Demystifying Change Order Provisions

Regardless of how well planned a project is, there will almost always be one change order. Whether it’s because of a change to the scope, or an unexpected issue, they’re a common document in the construction process. However, change orders aren’t always paid out. Sometimes a project can be completed, but still have outstanding change orders. Contractors must understand the legal process around change orders to protect themselves from these issues.

What is a Change Order?

A change order is fairly self-explanatory, it is a document that orders a change. Where it gets more complicated is when looking at the grander scheme of the contract. The contractor’s contract will specify what needs to be in a change order so that they can be paid out on it. So what a change order is and what goes into a change order will differ from contract to contract.

Common elements in a change order will include:

• Documentation of what must be changed, or the change in scope.
• The change in price, new cost of materials, labor and other costs must be agreed upon and listed in the change order.
• The change in time and schedule must be listed in the change order.
• It must be signed by all required parties.

However, that’s not usually how it happens. Usually someone directs the contractor to make a change in the field. There isn’t paperwork, or the contractor is told to just send the change order later. This can lead to legal issues later at the project close out.

Parts of a Change Order

A change order will consist of four parts, the change in scope, the change in cost, the change in time or schedule, and the signatures of all parties. However, not everyone fills in the time portion of a change order because it can be unclear how long it will take to complete the change. Leaving it blank can be detrimental to any contractor because if a dispute happens they may not be able to recoup lost hours. Since the hours for the change order say zero the expectation was that the change took zero hours. In court contractors can lose the ability to be paid on the time or delays because of this.

What about Minor Changes?

Many contracts will have lines that say that the subcontractor is responsible for any minor changes in the scope. However, these contracts don’t usually specify what a minor change is. Without this specification, what is a minor change and how does a contractor protect themselves for any work?

One of the best ways for a contractor to be able to protect themselves against and in minor changes is to include language in the contract defining what a minor change is and isn’t. A minor change shouldn’t affect the costs or time to complete. The best way to do that is to define what a minor change is. Wording that specifies the number of hours or the costs that the minor change can occur before it is no longer a minor change will protect contractors.

Contractors should also try to get the minor change in writing. When the minor change is in writing it is easier for the contractor to ensure the work for the minor change is manageable. Or write a follow up email or letter stating the directive, the change made, and any costs and time changes. But this isn’t necessarily possible, which is why it’s more important to have minor costs defined in the contract.

Changes in Scope

Change orders are almost always necessary, but what happens when the work must be done immediately and there doesn’t seem to be enough time to get a written directive?

The first step is to check the contract. Many contracts specify that change in work should never be authorized unless it is in writing and signed by all parties. Referring to the contract and asking for the correct legal process is important. However, it isn’t always practical.

If it isn’t practical, then the contractor can request a written directive with the agreed upon terms. The written directive from the owner or requesting party should detail the changes to be made, time it should take, schedule changes, and any changes in cost and negotiated cost. This can be used to show that all parties knew and agreed to the work changes and can be used later to fill out a more formal change order.

Conclusion

Contractors must always read their contract so that they can make sure that they are protected from litigation and can protect their bottom line. For more tips and tricks regarding change orders check out the On Demand Webinar Demystifying Change Order Provisions with Bill Haydt of Trauner Consulting Services, Inc. and Tony Byler of Cohen Segalis Pallas Greenhall and Furman PC.