Legally Speaking
Change Orders 201: Practical Tips and Tricks
by Joe Katz, Esq., Huddles Jones Sorteberg & Dachille, P.C.
In my construction litigation prac-
tice I have seen virtually every trick in
the book concerning change orders
practice: the good, the bad and the
ugly. I want to highlight what to
watch out for, and the work-arounds
you should incorporate within your
change order routine.
First, What Is a Change Order?
According to R.S. Means, a change
order is “a written authorization pro-
vided to a contractor approving a
change from the original plans, spec-
ifications, or other contract docu-
ments, as well as a change in cost.”
Practically, change orders are most
commonly caused by design errors,
differing site or project conditions,
incomplete drawings at the time of
bid, and owner changes. Other, less
common sources of change orders
include scope gaps, a particular
instruction as to means and method
or the sole sourcing of manufactured
items, project delay, acceleration and
the accompanying added labor force
(or overtime). In other words, virtually
never the cause or fault of the sub-
contractor. Moreover, when played
correctly, the subcontractor maintains
tremendous leverage in the change
order process, and should both be
mindful of that leverage, and use it
wisely.
26 N O V E M B E R 2 0 1 8
Pricing
A change order should always
include pricing to account for the
direct costs of the change, as well as
the indirect costs. Direct costs include
extended manpower (always include
the labor burden) and extended
equipment (from heavy equipment
to scissor lifts and even the com-
pany vehicles), as well as the addi-
tional material or sub-subcontractor
costs, if any. Indirect costs seek to
value the less tangible cost impact of
the change, and include field supervi-
sion (extended project management,
superintendent costs), field overhead
(extended trailer, on-site person-
nel and related costs), and extended
main office overhead. For large
changes or delays, the greater impact
of the change should also be calcu-
lated—this generally involves utilizing
a claim methodology such as the total
cost method, measured mile, or other
impact tracking formula beyond the
scope of this article. Finally, be sure
to capture the miscellaneous “reim-
bursables” such as fuel, lodging, tolls,
bond, insurance, etc.—while not sep-
arately recoverable in a fixed-fee con-
tract, these costs should always be
tracked, captured and priced within a
change order request.
T H E C O N T R A C T O R ’ S
Practice Tip #1
View all project occurrences through
a “change order lens” by assessing
the suitability of a change order in vir-
tually any scenario. If the field crew
is instructed to wash down the steel
because it was provided dirty by oth-
ers, or kept waiting because the trade
ahead of it is not ready, a compensable
change order should be priced using the
above methodology. Realize, of course,
that this requires precision coordina-
tion between the field, estimating, and
the back office to perceive the change
order through the fast-paced chaos of a
busy construction site—which should be
going on in any event.
The Subcontract as an IED
Once a subcontract is signed, vir-
tually every imaginable situation is
governed by the provisions of the
subcontract, including the poten-
tial for changes orders and addi-
tional compensation for changed or
extra work. Understand that subcon-
tracts are drafted to reduce and shift
as much risk as possible away from
the general contractor and onto the
subcontractor. Think of an unmodified
subcontract as an improvised explo-
sive device, just waiting to explode
when necessary.
For example, many subcontracts
will include a pre-existing obligation
to perform change order work even
C O M P A S S
without an agreement on price, or
agreement whether such work is even
a change. This is compounded when a
pay-if-paid provision is in use, which
will also apply to change order pay-
ment—if the owner does not believe
the work is a change, it will most cer-
tainly not be paid for! Adding insult to
injury, many subcontracts will include
a generic no-damages-for-delay
clause, and/or a waiver of consequen-
tial damages—which will preclude
many of the indirect pricing strategies
outlined above.
Practice Tip #2
All subcontracts should be modified
as necessary to reflect, at minimum, (i)
the subcontractor’s option not to per-
form change order work in the absence
of an advance, mutually agreed price
or pricing methodology, (ii) payment
for change order work is not dependent
on owner payment, (iii) delay damages
may be awarded for change order work,
or, at minimum, that the subcontractor
is vested with all the rights the general
contractor maintains against the owner.
Overbroad Scope
Regardless of the subcontractor’s
proposal and its specific inclusions
and exclusions, standard subcon-
tract language will typically include
language similar to the following:
“The Subcontractor’s Work includes
everything necessary to complete
the ____________ scope of work.”
