Construction contracts play a huge role in managing changes orders, an inevitable and often controversial part of construction projects. This article is geared towards commercial subcontractors, but these issues arise for prime contractors and owners as well as in residential construction. For ease of reading, the two parties will be referred to as the contractor and the subcontractor.

I have reviewed hundreds of construction contracts between contractors and their subs. Regardless of the type of contract – lump sum, time and materials or cost plus – the contract will generally contain provisions governing change orders. Understanding these provisions and being willing to negotiate reasonable amendments to suit the specific type of project is an important part of reviewing construction contracts.

The way that change orders are addressed can vary hugely from contract to contract. There are two subjects of change orders –  changes in scope, or changes in schedule. Sometimes these two types of changes are separated so that there are different paragraphs addressing the different types, and these provisions are in different parts of the contract. I have a mental checklist of issues to review in the contract, and spotting the two types of change orders is high up on that list.

Another way that the type of change orders is split up in the contract is the source of the change order. Changes mandated by the contractor or changes that arise in the field can be in different parts of the contract. Also, the way to price these two types of changes, complete with budgets and approval process, can be in different parts of the contract, and they can outline different procedures and deadlines to be followed by the change order in order for the change to even be considered by the contractor. It’s important to be aware of these procedures so that a change is not denied based on failing to follow the required steps.

The cost of changes can be an increase or a decrease. Sometimes the changes can be of so little value that it doesn’t impact the budget. These changes are often referred to as “de minimis” and the contract is clear that they will not be compensated. Other times, the change can alter the nature of the contract sufficiently to impact the budget. Some contracts limit the way that a subcontractor can recover for the change. For example, changes in schedule can often only be “covered” by an extension in the schedule, and even that extension can be limited. Contracts also can require changes to be paid on a time and materials basis, which can be a change to a cost plus or a time and materials contract.

Another variation is the approval of the change order. Contracts can limit the project member who can approve the change order. Many construction contracts state that only a senior project manager – sometime even identified by name – can approve a change. These contracts may even state that, without prior approval by this person, the change will not be compensated. In reality, many project changes occur from moment to moment in the field. For example, demolition might reveal the need for a different installation process or component, and the entire project could be held up without changing at the time of discovery. There is language that can be inserted into a contract that can address these “emergency” issues. If the project has some element that the subcontractor can anticipate will lead to change orders in the field, the subcontractor should consider inserting language into the contract to loosen approval.

Finally, before signing a contract that can lead to substantial losses because of the change order restrictions, review these provisions carefully. If you are concerned about convoluted language and many provisions that may seem to contradict one another, it is a good idea to make a written request for clarification. The form of the request can sometimes be evidence of the meaning of these provisions, which can be important to protecting your right to be properly compensated for changes to the project. Getting clear and reasonable change order provisions are critical, and it is well worth the cost of an experienced construction attorney to review the contract and advise you on the requirements and possible amendments. An ounce of prevention is worth so much more than a pound of cure.

MWH

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