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How to improve the change order process

Steps that contractors can take to improve collections on change orders

At the time a project contract is signed, everyone is generally optimistic and cordial whether it was competitively and openly bid on (a complete set of documents) or designed and built with just a concept of the final product. Yet, you know that the “honeymoon” phase of a construction project is usually over when the first change orders start rolling in. It seems that no one likes changes.

There is no law stating that there has to be change orders. Unless it specifically allows the owner to make changes, all construction contracts are changeless contracts. If a contract states, “I will pay you $X to do Y scope of work, the contractor can't be forced to do any more or be entitled to do any less work than Y. Also, the owner can't be forced to pay more or be entitled to pay less than $X. If a general contractor does not make a similar agreement with a subcontractor, the subcontractor can't be forced to agree to a change either. Without a changes clause, there can only be a change if both sides agree. This gives the contractor leverage — the contractor could refuse to make the change unless he or she was paid what was demanded.

However, most construction contracts do have change clauses. Contractors don't want to do work that they won't be promptly paid for. So, are there any steps that contractors can take to improve collections on change orders? There are some obvious steps contractors can take:

Give notice that you consider something to be a change.

Read your contract. It probably requires that you notify your customer if you think that something is a change — even a no-cost change. If you don't give this notice, you may never be able to collect a dime. Often, if the owner understands that something is extra and how much more money and time it will take, he will change his mind about the change entirely.

Demand a written order to do the change.

There is often pressure on the contractor to “just do it” with the assurance that “it will be worked out later.” Who wants to tell a customer that you need it in writing from his boss? Yet, that's what the contract probably says — and you can expect that most courts and arbitrators will enforce this clause. So, make them follow the contract if you want to get paid.

Negotiate contract terms for prompt payment for changes.

Contractors are not bankers, but they can end up financing a lot of extra work. It is now common for clauses to provide that only the disputed portion of a change can be held back. Also, the owner is usually required to front half the estimated cost of the extra work until it can be finalized even as to the disputed part. Such provisions help to level the playing field between owners and contractors.

Negotiate contract terms to verify the customer has money to pay for the change.

While most owners borrow enough to cover their contract cost, they may not have borrowed enough to cover extras. A contract term that allows a contractor to ask for confirmation from the lender that there are sufficient funds to cover the extra work is no longer unusual. These days, banks are more likely than ever to insist that they know about changes and approve them to protect their investments.

Take time extensions into account.

Contractors who do not think to ask for time extensions as part of changes could end up paying liquidated damages that they don't owe. Extra time also frequently generates additional field overhead, including temporary utilities, storage trailers, insurance, etc.

Consult with all trades about the impact of a change.

Just because the change is to reroute ductwork doesn't mean that an electrician, plumber, fire sprinkler or other subcontractor won't also be affected.

Reserve lien rights for unresolved changes.

Many lien waivers are drafted to give up lien rights for all work as of a certain date. If work has been done on changes, but not yet paid for, signing such a lien waiver could be giving up rights. Make sure that you tailor the lien waiver form to accurately reflect what should or shouldn't be covered.

Fully document specific costs of the change.

The moment work is started on a change, the contractor should assign a separate number to that work and record all expenses to that number. Contractors lose a lot of money because, months or years later, they can't prove how much the extra work actually cost.

Know your state's prompt-pay law.

Most state prompt-pay laws don't deal with the subject of changes specifically and admittedly are grey areas. However, by tightening up your contract terms, record-keeping and billing procedures, you can fall within provisions that give you attorney's fees and steep interest if you have to collect - this alone often prompts an owner to pay up quickly.

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