear and unmistakable. Vratsinas Construction Co. v. Triad Drywall, LLC, Ga. App.Ct.,
Case No. A12A2317 (March 25, 2013).
V. WHEN MUST CHANGE ORDERS FOR EXTRA WORK BE IN WRITING?
Construction changes clauses usually require that any change be authorized in writing. Generally, provisions requiring a written directive are valid in all states. Any contractor proceeding with extra work based on an oral authorization risks never being paid. For these reasons, the contractor should always demand a written change order or at least a written directive prior to proceeding with the work.
Georgia recognizes that provisions requiring a written change order are generally enforceable. Biltmore Const. Co. v. Tri-State Elec. Contractors, Inc., 137 Ga. App. 504, 224 S.E.2d 487 (1976). However, where the parties by a course of conduct have departed from the terms of the contract and operated without prior written change orders, there may be a waiver of the writing requirement:
But forfeiture of rights is not favored, and the courts will readily seize upon circumstances arising in the subsequent conduct or transactions of the parties and imply a waiver, in order to prevent a forfeiture because of non-compliance with formal prerequisites.
137 Ga. App. At 506. The courts are therefore willing to look at the conduct of the parties to determine whether or not it would be inequitable to enforce the writing requirement under the unique facts and circumstances of a particular case. In Biltmore, the court examined how the parties handled a number of different change orders on the project. The court found it significant that the parties did not consistently follow the changes clause. For example, several change orders were issued through oral instructions from the contractor’s superintendent and later ratified by the general contractor. The court believed that these after-the-fact approvals gave the superintendent apparent authority to issue oral directives that the subcontractor could rely upon.
Georgia courts will examine the course of conduct between the parties in determining whether to enforce a writing requirement. To the extent that the parties significantly departed from the terms of the contract and operated without written change orders, a waiver may be found. Consolidated Federal Corp. v. Cain, 195 Ga. App. 671, 394 S.E.2d 605 (1990). When a contractor orally orders a subcontractor to perform extra work and there is evidence the contractor understands the subcontractor would be entitled to additional compensation therefor, courts may find that the written change order requirement has been waived. Mion Chemical Brick Corp. v. Daniel Constr. Co., 111 Ga. App. 369, 141 S.E.2d 839 (1965).
Georgia courts do not require any formal type of writing to find that the writing requirement of a changes clause has been met. For example, in Crolley v. Haygood Contracting, Inc., 201 Ga. App. 700, 411 S.E.2d 907 (1991), the superintendent for the contractor prepared a handwritten estimate of some extra work that he and the owner’s representative had been discussing. The owner’s representative then initialed this handwritten estimate, acknowledging acceptance.
While the court had questions over whether the owner’s representative had authority to bind the owner, there was no question that the writing requirement in the changes clause had been met.
Courts are less willing to find a waiver of change order requirements when the contract involves a state or local authority. Dept. of Transportation v. Fru- Con Constr. Corp., 206 Ga. App. 821, 426 S.E.2d 905 (1991); State Highway Dept. v. Hewitt Contracting Co., 113 Ga. App. 685, 149 S.E.2d 499 (1966).
VI. RELEASES AND RESERVATIONS OF RIGHTS IN CHANGE ORDERS
Release language signed by the contractor generally WILL be enforced. See, e.g., Kennedy v. John Thurmond and Associates, Inc., 649 S.E.2d 762, 765 (Ga. App. Ct. 2007). Moreover, express release language may not be necessary if the signed change order shows that the parties recognized that the compensation provided in the change order was to be considered final and complete for all purposes.
In one Florida case, G.A.C.R.A.A. v R. Hyden Construction, 766 So.2d 1238 (Fla. 1st DCA 2000) the contractor brought a claim for general conditions costs and other indirect costs associated with a previously negotiated change. The contractor argued that the agreed compensation in the written change order did not cover the contractor’s indirect costs associated with the changed work. Noting that the change order did not include a release, the contractor argued that the change did not preclude its right to pursue its indirect costs.
The appellate court ruled that the written change, like any contract, will be enforced as written. The court found that the parties clearly intended that the compensation set forth it the change order was to be the “final agreement” to “all adjustments” due the contractor and that the change order represented “the total amount due . . . for any and all items pertaining to the [changed] work.” The contractor lost the argument because of the quoted language included in the change, and because the contractor had failed to expressly reserve its claims for impact costs.
