As stated elsewhere on this web site, the majority of construction litigation claims derive not from failure to perform or defects in performance so much as the dispute as to whether work or materials insisted upon by the owner or developer were properly included in the original bid price and specifications or constitute “change orders” to the project allowing additional compensation (and time to perform) for the builder.
In short, the average fight one will encounter in construction litigation is a change order dispute and one of our clients once quipped that if it was not for change orders there would be no lawsuits in construction. While an overstatement, there can be no question that one of the primary tasks of the construction professional is to be able to minimize the danger of change orders adversely affecting the project and that is true whether one is an owner, a builder, a sub or a material man.
This article shall try to highlight those typical areas of concern involving unanticipated or “hidden” change orders that an experienced bidder should look for in any invitation to bid and, hopefully adjust into their planning and bid. While there are many other types of hidden change orders, the ones below are, we believe, the typical situations one is likely to encounter in the modern construction project.
“HIDDEN” CHANGE ORDERS: WHAT ARE THEY?
It is in the construction contractual documents that one finds the source of most of the Hidden Change Order problems. Essentially, a hidden change order is any aspect of the contract and related bid documents that will probably result in a need to alter the plans, specs, or work, but which are not necessarily known by the parties to the contract. We have found the following group constitute the bulk of them:
1. Lack of Design Discipline Coordination
2. Defective Specifications
3. Nondisclosure of Information
4. Incomplete Design
5. Latent Conditions
6. Owner Changes
7. Updated Information
8. Improvements in Workmanship, Time and Cost
9. The intent of the documents versus what's included
10. Illegal Restrictions.
1. LACK OF DESIGN DISCIPLINE COORDINATION
The architect typically manages the assembly of the individual designs necessary to complete the facility. Ideally, in the final composite, the walls enclose the steel columns, the beams fit on the masonry, the roof pitches toward the roof drains, and the ductwork, heat piping, water piping, insulation, drain and vent piping, light fixtures, and electrical conduit all fit neatly above the ceiling, without having to cut holes in structural members. The underground piping layout and architectural plans show the plumbing drains in the same location.
If every job went like this, there would be few problems and change orders. However, problems often arise because separate plans and details are developed independently, by separate and, perhaps, unmanaged consultants. Either the designs were completed without full consideration for the other disciplines, or they simply were completed with many false assumptions.
Typical examples include:
· The civil engineer assumed that the architect would provide the finish floor elevations and ADA access grades and routes.
· Even though the water closet dimensionally fell in the same location as the steel column, the architect left the drawings unchanged, assuming that it will get "worked out" in the field, or would be caught during shop drawing reviews.
· The HVAC ductwork drawings were issued without adequate regard for steel beam locations.
· The structural engineer's calculations did not account for the fact that the air-handling units were being mounted on the roof.
· The soils engineer and the structural engineer each concluded the other was required to provide the necessary documentation for an additional extension for the deck added to a building.
These problems arose because the job of coordinating the respective designs wasn't performed properly. Either incomplete information was not given to the design consultants, or the individual designs were thrown together as a package, without the benefit of proper design coordination.
2. DEFECTIVE SPECIFICATIONS
The term "Defective Specifications" generally refers to flawed specifications. This is probably the most fertile ground for the types of changes that typically present the least difficulty in gaining owner approval and payment.
Common reasons for defective specifications include:
1. Cut-and-paste specs
2. Stupid specs
3. Out-of-Date Specs
4. Inconsistencies between plans and specs
"Cut-and-paste" describes the process by which many specifications and project manuals are prepared by architects. Whether prepared manually or electronically, most specifications begin with a generic format. It might be either an existing specification that the architect used for a past similar project, or it might be a commercially prepared standard format, such as those produced by the Construction Specifications Institute (CII). In any case, specifications are rarely prepared from scratch, with solely a specific client's project in mind.
Two factors tend to increase the probability that cut-and-paste will result in errors in the contract documents:
1. The technical specifications tend to be a secondary priority. When the design is complete, the technical specifications and contracts are finally assembled. For this reason, cut-and-paste is sometimes looked at as one of the least costly methods of preparing specifications.
2. The technical specifications and the front-end contract documents are often assembled at the last minute. Only when the deadline of the bid solicitation date looms is serious attention given to completing the specifications.
Stupid specs are similar to "cut-and-paste" specs in that they tend to originate from other sources and are often pasted into the contract documents. They can come from many sources, but common examples include:
1. Product requirements obtained from manufacturers' brochures
The difficulty often arises when several other manufacturers are listed as acceptable, and the words "or equal" are included, because "equal" manufacturers will often have different specifications. If the differences are slight, they tend to go unnoticed. If they're significant, the contractor may be entitled to a change order if forced to provide the "specified" item at an increased cost.
