CHANGE ORDERS – The Good, The Bad, and The Ugly – Part 2

So last time, we answered some of the most common questions we hear regarding the change order process.  This week, I want to concentrate on various cases that have come down in Texas that relate to construction change orders and specifically discuss how these cases affect you the contractor.  If you read nothing else in the article at least skip down to the last question and answer for practical advice. 

Ok, I didn’t get a written change order and now the owner is disputing payment for the work, what should I do?
While obtaining written change orders prior to performing change order work is always the best practice, should a contractor perform change orders without a written change order, there is still an opportunity to collect on such change orders in some circumstances.  In Buxani v. Nussbaum, the owner and contractor entered into a construction contract which stated, “Any alteration or deviation from above specifications involving extra costs will be executed only upon written change orders, and will become an extra charge over and above the estimate.”   The evidence in such case showed that the owner of the project ordered the extra work orally and that the owner accepted such extra work.   When the contractor sued the owners for the unpaid amounts, the owners counter-sued for breach of the original contract requiring change orders to be in writing.   Does this factual scenario sound familiar?  I know you’ve all been there.  It might make you feel better to know that the trial court found that an oral contract existed for the goods and services which were not contemplated by the written contract.  The owner argued that mutual assent (a requirement for a contract, whether oral or written) could not be implied when an express contract covering the subject matter already existed.   In response the court stated, “The Buxanis, however, fail to take into account the differences between their written contracts and the oral agreement.  The extra items and services were above and beyond what was included in their written contract with Nussbaum.”   The appellate court held that the parties entered into an additional oral agreement that did not breach the original contract.

Will a promissory note to pay out the change orders protect me from the Owners’ later denying payment?
Another consideration in attempting to enforce a change order which was not executed in writing can be whether the owner later ratifies an oral agreement regarding a change order.  “A ratification rests upon a person’s assent to a prior act or an act of another.”   Such ratification can be expressed or it can be implied from one’s conduct.   “Ratification of a contract occurs when a party recognizes the validity of the contract by acting under the contract, performing under the contract, or affirmatively acknowledging the contract.”  A party cannot withdraw the ratification and avoid the agreement, once the agreement has been ratified.   Also, when a party’s actions are inconstant with an intent to avoid an agreement, such actions have the effect of ratifying the agreement.   The Court used this reasoning to hold that an owner could ratify an oral request, acceptance and promise to pay for such services, by later confirming its promise to pay or by partially paying for such services.  When faced with this situation, it is advisable that Contractors who are owed money by an Owner, obtain verification, in writing, in the form of a promissory note so that the evidence does not come down solely to a he said she said situation.

My contract requires change orders to be in writing, however, I complied with a request from the owner for an on-the-job change without getting prior written approval.  Can the owner’s now deny paying me by arguing that I can’t enforce our agreement because it was not in writing?
Another consideration in attempting to collect on a change order which was not approved in writing prior to the performance of such change order is whether a contractual provision requiring written change orders was waived by the owner. “Waiver, the voluntary relinquishment of a known right, is sometimes spoken of as intentional conduct inconsistent with assertion of a known right.”   “Silence or inaction, for so long a period of time as to show an intention to yield the known right, is enough to prove waiver.”

In Travis-Williamson County Water Control and Imp. Dist. v. Page, the construction contract at issue specified that no claim for extra work would be allowed unless ordered in writing.   The evidence in the case showed that the owner of the project ordered the extra work orally and that the owner accepted such extra work.   The court held that such evidence constituted waiver as a matter of law.   By orally requesting, accepting and promising to pay for goods and services from a contractor, which were not contemplated by the written contract on the project, without requiring that such additional agreements be reduced to writing, an owner can be considered to have engaged in voluntary and intentional actions which were inconsistent with an assertion of a contractual provision that requires written change orders.

Courts throughout Texas have held that a change order provisions in construction contracts can be waived: Generally, a provision in a construction contract providing that any alterations or deviations must be executed in writing is binding, and there can be no recovery unless the writing requirement is met. State v. Martin Bros., 138 Tex. 505, 160 S.W.2d 58 (1942); D. H. Overmyer Co. v. Harbison, 453 S.W.2d 368 (Tex.Civ.App. El Paso 1970, no writ); Stave v. F & C Engineering Company, 438 S.W.2d 647 (Tex.Civ.App. Houston (14th Dist.) 1969, writ ref’d n.r.e.). However, such a provision can be waived by the actions and conduct of the parties. Mood v. Methodist Episcopal Church South, of Cisco, 296 S.W. 506 (Tex.Comm’n App.1927, holding approved); Travis-Williamson County Water C. & I. Dist. v. Page, 358 S.W.2d 158 (Tex.Civ.App. Austin 1962), rev’d in part on other grounds, 367 S.W.2d 307 (Tex.Sup.1963); Housing Authority of City of Dallas v. Hubbell, 325 S.W.2d 880 (Tex.Civ.App. Dallas 1959, writ ref’d n.r.e.).  The court went on to hold that an award of costs of extra goods and services was warranted under the theory that the written change order provision had been waived and that recovery was proper under the theory of quantum meruit.