Compare the Hyden Construction case to C.O.B.A.D. Construction Corp. v. School Board of Broward County, 765 So.2d 844 (Fla. 4th DCA 2000), decided the same year. In C.O.B.A.D the School Board ordered changes to the contractor’s work and presented change orders to the contractor for signature.
The contractor did not agree with the amount of compensation being offered in the change orders but signed and returned the change orders anyway, along with a cover letter that expressly stated that it was disputing the price being offered in the change order. The court’s opinion did not discuss the specific wording of the signed change order or whether the change order had specific release language.
Even though the contractor had signed the change order, the court found that the reservation expressed in the accompanying letter was sufficient to show that no agreement had been reached on price and the contractor was thus not prevented from suing for what it claimed to be the appropriate amount due.
In Citadel Corp. v. Sun Chemical Corp., 212 Ga. App. 875 , 443 S.E.2d 489 (1994), the parties entered into a number of bilateral modifications adjusting the contract price for various change orders issued by the owner. These modifications included the following release language:
This contract modification represents final release for any and all
amounts due or to become due contractor for changes referred to
herein. Contractor further releases all other claims, if any (except
those claims previously submitted . . . ), for additional
compensation under this contract, including without limitation any
rights contractor may have for additional compensation arising out
of delays or disruption of contractor’s schedule as may have arisen
prior to the date of this modification.
Subsequent to the execution of the modifications, claims arose relating to work not associated with the modifications. The owner argued that the release language in the modifications released not only the work covered by the modifications but also released “all other claims . . . except those previously submitted in writing” through the date of the change order. The court enforced the releases as written. Although the modifications were intended to cover only changes in the work, the release language included in the modification covered all the work performed through the date of the mod.
It is not unusual for contracting parties to agree on the compensation due the contractor for the direct costs of a change but not be able to agree on time extensions or delay and impact costs. C.O.B.A.D reflects one contractor’s strategy on how to handle this situation.
Once agreement is reached on a change, the parties will typically sign a bilateral modification to the contract. This modification memorializes the change. These written, signed bilateral agreements may contain release language that will limit the contractor’s rights to file any further requests for money or time arising out of the work covered by the modification. Release language may read:
“This contract modification represents final release for any and all
amounts due or to become due contractor for changes referred to
herein. Contractor further releases all other claims, if any (except
those claims previously submitted ...), for additional compensation
under this contract, including without limitation any rights
contractor may have for additional compensation arising out of
delays or disruption of contractor’s schedule as may have arisen
prior to the date of this modification.”
Courts will enforce releases as written. Although a modification may be intended to cover only the specified changes set forth in the change, release language like that quoted above may be construed to cover all work performed through the date of the modification.
Contractors are well advised to specifically reserve their rights to additional compensation and/or time in change orders unless they are comfortable that the amounts in the change covers all cost and time issues. The need to expressly reserve rights can arise in two ways. First, the contractor may not agree that the amount offered by the owner in the change order is fair compensation for the change. While the contractor wants to receive those amounts the owner is willing to pay, the contractor also wants to be able to assert a claim for the additional monies it believes it is due. In this situation, the contractor can ask the owner to issue a unilateral change order that grants the contractor the amount the owner will recognize, and thereafter allow the contractor to pursue a claim for the difference. On the other hand, the contractor can sign a bilateral change order with an express and written reservation that it is disputing the amount in the change order and reserving its rights to pursue additional funds.
The second situation is where the parties agree on the direct costs for implementing the change but the contractor nevertheless believes that it may have indirect, impact or delay claims arising from the change. Again, the contractor needs to include a written reservation in the change order at the time it is executed and returned. Otherwise, signing the change as written may bar the contractor from any further recovery.
The most difficult situation is where the owner insists on broad release language in the change and refuses to agree to any reservation by the contractor. In that situation, the contractor needs to understand that there is no agreement between the parties and signing the change order with strong release language and without a reservation will waive its rights. Under the changes clause, the contractor likely will be required to proceed with the change even though no agreement is reached. The contractor needs to decide whether to accept the owner’s terms, or proceed under protest without signing the change order.
