No. 4: Changes
Changes are No. 4 on the list of top ten construction contract terms. Few construction projects go from start to finish without a change. It could be a change in the work, a change in the price, or a change in the schedule. Usually, there’s changes to more than one, and often more than one change. Here we’re going to cover the different kinds of changes, how your contract affects them, and how they affect your contract.
Generally, changes fall into one of three types:
- Change Orders
- Construction Change Directives
- Minor Changes
"Change Order" is a just a technical term for an amendment to a construction contract. When you hear Change Order, think contract amendment. Why? Because a Change Order is a bilateral agreement between parties to the contract – an owner and prime contractor, prime contractor and subcontractor, two or more subcontractors – to change the contract. A Change Order represents the mutual consensus between the parties on a change to the work, the price, the schedule, or some other term of the contract. And, because it represents a mutual consensus, a Change Order is usually the best, and least controversial, way to make changes.
Like any other contract amendment, a Change Order must satisfy each requirement of original contact formation: offer, acceptance, reasonable identification of changed terms, and exchange of consideration. Each party’s signature on a Change Order satisfies the offer and the acceptance requirements.
Take extra care in identifying the changes your Change Order will make. Refer back to the parts of the original contract, and any earlier amendments or Change Orders, that you are changing or that your new changes may affect. You may need to inventory and audit the original contract and previous amendments to do that. And if you are changing the work, refer in your Change Order to the news design documents that reflect how the work is changing. Better yet, attach the new design documents as exhibits to your Change Order.
Change Order Consideration
Consideration can be tricky. Each side must either (a) promise to do something they’re not already legally obligated to do (including getting some third party to do or not do something), or (b) promise to not do something that they’re otherwise legally free to do. A Change Order where one side makes these kinds of promises, but the other doesn’t, is suspect and may be unenforceable.
A classic example: a foundation subcontractor approaches their prime contractor and says that they (the subcontractor) need to increase the price five percent. Because they don’t want to lose time (and perhaps money too) trying to get a substitute foundation subcontractor, the prime contractor reluctantly says "OK." They enter into a Change Order increasing the subcontract price by five percent. But there is no other change. The subcontractor doesn’t promise to provide additional work or different material. They don’t promise to complete the foundation work any earlier. Instead, the Change Order merely obligates the prime contractor to pay an extra five percent for the same foundation work promised in the original subcontract.
That Change Order may be unenforceable because consideration from the subcontractor is missing; the subcontractor is getting something – an extra five percent – for nothing. Luckily, there are some simple ways to ensure that a Change Order includes an exchange of consideration and avoids this problem.
Change Order Confusion – Who Issues Change Orders
There’s a lot of confusion surrounding Change Orders. One brand concerns who may issue a Change Order. The answer: no one can issue a Change Order.
A Change Order is a bilateral amendment to a construction contract. Each party to the contract must agree to the Change Order, usually by signing it. No one can unilaterally issue or impose a Change Order. Not the owner, not the contractor, not a subcontractor, and not the architect or any other designer. Anyone may propose a Change Order. But that’s just a proposal (or, if you’re a lawyer getting technical, it’s an offer to amend the contract). But a Change Order is something you and the other side must both agree to; neither can issue one unilaterally .
Where does the confusion come from? Perhaps it’s the AIA contract documents? The widely used A201 General Conditions of Construction Contract refer to Change Orders in ways that suggest they are something other than a specialty contract amendment. They mention Change Orders being issued, suggesting that the owner, the contractor, or perhaps even the architect may unilaterally impose one. They can’t. But this language has circulated for decades, fostering a trade myth, or at least a cherished superstition, that someone can issue a Change Order all by themselves.
This confusion isn’t just semantics. It has real consequences. More than once I’ve observed disputes where one side resolutely contends that their contract was amended by a Change Order they’d issued. They relentlessly insist, usually in vain, that the price was increased, or a completion deadline postponed. The result: they merely proposed a Change Order without agreement from their counterparty. Neither the price, nor the deadline, was changed. Nevertheless both sides spend precious resources on the dispute (including money on professionals fees that come along with disputes). That’s money they instead could have re-invested in operations, used to pay down debt, paid in bonuses to personnel, or dividended to owners.
Remember: if you want a Change Order, you can’t get one by yourself.
Other Parties Signing Change Orders – Guarantors and Sureties
In addition to the parties to the contract itself, you may need to get other people to sign a Change Order, or at least sign something else granting their approval of, or consent to, a Change Order. Generally, if someone has guaranteed one of the contracting parties’ performance under the contract, you’ll need to have the guarantor sign on to, or consent to, the Change Order so their guaranty applies to the change too. In some circumstances, amending a contract without a guarantor’s consent can release the guaranty, something you’ll usually want to avoid. The same goes for sureties who guaranty contractual performance under a performance bond or a payment bond.
Conclusions on Change Orders
Change Orders are necessary and very useful. But remember:
- Specifically identify what your Change Order is changing, especially changes to the work, the price, and deadlines for completion
- Get each party to the contract (the original parties, plus any others who’ve joined under previous amendments) to sign. Moreover, if there are others who have obligations affected by the contract you’re changing (e.g., guarantors, sureties), you should probably get their approval or consent too
Coming Up Next
No. 4 on changes continues: Changes you can make unilaterally – Construction Change Directives and orders for a minor change in the work.