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, it is only at the end of a project, when a contractor attempts to collect 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 ensure 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:
- The name of the parties, typically the owner and the contractor.
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. - 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.
- One of the most important things to include in the change order is the signature of the owner, indicating its approval.
- 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.
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, the contractor should still make an effort to document the change orders in the event of a dispute. The second-best option to execute a formal change order is to execute an informal change order. A contractor should keep a pen and notepad 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 would 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 of 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 mere oral communication. However, a contractor can request that the 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.
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