Disagreements between what was
included in the subcontractor’s price
and what was not are one of the
most common disputes surround-
ing change orders—but faced with
the above language, the subcontrac-
tor will usually not have a leg to stand
on. After all, it committed to perform
everything necessary, didn’t it?
Practice Tip #3
Be absolutely sure you incorporate, at
minimum, the proposal’s scope of work
within the subcontract. This should be
done using language that provides
“Notwithstanding anything herein to the
contrary, Subcontractor’s proposal is
adopted and incorporated herein by ref-
erence.” In this way, the proposal can at
least be considered on par to the sub-
contract, and not subservient to it. And
in preparing your proposal, be crystal
clear what is included within the quoted
price, and what is excluded.
T H E C O N T R A C T O R ’ S
Pass-Through Claims
Many subcontracts will permit
the subcontractor to make a claim
for changes or extra compensa-
tion directly to the owner, through
the “pass-through” provision. This
clause obligates the general contrac-
tor to pass-through claims submitted
by a subcontractor for consideration
by the owner, when the responsibil-
ity for the excess costs is attributed to
the owner. However, it is a doubled-
edged sword, because it often com-
pletely frees the general contractor
from responsibility to the subcontrac-
tor unless and until payment is made
by the owner.
I often encounter subcontrac-
tors who did not pass through via-
ble claims because they perceived it
as too difficult, too expensive or too
speculative. Remember, however, that
many changes are only an extra cost
to the subcontractor, and not the gen-
eral contractor. If the general con-
tractor does not stand to make any
significant money on the subcontrac-
tor’s claim, there is little incentive to
actually pass it through unless the
subcontractor has formally triggered
the pass-through requirement.
Recently, a client of mine was hit
with thousands of dollars in back-
charges for supplemental labor. He
readily admitted to me he was una-
ble to provide sufficient manpower
for the second phase of the job, and
the backcharges for supplemental
labor were justified. But when I dug
deeper, asking how is it that he had
the manpower for phase one but not
phase two, I learned that there was a
differing site condition that had to be
remedied in between phase one and
two, setting the phase two work back
by several months. During that time
period, my client’s union employ-
ees took other jobs and he could
not get enough qualified labor back
when phase two was actually ready
to begin. Putting my change order
glasses on, we drafted a pass-through
claim in the amount of the back-
charges, representing the increase
labor costs on account of the differing
site condition encountered at the job.
C O M P A S S
Practice Tip #4
Pass-through claims should be initiated
as a matter of course. Any claim, includ-
ing a request for change order, can dou-
ble as an official “pass-through” claim
by identifying it as such, and if neces-
sary on a state or federal job, including
the certification language as provided
under the Contract Disputes Act or simi-
lar state law. This will shift the burden to
the general contractor to formally pass
the claim through to the owner, where it
will hopefully be given the consideration
it deserves.
Partial Releases Are
Anything But!
Beware of the “partial” release
used, ostensibly, to ensure that a cor-
responding amount of each monthly
progress payment is released from
lien, bond and breach of contract
claims. The partial release, however,
will often be so broad as to include
within it retention, and the work per-
formed since the date of the last
pay application through the date of
the release, whether billed or not.
Pending change orders, and even
approved but unpaid change orders,
would also be caught in the dragnet
of such broad release language.
Practice Tip #5
All releases, even “partial” releases,
should be modified to include lan-
guage similar to the following:
“Notwithstanding anything herein to the
contrary, this release shall not apply to
retention, unapproved and/or unbilled
change order or other extra work, and
work performed since the last pay appli-
cation for which this payment is made.”
I have commissioned a rubber stamp
with this language that I send to my cli-
ents with instructions to stamp on every
release they sign.
Joe Katz, Esq., Huddles Jones
Sorteberg & Dachille, P.C., based out
of Columbia, Md., has practiced con-
struction law exclusively for nearly
15 years. Katz regularly represents
subcontractors and suppliers on fed-
eral, state and municipal construc-
tion projects. He is experienced in
all facets of construction litigation,
including mechanic’s liens, Miller Act
payment bond claims, arbitration, and
civil actions in both state and federal
court. He can be reached at (410) 499-
2615 or katz@constructionlaw.com.
N O V E M B E R 2 0 1 8 27