It is a basic and perhaps revealing fact that the overwhelming majority of legal cases involving construction contract disputes arise from change orders (e.g. requested or required alterations) on the project. An elderly litigator once told this writer that if it were not for arguments over change orders he would have had to find another way to make a living.
Why is this so?
There is little in life as complex as a construction project. Consider the number of entities involved in a typical “simple” development project: The owner of the land; the financing institution or institutions; the supervising governmental agencies, federal, state and local; citizens groups; neighbors to the land; the architect; the engineer; the developer who may or may not be the general contractor; the various trades and subcontractors who may or may not have union personnel involved; material men of each type of material, the actual manufacturers of the materials and tools including rental companies for the tools and/or fencing; the building inspectors; the insurance companies; at times the bonding companies; the realtors; and, last but not least, the buyers of all or part of the development and their lessees, associations and own insurance companies. A typical business agreement has two or three parties involved in the transaction. A construction project has a dozen or more.
Note that the motivations of the myriad persons above are far from uniform. The developer is concerned about completing a sellable project as soon as possible since financing costs a sizable amount each day; the architect wants a project that meets the engineer’s and developer’s demands and the banks financing limits but undoubtedly also wants a project of aesthetic and design value; the governmental agencies each have their own list of criteria and are subject to pressures from local citizen groups who may not want any project whatsoever, etc, etc. In most contractual situations, the parties seek a single purpose, e.g. to exchange money for product, to have a service performed for an affordable fee, etc. In construction, such singularity of purpose is seldom achieved.
And months or years before the above groups of entities have their input and involvement, various experts seek to create a plan of development and construction asking their legal counsel to generate the documents that will allow the banks to finance and the builders to put the matter out for bid and enter into binding commitments.
Even if the needs of the particular project were not subject to the vagaries of the site and alterations in specifications needed by the owners or construction requirements, the interaction of the above many entities would invariably result in changes on most projects as they progress.
Even a simple “non development” project has close to half a dozen entities involved, even if owner financed, since the general, the building inspectors, material men, the insurance companies, and the subcontractors, engineers and architects/designers still are usually involved.
With this complex system of construction, it is often a wonder that any project ever finishes on time or even close to what the original plans postulated! The fact that thousands of projects are completed each month in California speaks well for the professionalism of the various people in construction and the fact that the system, while complex, clearly does manage to accomplish completion in almost every case.
But one invariable result of the complexities is the need to often and sometimes constantly alter various aspects of the project. Whether it is adding extra work, altering existing specifications, altering time lines and critical paths, or the numerous other changes arising in a project, anyone who has been in construction for any length of time is aware that projects often have to be adjusted based on changes in requirements or unpleasant surprises.
And it is equally inevitable that confusion not only about what is a change order versus part of the original bid and how/if to pay for the change order will be a matter of dispute and, often, litigation.
Many construction contracts, especially the AIA and other types of “standard” contracts have long and complex provisions regarding change orders and what criteria will apply to make them enforceable. Nevertheless, despite these provisions, perhaps often because of them, change orders remain matters of dispute.
The reason is that despite provisions in the contract, the Courts have quite often have utilized a criteria of “equity” or “fairness” in determining whether they will apply the rigorous criteria imposed upon enforceable change orders in contracts and arbitrators are, if anything, even more loathe to enforce what they consider harsh provisions eliminating the right for fair payment for changes in labor to be performed or material to be installed on a contract. Mechanics liens and stop notice rights are “equitable” remedies that grant judges and arbitrators great leeway in determining whether provisions in a contract are to be strictly construed. The reader should review the many articles on change orders on the Retainer Pages of this website for the numerous instances of change orders prohibited by the strict wording of the contract-but allowed by the trier of fact nevertheless.
And the result is that judges and arbitrators are constantly called upon to decide many of the disputes with owners, developers and general contractors or subcontractors locked in argument over whether a particular alteration in the project requires an alteration in compensation. (Note that even speeding up a project can create a claim for additional compensation due to the need Which, in our opinion, is rather like hoping that that tooth fairy will come along and pay for your tooth.
Business is business and the entire purpose of creating expertise in bidding is to hone one’s skills to accurately and fully create a bid that will get the job done, make a profit, and beat out the competition. To make a bid but ignore the likely effect of change orders in superseding much of the bid is to create a structure in which one’s skill is to be supplanted by the mood and sense of fairness of a relative novice to construction, the judge or the arbitrator. Again, a client put it better than this writer can: “If I depend on the judge and his sense of equity, I am depending on his mood on the day of the hearing. If he just argued with his wife, I might find myself working for free!”
But if judges and arbitrators often will not enforce the tough language of change order provisions, is there any point in creating them?
Yes, for quite often a judge or arbitrator will enforce the provision, especially if it is fair, and inevitably they will read the provisions closely and use them in determining some aspect of what the consider fair compensation.
In our opinion, the vital part is to create not a mindlessly vague or ruthlessly “tough” provision as to change orders so much as a fair and logical system for change orders. Vague provisions do not give protection at all since the parties do not know what they must do to protect their rights. As for those remarkably one sided provisions seen often in use by large developers or owners, this writer has seen numerous provisions that are patently unfair evaded by the Courts or arbitrators who usually simply are trying to do the “right thing.” This reluctance on the part of a trier of fact to enforce such a provision creates uncertainty even in the mind of the party in whose favor the provision was drafted since it is unclear if the provision will be actually enforced. Thus too much “power” in one’s provision actually acts to undermine its effectiveness.
