Change order myths demystified

Construction attorney Susan Linden McGreevy explains the myths and misunderstandings about change orders

I have often thought that without changes and change orders, I would never had developed a law practice concentrating on construction. The general belief among owners is that contractors love changes — they can mark up costs to whatever the market will bear to make up for low initial bids. The general belief among contractors is that owners use the change directive process to get a lot of extra work without having to pay for it for months or years, and put contractors through the wringer to get paid.

Yet changes are (almost) inevitable. They are so engrained in our industry that people don't often step back and consider the whole concept of changes, to see that they don't necessarily have to be a “given” and that contractors could exercise more control over how these little devils are used in construction. Let me explain some of the myths and misunderstandings about them.

First, let's start with the fact that there is no law that says that you have to have changes or change orders in a construction contract. I have seen contracts (generally prepared by the lawyer for the owner hiring the contractor) that do not provide for changes. In such a case, the owner has no right to insist that the contractor do anything that was not part of the original scope of work. Although I assume that owners who felt burned by changes in the past deliberately chose this language, it is, nevertheless, a terrible idea. Until the perfect set of plans and specifications is produced, some flexibility has to be allowed or an owner could end up with plumbing on the wrong side of the walls.

Second, there is no law that says that a construction contract has to provide for “change directives,” “force accounts” or any other means by which an owner can direct a contractor to do work now and argue about whether it is an extra or how much time or money is owed for it later. I have seen a growing number of contracts (again, prepared by the owner, or his or her lawyer) that seem geared to maintaining “control” by not allowing any changes unless they are agreed to, in writing, in advance. This gives the contractor a perfect excuse not to perform the change and can produce the same result as having a no changes clause: giving the owner no right to order changes.

Third, there is no law, or even logic, that the contractor has to be the one to finance changes until the end of the job. Contractors are not banks, yet they are routinely used as such by owners who order changes, but refuse to execute change orders, which can then be billed. Some form contracts — DBIA and the new ConsensusDOCS — provide that 50% of the estimated value of the change will be billed provisionally, so that both sides will have some risk/reward in the process, but this is still by far the exception.

Fourth, there is no reason why all of the undisputed parts of changes can't be billed and paid as part of the next payment application. Many form contracts now contain this language, but the owners frequently cross it out. I have yet to hear a convincing explanation from an owner's lawyer as to why this is fair. With both the third and the fourth points, the contractor has to be careful not to give up any rights in monthly lien waivers, another reason why postponing reconciliation and payment ends up hurting the contractor.

Fifth, who says that contractors (and subs) have no business contacting the owner's lender before performing large changes? Some form contracts contain provisions that allow the contractor the right to see that financing is in place before performing work. There is no reason why a subcontractor shouldn't be able to see it too (especially in states where general contractors are allowed to insert “pay-if-paid” clauses in subcontracts). Lien rights are good to have, but never as good as getting paid on time in the first place. Many lenders actually insist on knowing about and approving changes because they don't want to end up with an upside-down project either. Transparency is a great thing when it comes to construction financing.

Sixth, there is no reason that the parties can't agree on unit prices or alternates in advance, so that if and when there are changes, there is no need to have disputes over what they should cost. The more potential issues that can be negotiated in advance, such as unit price adjustments if quantities are significantly changed, the quicker contractors can get their money.

Finally, there is a legal limit to how many changes an owner or general contractor can make. No matter what the contract says (in most cases, but not all cases), if the amount or type of changes made end up being “beyond the contemplation of the parties” a court may well not enforce them. For example, a plumbing contractor can't be forced to do electrical work that has nothing to do with its scope, for which it is not licensed and has no experience. A $5,000 contract can't be converted to a $5 million contract through change orders — unless the parties both want it that way.

Susan McGreevy is a partner at Stinson, Morrison, Hecker LLP, Kansas City, Mo., 816/842-4800, e-mail [email protected].

TAGS: Law