There are some projects where the owner makes many changes, with the parties reaching separate agreement for cost and time issues on each. However, after many of these changes, the contractor begins to realize that the prices charged are not adequate to compensate the contractor for the disruptions and inefficiencies created by the large volume of changes. This situation can easily occur where the contractor prices a change based on the direct cost to perform the work but does not account for the adverse impact the change may have on the contractor’s overall performance.
Generally, the contractor will be bound by the terms of the change order he signed, including any release or reservations language. Thus, the contractor needs to be aware of the potential impact that a change may have on unchanged work. It is far better to price all cost impacts in a change order rather than waiting and seeking to claim additional delay and impact costs at a time when the owner believes that a cost agreement has already been achieved. Another alternative is to include a written reservation in the modification reserving its rights to claim impact costs at a later time.
VII. CONSTRUCTIVE CHANGES
“Constructive” changes are changes which result from “conduct which is not [subject to] a formal change order, but which has the effect of requiring the contractor to perform work different from that prescribed by the original contract, but in theory, which could have been ordered under the changes clause.” C. Gusman, “‘Constructive Change’—A Theory Labeled Wrongly,” 6 Pub. Cont. L. J., 229 (January, 1974).
The changes clause generally applies to “constructive changes” because the owner, for whatever reason, is effectively revising the details or adding to the contractor’s work. Normally, the parties will refer directly to the changes clause to answer any questions about how to implement such a change. Events and disputes that amount to a “constructive change” and therefore trigger application of the changes clause are not always easy to identify. A change to a construction contract can occur outside the context of direct actions by the owner or his authorized representative to make a change. A constructive change can arise from an act or an instruction from the owner or its agents that impacts the way the contractor ultimately performs the work. If the owner’s act or instruction is not consistent with the rights of the contractor, and any resulting change to the contractor’s performance increases the cost of or time for doing the work, the contractor would be entitled to be compensated for this “change.”
“Constructive changes” typically fall into one of three general categories:
(1) The drawings or specifications are defective and, as a result, the contractor is required to perform extra work;
(2) The owner or its representative misinterprets the contract—for example, where work that actually satisfies contract requirements is erroneously rejected or where an unreasonably high standard of performance is required; or
(3) The owner denies the contractor a justified time extension, requiring compliance with the original completion schedule, and thereby forces the contractor to accelerate performance. Gusman, supra, at 232.
A. Defective Plans And Specifications
Courts have recognized for years that when an owner supplies the plans and specifications for a construction project, the owner impliedly warrants to the contractor the fitness of the plans and specifications for the contractor to perform its work satisfactorily. United States v. Spearin, 248 U.S. 132, 136 (1918). The delivery of defective plans and specifications is therefore a breach of the implied warranty, absolving the contractor from liability for unsatisfactory results or delays in completion. As a result, when the owner provides the plans and specifications, the contractor is not liable for an unsatisfactory final result attributable solely to defects or insufficiencies in the plans and specifications. R. M. Hollingshead Corp. v. United States, 111 F. Supp. 285 (Ct. Cl. 1953).
Where defects in the plans and specifications, the sufficiency of which is not warranted by the contractor, necessitate extra work or materials to complete the contract, the contractor may recover therefor from the owner. Fairbanks North Star Borough v. Kandick Construction, Inc., 795 P.2d 793 (Alaska 1990).
Lawyers can pursue various possible causes of action for disputes involving design errors. These include breach of contract, breach of express warranty, or breach of implied warranty. Regardless of these legal theories, the changes clause to the contract will likely be triggered. If an error or omission in the plan forced the contractor to “change” his work plan, a change under the changes clause has occurred.
Certainly, not all alleged defects in plans and specifications may constitute a “change.” Although the contractor may believe there is a defect in the plans, the ultimate problem may be the contractor’s over-optimistic assessment of the difficulty of the work. In addition, unless there is a differing site condition clause in the contract, the owner is generally not responsible for difficulties encountered by unexpected subsurface or concealed conditions. American Demolition Inc. v. Hapeville Hotel Ltd. Partnership, 202 Ga. App. 107, 413 S.E.2d 749 (1991).
Unless the owner makes actual representations as to the conditions that the contractor will encounter, there is no “change” to the contract. It is the contractor that must make his own assessment as to concealed conditions and it is the contractor that must accept the consequences of his evaluation.
