Next on the list of top ten construction contract terms: “construction change directives.” Often in their contracts, the owner and the prime contractor agree that the owner may unilaterally order changes in the work and the prime contractor will change the work as the owner orders. Those orders must usually be written. And subcontracts often have similar terms, if for no other reason than to pass down orders that come from higher up the chain.
For generations, the AIA form contracts have referred to those orders as “construction change directives.” And because of that, so does everyone else.
How price and schedule change along with the changed work? That comes later. Ideally, the owner and prime contractor can later agree on price and schedule changes, then incorporate all changes into a comprehensive change order they each sign that supersedes the construction change directive.
If owner and prime contractor don’t agree, they will fall back on other tools. The original contract may have unit prices for particular materials or parts of the work. Then adjusting price is just addition and multiplication. Unfortunately, unit prices aren’t a common feature in contracts for many types of projects.
Cost-plus priced contracts also lend themselves to easy pricing changes. Though if the prime contractor has a fixed fee, the cost of additional or reduced work won’t automatically adjust the fee. Sometimes lump sum contracts will have a default cost-plus feature for additional work. So, if the owner and prime contractor don’t agree on a different way to adjust price, the cost of the additional work, plus a percentage fee, gets added to the lump sum. And while unit prices and cost-plus can set price changes, they still don’t adjust schedules and deadlines.
Problems Reaching Agreement
For price and schedule changes that the owner and prime contractor can’t bilaterally agree on, some contracts feature submission to a private neutral person to decide. This may be a specific person or class of persons identified in advance. (In contracts that emphasize architectural hegemony, that neutral is the architect.)
Other contracts don’t identify or even call for a neutral. They are often vague and resort to the passive voice, saying something like: “the contract sum and the contract time will be equitably adjusted.” Who will do that equitable adjusting? By whose standards of equity? And by when will they do it?
If owner and contractor can’t agree on price and schedule adjustments, and their contract doesn’t articulate a way to adjust—or an equitable adjustment doesn’t seem equitable to at least one side—then there’s a dispute. And then it’s off to the dispute resolution parts of the contract (e.g., mediation, arbitration, litigation). And if the contract doesn’t specify anything, it’s litigation.
Better for your contract to identify a default method to summarily adjust price and schedule without going into full dispute resolution mode, sparing everyone diverting the of attention away from the work and into the weeds. The cost plus a percentage fee stand-by method usually fits the bill without arousing a lot of controversy during original contract negotiations.
Cardinal Change – Limiting Principle
Must the contractor comply with any construction change directive that the owner issues? No. There’s a limiting principle. If the directive mandates a “cardinal change,” the contractor needn’t comply. And usually, by issuing a directive that imposes a cardinal change, the owner breaches the construction contract. (It has the aroma of anticipatory repudiation.)
So, what is a “cardinal change?” It’s an elastic term that eludes precise definition. It’s been described as a “change that departs from the existing work contracted so that it frustrates the purpose of that agreement or is impossible because of the extent of the requested change.” Not too helpful. In New York, John Caravella observed one case where the court held changes bracketing 40% to be sub-cardinal, while a 2% change in another case surpassed the cardinal threshold. The standard for what is cardinal? It shares a lot with Justice Stewart’s for the kind of obscenity that lies beyond First Amendment Protection.
A good rule of thumb: the further you go from the original, the more likely the change is a cardinal one. If the original contract is the menu, this clip might help you decide.
Construction Change Directives: Why Rare?
A colleague recently asked why I thought construction change directives are rare. They’re rare because they’re risky, often intensifying existing problems and spawning new ones. Owners usually consider a directive after they and the prime contractor are already at an impasse on a change order. It’s a relationship that’s already strained. Adding a unilateral directive isn’t likely to make things better. Plus, few are eager to risk escalating what was an impasse over changing three or fewer parts of the contract into a wider dispute that includes whether one side has breached the contract by issuing a change directive, or the other has breached by defying one. There’s other reasons construction change directives are rare, but that’s the most common.
There’s times when a construction change directive may not be a good answer, but it’s the only solution. But still, those times are rare.