The Dotted Line: Avoid these change order snafus
It is always important for construction firms to track changes to their construction agreements so that they can bill their customers appropriately. It might be even more important now, however, as many general contractors and subcontractors get back to work after extended COVID-19 shutdowns.
Contractors cannot afford to leave any money on the table right now, which means they should pay even more attention to issues that could affect their bottom lines.
“The one thing that change orders and COVID have in common is you’re going to need good hygiene for both,” said attorney Josh Leavitt, a principal and chair of the construction law practice at Much Shelist P.C. in Chicago.
This includes not letting best change order practices — timely notices, field emails confirming changes, actions otherwise preserving rights and remedies — fall to the wayside without the proper documentation.
Contractors need to avoid the mentality of ‘Well, let’s just get the work done, and we’ll talk about change orders at the end of the job.’ That is the prescription for disaster,” Leavitt said.
A sample email script that a supervisor or project manager in the field could send to the customer after being asked to make a change or perform extra work, the attorney said, depending on the contract requirements and the situation, could look like this:
You directed me today to do this [extra work] in the field, and we’re going to do it and not slow down the job. But I’m making an email record that we told you that there is going to be a cost for the extra work, and we’re going to price that out to you and give you that pricing, but, per your request, we’re going to go ahead and get the work done.
Many contracts will say that contractors — both general contractor and subcontractor — should only perform extra work after they have received a written change order, but “that’s not the real world,” Leavitt said.
There are some states, he said, in which case law validates an oral change order as long as the contractor has clear and convincing evidence that it was asked to perform the work. But it’s better that the situation never comes down to trying to prove change order claims that way.
“Send those emails out … follow up and preserve those rights,” Leavitt said.
Here are four other issues to consider in the current environment:
Contract omissions. If a particular item of work is left out of the contract, said attorney Elizabeth Marchionni, partner at Kaufman Dolowich Voluck LLP in New York, it might not be clear whether it is extra work or if it is something necessary to advance the work covered in the contractor’s original scope.
Where some contractors slip up, she said, is in not asking for clarification through a Request for Information to the general contractor, owner or architect, whichever party is appropriate.
“If you think that there is an omission that calls for you to do extra work, then it’s better to get them … to either agree or disagree with you that it’s extra and to know going into it whether or not this will be a dispute or a claim rather than just barreling ahead with the work and saying, ‘Oh no, that was outside my scope.'”
Inconsistencies in scope of work. Unlike a change order that flows from the owner to the general contractor and then to subcontractors, Marchionni said, sometimes the general contractor will ask a subcontractor to perform extra work that is not actually extra as far as the general contract goes.
For example, she said, perhaps the subcontractor is required to perform one round of a particular test. However, the general contractor might be obligated to perform multiple rounds of that test.
Subcontractors need to regularly check their contracts to make sure the work they’re being asked to perform is part of their scope and not something that warrants a change order.
Extensions to the schedule. Some contractors, Leavitt said, might forget that securing an extension to the schedule is something one must get approval for by change order.
“[Contractors] are very good at recognizing that they need to get design changes approved as change orders, but then they forget to issue the proper extension request paperwork when they have a delay,” he said.
Again, depending on the applicable law and contract language, without a change order to reflect an extension to the project schedule, contractors could be on the hook for liquidated damages if they are not complete by the contract deadline.
Loss of efficiency. If in the post-COVID-19 job environment, Leavitt said, workers are required to adhere to social distancing and other safety guidelines, and if this prevents them from maintaining a productive level of work, that could be the basis for a change order claim, depending on the contract and the state one is in. However, it would be crucial that field superintendents and foremen document these conditions and inefficiencies in great detail in their daily logs.
This type of claim would also be relevant in situations where workers are delayed or crowded out of their workspace by other trades at no fault of the contractor making the claim.
“It’s often the language that’s in those daily reports that determines the likelihood of success,” Leavitt said.
When not to use a change order
Sometimes, Marchionni said, contractors think that the cost of extra general conditions such as site supervision or bond costs associated with a delay warrants a change order, but that is not always correct. Those additional costs might be part of the delay claim, which is separate from a change order claim.
“There could be delay claims or damages that you incur as the result of an extended duration,” she said, “which we shorthand as a delay.”
What could help contractors identify potential change orders along the way is a regular review of the budget against the actual numbers through a job cost accounting system, said Michael Ceschini, managing member at Ceschini CPAs Tax & Advisory PLLC in New York. In addition, he said, it is not uncommon for accountants to get involved in contract review.
The best-in-class contractors, he said, take a team approach and involve their accountant, attorney and even the surety company before signing a contract, allowing those trusted advisors to give input.
Communication between accounting, administration and the field is also crucial.
“Whenever change orders are being missed,” Cheschini said, “it is almost always the field not communicating with the office.”
The bottom line, Marchionni said, is everything relates back to the contract and how well contractors abide by its requirements.
“I can’t stress enough how important it is to know what your obligations are under the contract terms,” she said, “to properly notice, properly document and properly present your claims, whether they be for extra work or for other costs and damages that you incur as a result of any number of things that can go on in the job, including doing extra work.”
This article was originally written by Kim Slowey and appeared here.