B. Misinterpretation of Plans and Specifications
Constructive changes can also arise from a misinterpretation of the plans and specifications by the owner or its representatives. The owner generally has an implied duty not to hinder or delay the contractor in the performance of his work. George A. Fuller Co. v. United States, 69 F. Supp. 409 (Ct. Cl. 1947). This type of “constructive change” can arise where the contract clearly specifies a particular method of performance or allows the contractor to select the method, but the owner or architect requires a different, more expensive method than reasonably contemplated by the contractor when he prepared his bid. For example, a constructive change was found where the owner’s representative rejected a bar-type progress chart that satisfied the contract’s progress of work clause, and instead required the contractor to provide a CPM schedule. H. I. Homa Co., ENG BCA Nos. PCC-41, PCC-42, 82-1 BCA ¶ 15,651. One common situation that can trigger the changes clause is where the owner or his architect makes or issues a clarification of some provision of the contract. While the owner or architect believes he is assisting the contractor with the clarification, the contractor, however, may interpret the clarification as an instruction that conflicts with a proper interpretation of the contract. These types of situations are some of the most difficult to recognize and frequently cause some of the biggest disputes on a construction project.
A comment or suggestion, intended by the architect or owner to clarify contractual intent, creates risks for both parties. The owner or architect generally does not understand that the clarification may be a change in scope that can create a cost increase. If they were aware that the comments would be construed as a change, they wouldn’t have made them. Nevertheless, even though the comments and suggestions may not be couched or intended to be an order or directive, the contractor may interpret them as such and proceed as instructed with the intent of filing a claim.
When the contractor receives suggestions or comments from the architect or the owner that the contractor believes to be a change, it is important that the contractor give immediate notice to the owner. The contractor should not proceed with this “change” until he asks for and receives a more definite order or directive from the owner. This gives the owner the opportunity to reassess the clarification in light of the contractor’s contention that it amounts to a change. Rather than pursue something that will generate a claim or a dispute, the owner may reassess and withdraw his comments.
The worst problems occur when the contractor proceeds with work consistent with the comments or suggestions without objection or notice. After the work is done, the contractor then files a claim. The first question to answer is whether there was ever a directive or “order” that authorized the contractor to proceed. If not, the courts may rule that the contractor was a volunteer and therefore not entitled to additional compensation.
It is incumbent upon both owner and contractor to be careful in these types of situations. To the extent that clarifications are issued, they should be issued on a contract form (i.e., field instruction) that the contractor clearly understands is not meant to be a change. Many change order clauses give the project architect the authority to issue minor changes to the work that will not affect the cost of or time for performance. Procedures should be in place to allow a contractor to object to any such field instruction to the extent that the contractor believes the instruction to be inconsistent with the contract and amount to an extra.
A constructive change can arise from the owner’s interpretation of a contract ambiguity in his favor. In American Asphalt, Inc., ASBCA No. 37349, 91-2 BCA ¶ 23,722, the government’s plans appeared to show that material would remain on site as fill material, but the government intended to show finish grade of paving, not the level for additional fill. The contractor had made no allowance in the bid for the removal of this soil. The board allowed the contractor to recover additional costs of removing excavated soil because the owner-prepared plans were ambiguous as to whether the excavated materials were to remain on site.
A constructive change can also arise where the owner refuses to give the contractor a time extension to which the contractor is contractually entitled, thus forcing the contractor to “accelerate” its work to maintain the original work schedule.
In Norair Engineering Corp. v. United States, 666 F.2d 546 (Ct. Cl. 1981), the United States Claims Court stated three elements that must be proved to recover for acceleration under a changes clause:
(1) That any delays giving rise to the order were excusable (thus entitling the contractor to a time extension);
(2) That the contractor effectively was ordered or required to accelerate; and
(3) That the contractor attempted to accelerate its performance and incurred extra costs.
The Norair court held that the contractor could recover acceleration costs even though the project was over 500 days “late” because the contractor was entitled to 700 days of time extension and had to accelerate to finish “only” 500 days behind schedule.
An example of a constructive acceleration case is Appeal of Monterey Mech., Inc., ASBCA No. 51450 (Apr. 11, 2001) where a contractor was awarded a fixed-price contract to replace water and sewer mains at various Air Force bases in the Pacific. The contractor had numerous problems performing its work as a result of unidentified subsurface obstructions and deficient plans. These problems caused the contractor to fall behind schedule. Rather than granting the contractor time extensions acknowledging the problems it was having, the government issued a cure notice under the default clause threatening liquidated damages and termination.
