December 05, 2018

Construction 101: The Basics of Change Orders

By Luke J. Farley, Sr., Conner Gwyn Schenck PLLC, Raleigh, NC, Young Lawyers Division

The term “change order” is ubiquitous in the construction industry, but you’re unlikely to have come across it anywhere else. As a new practitioner, having a good handle on change orders is important; it’s the rare case indeed where the parties won’t have at least one disputed change order.  This article will discuss:  (1) the basic definition of a change order, (2) “changes in the work” clauses and the legal basis for change orders, and (3) a few pointers for handling change order disputes.

What is a Change Order?

 “Change order” is just the industry term for an amendment to a construction contract that changes the contractor’s scope of work. Most change orders modify the work required by contract documents (which, in turn, usually increases the contract price) or adjust the amount of time the contractor has to complete the work, or both. For there to be a valid change order, the owner and contractor must both agree on all terms.

Classic examples of change orders include the owner’s desire to move the location of a wall to accommodate some other design element, adding a window where there was none in the original plans, or changing the finish of the floors from tile to terrazzo. These types of change orders are known as additive change orders, but there are also change orders which delete portions of the work; these are known as deductive change orders and typically result in a decrease in the contract price.

Change orders exist because of the dynamic and complex nature of construction projects; for most projects, it’s simply not possible to anticipate every challenge or variable from the outset. Mistakes or ambiguities in the plans, the owner’s desire to make aesthetic changes to the project, and the owner’s need to reduce costs can all be addressed by means of a change order.

“Changes in the Work” Clauses

Most all construction contracts have a “changes in the work” clause that establishes procedures for revising a contractor’s scope of work. A “changes in the work” clause is an essential part of any construction contract and allows the parties to agree in advance to a process for making changes to the work and pricing those changes.

All major standard form agreements address changes in the work, usually as part of the general conditions. For instance, in the AIA-A201 2017 changes are addressed in Article 7, while in the AGC ConsensusDocs 200, the change provisions are found in Article 8. The standard form agreements all assume change orders will be written documents. Custom contracts often explicitly state there can be no oral modification of the contract and only signed, written change orders will be binding on the parties.

The process for agreeing to a change order begins when one of the parties to a contract requests a change to that agreement. The contractor prepares a “change order proposal” quoting a price for the extra work. Once the owner and contractor have agreed on scope, price, and schedule, a formal, written change order is prepared and signed by all parties. Then, the contractor proceeds to perform the changed work. 

At least that’s how it’s supposed to work. Under field conditions, where the need for changes in the work can arise suddenly and there’s constant pressure to keep to the schedule, the standard process isn’t always followed and change orders aren’t necessarily reduced to writing. Are those changes still binding on the parties? In most cases, yes. Even if the parties don’t follow their own contractual procedures for making changes, they can still bind themselves to change orders through words or conduct which waive the “changes in the work” clause.[1] So, for instance, if the contract requires written, signed change orders, but the engineer in the field directs the contractor to make a change in the work with the understanding that the parties will set a fair price later, the owner won’t be able to deny paying for the change just because it wasn’t in writing. 

Construction Change Directives

Change orders are not the only way for the owner to change the work. Most contracts also allow the owner to unilaterally change the work without agreement from the contractor through a “construction change directive” or “CCD.”[2] Remember, issuing a change order depends on an agreement between the owner and the contractor as to scope, price, and time. When the parties cannot agree, the owner is empowered to issue a CCD and the contractor must carry out the change—even if the contractor doesn’t know how much it’ll be paid for the extra work. Under the AIA form contracts, the additional compensation or completion time due for the CCD will be determined by the architect instead of by agreement of the parties;[3] if the contractor disagrees it can make a claim against the owner under the contract or sue. What the contractor can’t do, unfortunately, is refuse to perform the work. Failure to carry out the work of a CCD is a breach of contract.

The value of the CCD from the owner’s perspective is that it minimizes delays and allows the work to proceed even if the parties can’t agree about the additional time or money. But enforcing a CCD against a contractor seemingly conflicts with the traditional common law rule that modifications to contracts must be mutual and supported by consideration.[4] Nonetheless, courts routinely enforce CCD provisions.[5]

Cardinal Change Doctrine

While an owner’s authority to require changes in the work is broad, it’s not unlimited. The cardinal change doctrine protects contractors from overreach. Simply put, the cardinal change doctrine holds that some changes in the work so fundamentally alter the original obligation undertaken by the contractor that it would be a breach of contract by the owner if the owner insisted the contractor perform the work.[6] To illustrate, if an owner and a contractor entered into an agreement for the construction of a hotel, but the owner later decided to build a movie theater instead, the cardinal change doctrine would relieve the contractor from building the movie theater even if there was an otherwise valid CCD directing the contractor to build the theater.

