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ConstructionPro Week, Volume: 1 - Issue: 18 - 09/03/2012

Are Deductive Change Orders Being Abused?

By Bruce Jervis

 

When a construction contractor bids work, the quantity or volume of that work has a significant impact on the pricing structure and profit expectation. Yet standard clauses commonly found in construction contracts allow for a reduction – even a drastic reduction – in the scope of work. These clauses authorize deductive change orders and partial terminations for convenience. The financial impact on a contractor can be significant.

 

One recent case involved what appears to be an abuse of the deductive change order. A contractor awarded a unit-price subcontract which authorized changes in the quantity of work without any adjustment to the unit price. At the time of subcontract award, unbeknownst to the subcontractor, the prime contractor had negotiated a change in the design with the project owner. This change effectively eliminated 80 percent of the sub’s work.

 

The subcontractor learned of this development only when it arrived at the site. The sub demanded an equitable adjustment to the unit price for the remaining 20 percent of the work. The prime contractor refused. The subcontract gave the contractor the right to reduce the scope of work, even by 80 percent, without increasing the unit price.

 

To be sure, many contract clauses call for an equitable price adjustment when there is a change, additive or deductive, to the scope of work. And some courts impose a standard of good faith when reducing the work, something which seemed notably absent in this case. Nonetheless, contractors are vulnerable to drastic reductions in the quantity of work. What has been your experience? Are contracting parties always fair and reasonable when reformulating the scope of work?

 

COMMENTS

Contracts are bid using guides that sometimes base their estimate on the volumn. A change in the unit price is usually figured in. However, that is between the Owner and Prime Contractor. The Prime and his subs may have a different agreement.
Posted by: Eastern Inspector - Wednesday, September 05, 2012 2:49 PM


The words "fair" "reasonable" "good faith" "standards" should not be used in the same paragraph (possibly even the same chapter) as "change order", whether deductive, additive, deductive, reductive or subductive.
Posted by: jon f edelbaum aia - Wednesday, September 05, 2012 2:50 PM


Believe me, today abuses of subcontractors are found in abundance on just about every topic! Yes, we have had almost our entire contract removed, and usually we would not have bid the remaining portion at all, since the prevailing wage paperwork would then cost more than the remaining work. Unit pricing is also abused. We never like to give it, for that reason. But in this severe recession, almost everyone appears to be in a dog eat dog world, and little subcontractors, especially, are fair game.
Posted by: Sharon Toji - Wednesday, September 05, 2012 4:31 PM


As an engineer I like to recommend unit prices for work where I expect the quantity may vary (i.e. removal of unacceptable soil). This add/deduct unit price shifts the 'risk of unkown' to the owner rather than forcing the contractor/sub to bear it. Your point is a good one in that if the volume of work changes significantly then the deduct (or add) unit price may need to be deducted. What I find frustrating is when the add price is significantly higher than the deduct price. Pile drivers may be able to justify this, I am not sure others can.
Posted by: James Baker - Thursday, September 06, 2012 8:12 AM


A change this drastic would be considered a cardinal change and would entitle the sub to entirely rebid/renegotiate their contract. The trouble is that most subs (or GC's) don't understand that when a scope is so significantly altered that it no longer resembles the original deal that the offended party is entitled to recast the deal. Contractual allowances or percentages for OH and profit are not necessarily valid under those conditions.
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