The contractor ultimately filed a large claim alleging a constructive change caused by the government’s failure to disclose superior knowledge, delays, changes, acceleration, and breach of an implied duty to cooperate. The contractor was able to prove that the as-built information included in the contract was grossly inaccurate causing additional work and delays.
The Board addressed whether or not these facts would support a constructive acceleration claim in light of a cure notice that the government had issued. The Board found that the cure notice issued by the contracting officer effectively was an order to the contractor to accelerate the work. The Board also found that the contractor made reasonable efforts to accelerate and thus was entitled to its acceleration costs.
VIII. WRITTEN NOTICE OF A CLAIM FOR EXTRA WORK
Construction contracts typically provide provisions requiring an owner to be notified in writing within a certain period of time if the contractor intends to file a claim arising out of the work or from an instruction received. Certainly, owners do not want to be surprised at the end of a project by a large claim from the contractor. Funding limitations and other restrictions make it critical to an owner to control project costs including the potential costs associated with resolving claims. Owners want to know as soon as possible whether or not the contractor intends to file a claim. Contractual notice provisions are intended to protect the owner on these occasions.
Problems arise, however, when the contractor does not meet the literal requirements of providing timely, written notice of its intent to file a claim for an extra. A contractor’s failure to give the required written notice may bar its recovery for additional compensation.
Provisions relieving the owner of liability unless timely notification is given may be waived or modified in much the same fashion as the written change order requirement. Courts hesitate when asked to enforce a provision that would cause a contractor to forfeit all its rights. However, courts need some logical and rational basis not to enforce the express terms of the contract.
In State Highway Dept. v. Hall Paving Co., 127 Ga. App. 625, 194 S.E.2d 493 (1972), the contract provided liquidated damages to the DOT if the contractor did not complete on time. The DOT was contractually required to give the contractor written notification of the DOT’s intent to assess these liquidated damages. When the DOT failed to provide this written notification, the contractor argued that the DOT was barred from seeking liquidated damages. The court, however, saw the issue as being “whether the [progress] reports sent by the Highway Department amounted to substantial compliance with the spirit of the notice requirement. The court wanted to see ‘a substantial compliance with the spirit and not the letter only, of the contract . . .’.” 194 S.E.2d at 495.
The court noted that the DOT regularly kept the contractor informed as to the amount of contract time remaining. In addition, the contractor was actually aware that the DOT intended to seek liquidated damages and the contractor could show no prejudice. Finally, the court noted that the contractor may have waived this notice requirement by failing to raise the issue promptly once he learned that the DOT was assessing liquidated damages.
In Clark v. Belleau, 114 Ga. App. 587, 151 S.E.2d 894 (1966), the contractor’s superintendent authorized the subcontractor to excavate additional muck with the promise that the sub would be paid for this additional work once the engineer made a determination of the volume of the excess muck. The subcontractor did not submit a bill or give notice of intent to claim for the extra work but waited until the project was complete to submit his bill. The sub’s excuse was that he was waiting for the engineer to calculate the volume of muck removed. Based on these facts, the court ruled that a requirement for written notice filed within one week of performing extra work would not be enforced. In Batson-Cook v. Loden & Co., 129 Ga. App. 376, 199 S.E.2d 591 (1973), the architect responded to a submittal for the type of brick to be used on the project by writing: “chipped or damaged faces shall not be laid up on this project. The contractor is advised to exercise the greatest care in selecting brick to be laid up in order that chips and deformations may be kept to a minimum . . .” The mason ultimately filed a claim with the contractor for the extra work to cull out a large number of chipped bricks. The contractor argued that the mason failed to provide the timely written notice required for pursuing a claim.
The court affirmed a jury verdict for the mason, finding that as a matter of fact that the contractor as well as the owner was aware that the mason believed that the work required by the architect’s instruction was excessive and would justify additional costs.
Failure to give prompt notice may prevent a contractor from recovering compensation to which he otherwise would be entitled. Disputes can be minimized by prompt, written notice to the owner, contractor or architect, as the case may be, that the contractor intends to make a claim for changes or instructions issued.