Are there any practical hints you can provide me to help me collect monies owed on my change orders?
Despite the fact that a contractor may be able to collect on change orders which were not executed in writing prior to the performance of such change orders, there are some things that contractors should consider in such circumstances.  When a contractor performed a change without a prior written change order, the contractor should invoice such changes as soon as possible.  A contractor should not wait until the end of a project to request payment for a change order.  Moreover, when a change order is performed without a change order, it is also important for the contractor to carefully examine any lien releases which it executes pursuant to a payment on the project.  If the contractor is asked to sign a lien release which states that the contractor has been fully paid up to a particular date, the contractor must not sign such lien release unless the payments include all change orders performed as of the date indicated in the release, as well a contractual work, or the lien release specifically excludes change orders.

CHANGE ORDERS – The Good, The Bad, and The Ugly – Part 1

I want to take some time to discuss with you something that comes up daily within the lawsuits we litigate for our contractors.  Change Orders.  I know, it’s a dirty word.  However, through our practice we have commonly dealt with the issues that arise from the Change Orders and believe that we have developed a strategy to help prevent future change order disputes.  Hopefully, this article will help you answer some of the most common questions we hear regarding the change order process.

What is a change order?

Change orders are a common part of construction projects.  Additional goods and/or services on a project (those in addition to the initial contract) should be provided and/or performed only upon approval of the owner.  Unfortunately, it is far too common for contractors to fail to adequately document change orders.   Properly documenting a change order can not only avoid disagreements over additional costs on a project, but, a properly documented change order can make resolving a disagreement over additional costs easier and less expensive to resolve.  Often times, it is only at the end of a project, when a contractor attempts to collect for additional costs that a contractor may realize the importance of a written change order.

What information should a change order include?

The best way for a contractor to insure that it is able to collect on change orders from an owner is to document the change the change order prior to undertaking the work contemplated by the change order.  Unless specified otherwise in the parties’ contract, a written change order does not necessarily need to be in a particular form, but should contain certain essential information.  A change order should contain the following:

  1. The name of the parties, typically the owner and the contractor;
  2. Identity of the scope of the change in as much detail as possible.  The scope of the change should include any additional work to be performed, any additional materials to be provided, and ideally, the reason for the change.
  3. The change order should also identify the price of the change.  If the price of the change is unknown prior to the execution of the change, then the change order should specify that there will be an additional cost and the basis for determining such cost.  For example if the price will be cost plus a specified amount of profit, the change order should specify such.
  4. One of the most important things to include in the change order is the signature of the owner, indicating its approval.
  5. If the project is a residential project, the contractor should have both the husband and wife sign the change order to insure the contractor’s right to lien the property in the event of non-payment.

What should I do if my contract specifies that “all change orders must be in writing and signed by the owner?”

It is extremely important for contractors to carefully examine their initial contracts to determine whether the contract requires written change orders.  Many construction contracts specify that the contractor is not allowed to request additional funds unless a written change order is executed and signed by the owner prior to the change being performed.  If a construction project specifies that all changes must be in writing and signed by an owner, it is even more important for a contractor to execute written change orders before performing additional work or providing additional materials which are not part of the initial contract.  A contractor can count on an owner attempting to avoid paying for a change that was required to be executed in writing but was not.  If the contractor is providing the contract for the project, the contractor should seriously consider removing any provision requiring written change orders just in case a written change order is not executed. A contractor who is not diligent about executing written change orders should not include a written change order provision in their contracts.

There are numerous reasons why it may be inconvenient for a contractor to fully document a change order prior to undertaking the additional work or cost.  If a contract does not require written change orders to be executed, a contractor should still make an effort to document the change orders in the event a dispute arises. The second best option to executing a formal change order is to execute an informal change order.  A contractor should keep a pen and note pad with him with which he can note the scope of the change and the cost or method of calculating the cost and have the owner sign the page.

What should I do if I didn’t obtain a written change order prior to the work being commenced, as set forth in my contract?

Sometimes there may be reasons why it may be impractical to informally execute a written change order.  For example the change may be immediately necessary and the owner may not be available to execute a written change order.  Sometimes the owner is a person or entity which is out town or out of state.  If the contractor cannot obtain a change order executed by the owner prior to proving goods and/or services in addition to those in the contract, the contractor should document such change through more than just an oral communication with the owner. In the event that a dispute arises regarding change orders, some documentation can prevent a judge or jury from having to decide between what a contractor says and what an owner says.  Although not as good as a written change order, following up an orally approved change order with an email that discusses the change and the cost can be helpful.  Even if a contractor merely recites its discussion with the owner regarding the change and cost, it is better than a mere oral communication.  However, a contractor can request that owner approve a change order via email.  I always recommend putting something at the bottom of the email stating “if you disagree with the contents of this email and the change order described herein, please notify me within 24 hours.  Otherwise, XYZ Company will continue to act upon this mutual understanding and this email will constitute our written change order.”

Next time, in Part 2 of this segment, we will discuss various cases that have come down in Texas that relate to construction change orders and specifically discuss how these cases affect you the contractor.  Hint – the case law is helpful for those that didn’t get their change orders in writing.

Written by:  David Fink, Associate Attorney of Kelly M. Davis & Associates, LLC

Another Reason You Should Have Your Change Orders Documented

Change Order
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