2. Specifications written by manufacturers' representatives
Because the specification preparation process can be tedious and unpleasant, architects may be receptive to a manufacturer's rep's offer to prepare those sections specifying his or her product. As a result, the final specs might reflect the manufacturer's language, even though it might not be exactly what the architect originally had in mind.
3. Specifications written without a specific product in mind
On occasion, a specification will be written without a specific product in mind. Desirable qualities or requirements will be listed, without confirming if they all are available in a particular product. If this becomes a problem, it is usually because some qualities will be found in one product and different qualities will be found in others.
If a specification's age becomes a problem it will often be on a public project, because public projects are subject to variations in political funding. It is not uncommon for a state or federal project to be shelved for two, three, or more years while it waits for the political climate that will allow it to proceed.
A project's time on the shelf increases the possibility that priorities will change. The people in the chain of command will have different authorities. Even the people who designed the job in the architect's office may be working somewhere else. The project architect might even be out of business.
The net effect of all of this is that the original project concept may become altered, and the bases for certain design decisions will be lost. Accountability for design success becomes diffused, and motivation for decisive action necessary to keep on schedule can become nonexistent.
Inconsistencies in the Plans and Specs
If a specification is subject to more than one reasonable interpretation, the contractor generally has the right to choose one of those interpretations. Such inconsistencies have taken the form of:
a) Discrepancies between requirements of the plans and specifications.
b) Differences between small and large details.
c) Differences between initial and final finish schedules.
d) Differences in plan dimensions and equipment locations among design disciplines.
e) Differences between the actual equipment cuts and those details originally shown in the contract.
Impossibilities in the Plans
A designer may follow old habits, fitting together components without consideration for construction means and methods, or not properly coordinating an item with adjacent work. Examples from previous cases include:
a) Foundation wall configurations that did not allow removal of forms.
b) Anchors that were designed to be installed in inaccessible areas.
c) Equipment that could not use available access routes.
d) Illogical construction sequences. (This often can result in litigation with other subcontracts as well as the various subs or material men interfere with or even remove past construction of the other trades)
e) Insufficient physical space. (Both work and storage…and recall SECURE storage space is vital for equipment and materials)
f) Equipment that could not be accessed (after installation) for maintenance.
Nondisclosure is the failure to inform a contractor of design or construction information that is significant to the completion of the project. If intentional, it may be because the inclusion of such information would lead to a corresponding increase in price. Examples from previous cases that were withheld and caused unanticipated financial hardship on the contractor include:
a) A seasonal watercourse that was not apparent in a pre-bid site investigation.
b) Changes in the funding climate that affected the timing or amount of progress payments.
c) The presence of bedrock in areas of excavation.
d) The presence of organic material with unsuitable bearing capacity.
e) Unusual/excessive procedure for staging, lay-down or site access that cut-down on construction productivity.
If unintentional, nondisclosure can be the result of a deficiency in the design effort or simply the failure of an owner to understand the significance of the information to the construction process. In either case, the contractor may have been denied the opportunity to consider the information at the time of bid. Therefore, compensation for the adverse affects of nondisclosure may be justified.
If the nondisclosure is intentional, there may be grounds for fraud and deceit thus allowing the builder to refuse to continue or seek damages.
4. INCOMPLETE DESIGN
Incomplete design is a term that refers to a designer's failure to adequately specify all project components to the level necessary to allow the contractor to proceed with the work. This type of deficiency can appear anywhere in the contract documents. A simple example can amount to neglecting portions of equipment requirements. More common, however, is an incomplete design resulting from the failure to verify that supplementary information is in fact being provided.
5. LATENT CONDITIONS (DEFECTS)
Latent conditions are those that are unknown at bid time. Because the proper relevant information usually is unobtainable by reasonable means, the presence of latent conditions may not be anybody's fault. It is for this reason that owner approval of such change orders can be straightforward if the professionals educate the owner appropriately.
Examples from previous cases include:
1. Subsurface site conditions that remained undetected due to inadequate testing or research.
2. Hidden conditions in an existing facility (such as a renovation project) that could have only been, but were not, disclosed by prior demolition.
6. OWNER CHANGES
Assuming the proper contract language, the owner can order changes in the work, so long as he or she is willing to pay for them. On the positive side, the owner's requirements may change, resulting in:
a) Additional space requirements.
b) More luxurious accommodations.
c) Better equipment.
d) Negative effects might be an altered ability to fund the work and changed circumstances leading to a reduction in the scope of work.