A typical example of the “too strong” provision is the clause which states that the change order will not be paid for unless an uniquely authorized representative of the company requested same in a prior writing, even if the company benefited from the change order and it was requested by an unauthorized agent. (Typically an emergency situation arises, the job sub foreman who is not “authorized” begged the subcontractor to do the extra work yet, since the contract provides that the home office must approve in writing any change order and the home office, three hours ahead on the East Coast, was closed at the time, the change order is later contested after the job is completeg is that many subcontractors or contractors do not realize the fragility of such clauses or simply do not have the resources to test them in court or arbitration, thus end up losing even without a fight.
And the fight can be expensive for both sides, depending on the forum in the contract and the provisions regarding attorneys fees. The reader should review our article on Binding Contracts as well as Arbitration on this web site.
Most states, including California, have statutes that provide doctrines by which the trier of fact can avoid such “unjust enrichment” to the owner or general contractor. Using such doctrines as estopple, waiver, unclean hands and the like, the judge or arbitrator can claim the clause was “waived” by the owner or that the owner should be estopped from enforcing it.
The result is that both sides are unclear as to whether the clause will be enforced, predictability is eliminated, and litigation more likely. What should be fair provisions for the likely events of a project-change orders-instead exacerbate the uncertainty and cost of the change order.
Larger entities are especially enamored of extremely long complex contracts that were created by large prestigious law firms often decades before and which are declared to be “a form we cannot alter,” or the like and which they feel give them tremendous protection due to the often onerous one sided clauses contained in the contract. Overwhelmed by the pages and the cost of attorney review, smaller companies often just sign the documents with a sigh and hope things will go right with the project.
It is a matter of some grim amusement to our office to note the shock that the larger entities encounter when arbitrators or judges refuse to enforce clauses that, while expensive to draft, perhaps, and long used, are simply outrageously unfair. It is equally revealing to note how the smaller entities, once they finally read the clauses or have them explained to them by counsel, are both shocked and somewhat embarrassed that they would have agreed to such remarkable provisions.
In reality, neither party is served by truly unfair contracts though it may require tens if not hundreds of thousands of dollars in attorneys fees to demonstrate that to those unused to the real world of construction litigation.
Sixth Rule: If a fight has begun and you did sign one of those unfair provisions, do not give up but get good tough legal advice before you surrender. You might have more power than you think by using the tools such as mechanics liens and stop notices or claims on bonds or warranties which utilize equitable principles not necessarily ruled by the contract terms. Be sure to consult with an attorney who has been in those types of fights before.
4. SUGGESTED CLAUSE CRITERIA: WHAT IS FAIR?
Get in line with realities on a job site concerning change orders. Most occur at the last minute or in a tense situation. An efficient clause would be to provide that written authorization for change orders will be required but in an emergency situation the subcontractor can proceed with written authority from the job foreman on site but only will be paid the reasonable value of its services which are precisely defined by a fair formula inserted into the contract. Any trier of fact is going to enforce that clause, both sides know the formula, and the reality of the conditions of the job site are not distorted by the wording of a contract which seeks to impose unfair conditions on the parties. (Typical formula: cost of labor and materials plus ten percent if not overtime and fifteen percent if overtime.)
One would think such a clause, which any good attorney would draft, would be in most contracts. It is not. Instead, in a mistaken notion that more powerful clauses which give tremendous advantage to an owner or developer will somehow allow them to avoid fair payments, one sided contracts are the norm in many forms used by the larger companies.
A fair system for evaluating change orders allows not only fairness but predictability to enter the relationships but that does not mean that the builder is allowed to alter at will. It still must be provided in the contract that change orders must be approved in writing and in advance. Change orders without prior approval can not be allowed since it would allow the contractor or sub to ignore the contract entirely and convert much of it to a time and materials contract.
/5/ Assuming a change order is requested, it is absolutely vital to go into high gear in proactive protection. Immediately obtain legal advice to walk you through the process. Know precisely what are your rights and liabilities. Commence effective written communication with the other parties (with review by your own legal counsel ahead of time) so that a record is kept and there can be no later question of who said what to whom. Do not rely on your “buddy” foreman on the job site to protect you if the home office seeks to turn on you after you have done the change order…it may be his job on the line and you will probably find you are expendable. (So many of our clients come to us sadly stating words to the effect that “Joe said he would protect us, not to worry and now he won’t even return our calls.”)
/6/ And if things begin to go wrong, immediately get advice on what remedies are available since most equitable remedies in construction projects have rigid and critical time limits.
6. CONCLUDING THOUGHTS
What every lawyer would like, of course, is for a perfect clause to be already executed by the client before the client comes into the office with an existing problem. In an ideal world this would certainly happen. In reality, we normally encounter clients already in trouble with clauses of dubious value.
If you are still negotiating a contract, concentrate on the change order provisions and get them right. If you have already executed a poorly drafted clause, take the proactive steps above and be ready to enforce the rights you still have left…and next time around, fight for a better clause in your contract.
What makes construction an interesting and rewarding field is that something of value is created or improved by a large group of people working, hopefully, in concert. Such efforts necessarily require continuous and active cooperation and inevitably such cooperation will at times cease to exist.
The role of contracts is to regularize and make predictable what occurs when other types of cooperation break down. Given the frequency of such “breakdowns” with change orders, the professional in construction or the owner of a project will understand the need to create excellent clauses that are fair and predictable…and to make advance plans as to what to do if such clauses are, for one reason or another, not in effect during the progress of a project.
Change orders will happen and many of them will cause problems. As the Boy Scouts motto goes: “Be Prepared.”