Change orders

Many contractors and subcontractors examine their contracts carefully for time of performance and payment provisions but overlook other serious financial risks inherent in their contracts. One of those commonly overlooked financial risks, contingent payment clauses, is discussed below. Most general contractors seek to avoid making payments to a subcontractor prior to acceptance by the owner or architect of the subcontractor’s work and receipt of progress or final payment from the owner. This results in the use of contingent payment clauses. An example: Subcontractor agrees and specifically acknowledges that contractor has no duty or obligation to pay subcontractor for any work pursuant to this agreement, until contractor has been paid by the owner. All payment provisions are subject to the condition precedent that contractor shall receive payments from the owner for all progress or final payments covering the amounts payable to subcontractor on account of work performed pursuant to this agreement.

Change order clause

Perhaps the subcontract clause least followed by all parties in construction is the change order clause. Failure to follow this clause, which usually involves notices and requirements for written orders, causes substantial claims and litigation.

Extra work is that which arises outside and independent of the contract, something not required in the contract’s performance. There must be clauses within the general contract or subcontract for additional monies when the owner requests the performance of extra work. Subcontractors must have either a written change order or written directions to perform extra work in order to be assured of payment.

Nearly all general contracts contain provisions for adjusting the contract price upward or downward to reflect extra work or deletions. In reviewing those clauses, the contractor should be certain that compensation for extra work is forthcoming within a reasonable time after the work is performed.

1. General law on written change orders

It is the general rule that a stipulation in a construction contract that changes, alters or deviates must be ordered in writing, is valid and is binding upon the parties. This general rule has been followed in several Texas cases, as well as the courts of other states. Therefore, compliance with the requirement for written changes or directives is the best policy to ensure payment for changed work.

However, for every general rule, there are several exceptions when the contractor has not complied with the written change order requirement. These exceptions turn on the facts of the individual cases and the specific contractual clause, and recovery under any or all of the exceptions is not guaranteed. The safest practice for any contractor or subcontractor is to follow the change order provisions of the contract to the letter.

2. Exceptions to written change order requirement

The most commonly used exceptions to the written change order requirement are quantum meruit, waiver, breach of contract and oral agreement. Another theory is promissory estoppel, which is very similar to the waiver concept.

3. Getting something in writing

A subcontractor should never feel confident about recovering additional compensation when he or she has been orally directed to perform extra work. The exceptions mentioned above are not foolproof by any means, and recovery is always a question of fact decided on the proof before a court or arbitrator. As a practical matter, there are times when contractors cannot afford the luxury of following the contractual change order procedures to the letter.

If the literal terms of the change order provisions were followed for every change or alteration and all extra or additional work, few projects would ever be completed on time. Although honesty and integrity dictate that extra work of a contractor or subcontractor should be paid, something in writing may help prick the conscience of the recipient of the extra work.

4. Confirming oral instructions

It is sometimes impossible to get anything in writing from the other party due to either time pressure or sheer obstinacy. When that occurs, the contractor or subcontractor should confirm the oral directions in writing by self-serving correspondence. For example, the following letter will put a contractor on notice that additional compensation is expected by a subcontractor:

A letter of this nature will put the prime contractor on notice that receipt of additional compensation is anticipated and may place a duty to either respond or face the possibility of acquiescence to additional compensation by remaining silent.

Although various legal theories provide alternatives to written change orders or receipt of written directions for extra work, the burden to prove the exception will be on the person asserting it.  As a rule, exceptions are hard to prove.

There are many architects, engineers, owners, contractors, and subcontractors whose word is their bond. Those people can keep projects moving with handshakes; however, the person performing extra work will always be operating at legal peril without a signed change order.