A key element is to educate the owner as to the full ramifications of the change order in all aspects of the construction. What an owner may consider minor may be a major problem for the trades.
7. UPDATED INFORMATION
Improved information seems rather obvious:
a) Information that was not available at the time of bid document preparation may become available.
b) Previously unknown conditions may later become evident.
c) Newer/better methods to achieve a function may be developed.
d) Specific information corrects previous assumptions and allowances.
These and other examples will result in a contract scope change that may be of an easily approvable change order type.
8. IMPROVEMENTS IN WORKMANSHIP, TIME, OR COST
The contractor will often initiate changes of this type. As such, if they result in additional costs, it may be difficult to get the owner to accept even a portion of the responsibility. One way for the contractor to overcome this difficulty is to tie the proposed change as closely as possible to one or more of the other categories described in this article.
Examples from previous cases that were accepted and paid for by the owner include:
· Cost reductions achieving the same or similar function and/or appearance.
· Improvements in time (acceleration) where the current delays are the owner's fault.
· Acceleration where the owner desired a faster completion.
· Significant improvements in appearance, workmanship, and quality that added value.
9. "INTENT" VS. "INCLUDED"
Statements have been included in the Supplementary General Conditions that it was the owner's "intention" to have a "complete" project. In addition, the separate technical specification sections had their own clauses stating a similar objective. Statements like, "It is the intent to have a complete and operating system in every respect", might permeate these documents.
THESE ARE WORDS OF ART INSERTED BY ATTORNEYS TO PASS ON TO THE VARIOUS BUILDERS THE EQUITABLE AND LEGAL RESPONSIBILITY FOR ANY WORK NEEDED TO FINISH UP THE PROJECT. BE CAREFUL AND GET LEGAL ADVICE BEFORE SIGNING OFF ON SUCH PHRASEOLOGY.
There are certain statements of intent that are specific and completely legitimate. The notation in an electrical specification, for example, that the electrical drawings are symbolic and diagrammatic in nature and are intended to show only the general scheme, equipment involved, and the approximate locations of outlets and equipment, is consistent with trade custom and usage. More important, however, is that it is clear as to the manner in which the work is represented.
Statements that unilaterally place design responsibility on the contractor are another story. It may be the "intent" to have a complete and operating system, but it becomes difficult when this kind of statement is stretched to cover up design flaws. The designer might prefer "intent" to result in the contractor's supply of all the components of a complete system, whether or not they have been properly called for, sized, or coordinated.
10. ILLEGAL RESTRICTIONS
This is a category in which the designer either includes requirements or deletes some option contrary to procedure outlined by law. Errors and omissions of this type can force a contractor to complete a portion of the work more expensively than otherwise would be allowed. The most common example of this type of interference is the use of a proprietary specification on a public project. Such a specification is one that is restricted to unreasonably narrow choices (usually source of supply). In such circumstances, the law may provide that several sources of supply be permitted, plus the flexibility to allow a contractor to propose additional items as equal to those listed. If a single product is listed, it can be an indication that the specification has been unlawfully restricted.
Remember, it is the contractor’s license (and, perhaps criminal liability) on the line and the contractor must be fully aware of local, State and Federal requirements since the average arbitrator or Court will assume that a bid was intended to do the work necessary to achieve a project in full compliance with the law.
CONCLUSION-THE SAFE STEPS
A wise old builder once told the writer that change orders are the essence of construction. Less than ten percent of his jobs had been completed without them and he was…by all criteria…one of the most successful builders in our experience. When we commented that such uncertainty must make it difficult to make a good living, he laughed and responded that all professions were full of such uncertainty and that the difference between a professional and an amateur was anticipating…and handling…those uncertainties.
“How many of your trials have gone along the path you predicted one hundred percent?”
“None, really. The best you can hope for is to anticipate and not be too surprised and be ready for the surprises.”
“Same with construction, boy. You show me the plans and specs and by now I can tell you how likely trouble is going to be…but, I’ll tell you, if you know how to predict areas of problems you can solve them ahead of time…or, even better, make more money when things go wrong and the owners comes by wanting the CO. You just have to make sure that the contract doesn’t set you up for free COs.”
“How long does it take you to review the typical contract to check for that?”
“Depends. If it’s a new area or new people I’m working with, perhaps an hour a page…and if it looks a bit odd, I bring you fellows in. Cheaper to use you now than hire you to fight later.”
The above areas of concern are only an outline and any experienced builder could double the list…but the thrust of this article is that knowing what the problem areas normally are can give you a tremendous advantage in both avoiding dangerous commitments…and making more money, not less, when change orders are needed.