The cardinal change doctrine can also be invoked if the totality of the change orders on the project results in a fundamental change to the original work.  Therefore, it’s important to be mindful of the entire scope of the project and the change orders issued to date when evaluating your client’s position. 

Tips for Change Order Disputes

Change orders create a lot of work for construction lawyers. Owners and contractors can never seem to agree on whether something is a change (which costs more money) or part of the original contract scope (and included in the original price). The next time you’re you are litigating a change order dispute, keep these tips in mind:

  • Figuring out whether a change order is justified is fact-specific. To determine whether a “change” is really a change, look at pre-bid documents, responses to RFIs, field work orders, and the parties’ course of dealing. Also consider order-of-precedence clauses which determine whether written specifications or drawings control.
  • Contractors often proceed with extra work without first securing a written change order. If the contractor doesn’t does not have a written change order or CCD, consider whether the parties may have waived the requirement through their words or actions.
  • A change to one contract doesn’t does not necessarily change another. If the owner and the contractor execute a change order, but the contractor fails to obtain a change order from its subcontractor, there may be a gap in the scope of work. Be sure subcontractor clients get the change orders they deserve.

Conclusion

The change order is a fundamental concept in the construction industry. Change orders give owners and contractors flexibility to address the unexpected. But the flexibility comes at a cost—often in the form of attorneys’ fees. You can help minimize that cost by advising clients to be sure they get detailed, written change orders, and, if nothing else, document everything. If a dispute rolls around, they’ll be glad they did. 

Endnotes

1. See Son-Shine Grading, Inc. v. ADC Const. Co., 68 N.C. App. 417, 315 S.E.2d 346 (1984)(Verbal agreement between superintendents for contractor and subcontractor sufficient to amend subcontract despite clause prohibiting verbal amendments); cf Charles T. Driscoll Masonry Restoration Co., Inc. v. Cty. of Ulster, 40 A.D.3d 1289, 1291–92, 836 N.Y.S.2d 362, 365–66 (2007)(Contractor obtaining written change orders during the time in dispute showed the parties did not waive formal requirements of changes clause).

2. CCD is the term used under the AIA documents. The equivalent term under the ConsensusDocs series is an “Interim Directive.”

3. The architect does not play a role in determining additional compensation under the ConsensusDocs series. Instead, the owner and the contractor must negotiate themselves or make claims under the dispute resolution provisions of the contract. 

4. See, e.g., L.D.F. Family Farm, Inc. v. Charterbank, 326 Ga. App. 361, 365, 756 S.E.2d 593, 598 (2014), adopted, (Ga. State Ct. 2014); Course, LLC v. JMR Golf, LLC, 222 N.C. App. 492, 502, 731 S.E.2d 474, 480 (2012); Martin v. Pack's Inc., 358 S.W.3d 481, 484 (Ky. Ct. App. 2011); Jole v. Bredbenner, 95 Or. App. 193, 196, 768 P.2d 433, 435 (1989).

5. See Oneida Indian Nation v. Hunt Constr. Group, Inc., 88 A.D.3d 1264, 1265, 930 N.Y.S.2d 729, 731 (2011)(Recognizing that a guaranteed maximum price was modified by a CCD); RDP Royal Palm Hotel, L.P. ex rel. PADC Hosp. Corp. I v. Clark Constr. Group, Inc., 168 Fed. Appx. 348, 354 (11th Cir. 2006) (Owner’s issuance of CCDs after date of substantial completion waived claim for liquidated damages); Veolia Water N. Am. Operating Servs. LLC v. City of Atlanta, CIV.A. 1:06CV1457TWT, 2008 WL 5169525, at *7 (N.D. Ga. Dec. 8, 2008)(Parties’ conduct treated revised scope of work as a CCD).

6. Gill Constr., Inc. v. 18th & Vine Auth., 157 S.W.3d 699, 723 n.2 (Mo. Ct. App. 2004), as modified, (Feb. 1, 2005); J.A. Jones Constr. Co. v. Lehrer McGovern Bovis, Inc., 120 Nev. 277, 293, 89 P.3d 1009, 1020 (2004).