A fit is well established that when a project owner issues a directive the contractor must comply, even if the contractor considers the directive an expansion or change in the scope of work. The contractor cannot stop work and insist on negotiating a price adjustment. The contractor must rely on the contractual dispute resolution procedures to seek eventual compensation. Some contract documents, however, take advantage of the contractor’s lack of leverage and skew the process in the owner’s favor.
In a recent case, the Changes clause in a public contract required the contractor to submit a detailed, itemized change order price proposal. The project owner then responded with a “settlement by determination” – a unilateral contract modification establishing a price adjustment at a level the owner considered adequate. There was no give-and-take, no negotiation and no opportunity for additional input from the contractor.
The contractor in this case was not left without redress. Even a “final” unilateral contract modification can be challenged. But it seems heavy-handed and unnecessarily litigious to deal with scope of work disputes in this manner. Just because changed work cannot be priced at the outset does not mean that it should ultimately be priced unilaterally.
I welcome your comments on this topic.
What are the best practices when dealing with work which cannot be priced in advance? Do project owners take advantage of the leverage they possess as a result of the contractor’s obligation to proceed with work directives?
Featured in Next Week's Construction Claims Advisor . . .
- Price Adjustment Clause Flawed Because Not Tied to Contractor’s Actual Costs
- Board Addresses Authority of Architect, Construction Manager and Contracting Officer
- Bid Timely Despite Absence at Opening
Bruce Jervis, Editor
Construction Claims Advisor
As a practicing CM in the SE Texas area, we make use of Work Change Directives as a tool to protect both parties. The WCD is devised to set a scope, a reasonable compensation route to be able to pay something within the contract value until it is adjusted. The contractor typically always has the ability to make a claim within the contract for additinal compensation and time. The WCD makes sure that all parties are aware that work and scope and future payment are imminent, instead of waiting weeks or months to negotiate and gain apporvals on Change Orders.
Posted by: Hugh Brightwell | 07/02/2010 at 07:18 AM
As a construction lawyer and former commercial contractor in the Houston area, I've seen this issue quite a bit, from different perspectives, for many years. The simple reality is that some contracting parties (on both sides) will take unfair advantage at times, if they are allowed to. Change Directives are a beneficial tool in many ways, but can also be abused. They also are less useful when the dispute is not only over the price, but whether certain work is even legitimately outside the contract scope. In these situations, some interim method of determing the issue that allows work to continue, provides the opportunity for either party to address the dispute at a later date, and does not place undue financial burden on either in the meantime produces the best result for everyone. If the cost is large enough, fast-track third-party determinations, e.g. dispute resolution boards or IDMs can be a useful alternative. Unilateral determinations will rarely be upheld as final, but you still better watch what you sign!
Posted by: Gavin McGee | 07/02/2010 at 07:46 AM
As a fire alarm contractor in the Houston area, I am seeing this taken advantage of by contractors but unfortunately my peers. Bids will be made with specific exclusions knowing it does not meet the job, but it is ultimately cheaper to use the more qualified bid. Since this is public work in an industry that does have changes, this practice makes everyone look bad. Contractors/owners have taken advantage of this attempting to wear down the sub-contractor. In a healthy economy, you can be choosy in the companies you deal with. In this economy you have to aggressively manage your risk. It is a risk of doing business in this market that must be managed.
Posted by: August Skopik | 07/02/2010 at 08:08 AM
As an architect the biggest issue I see is getting pricing from the contractor. The pricing needs to be fair and complete so that the Architect-Owner-Engineer can evaluate the claim.
I have Contractors submit lump sums that defy evaluation; never submit enough data to understand the basis. I have had claims go from $25,000 down to $7,000 once the labor and materials were reviewed. This was not my revision but the contractor's once they reviewed the scope of the work and material and labor required. For the Owner I want to pay the Contractor fairly and reimburse the contractor promptly.
I repeatedly tell them I will recommend payment but I can't make a recommendation if they just throw a pile of papers that can't be evaluated.
Posted by: Kit Burns | 07/02/2010 at 08:39 AM
I agree with the Architect's comment. As a CM representing the owner, I see too many Change Orders submitted without the proper backup documentation. Change Orders are merely passed on by the G.C. without requesting supporting documentation from their subs. This puts both Contractor and Owner at odds because the Contractor want to be paid right away, but the Architect-Owner-CM has to spend time to review the details to determine if the work was additional.
Posted by: Steve P | 07/02/2010 at 09:04 AM
Speaking as an Architect with 20 years in the private sector, and the last 10 years in the public sector serving the state as Owner's representative, my office's philosophy is to treat contractors fairly while upholding the public interest. We have also experienced too many claims that defy evaluation, but now increasingly find that the leverage some contractors are systemmatically using to their advantage is refusal (by delaying tactics) to price any change until the work is complete. Reducing the fear of risk is possible by reasonable negotiation which breaks work into tasks, unit pricing, defining results,and including 'what if' scenarios. Refusing to quote even simple changes gives Owners the impression that contractors are not being honest, and causes disruption of construction processes and communications throughout the construction team. As experience with these disruptive companies increases, we find that this behavior provides sufficient reason to deem them non-responsive based on past history, and exclude them as successful bidders.
Posted by: Beth Ruffing | 07/02/2010 at 09:31 AM
To address your question, the contract should be written stating several methods on how to handle changes in the work, T&M, unit pricing, not-to-exceed. Both Contractor and Owner should also discuss how to handle changes in the work prior to the first change order. ADR (Alternate Dispute Resolution) would be the last course of action.
Eventhough the "final" unilateral process can be challenged, if done fairly, it allows owners to quickly mitigate changes and lessens the financial impact to the contractor.
Posted by: Steve P | 07/02/2010 at 10:32 AM
Beth- You can exclude them as successful bidders, but are you guys then allowed to prevent them from bidding in the first place on, say, other public bid jobs? Can you exclude them from bidding by addendum after they have already been approved by addendum to bid because you are in the middle of a dispute on another job? We have this situation here and it doesn't seem like sound practice to exclude bidders up front by addendum after they've been approved by you because you are mad at them on another job. Publically airing disputes doesn't sound kosher to me. What's your opinion? Thx-
Posted by: Carol R. | 07/02/2010 at 10:33 AM
We are CM's / GC's in the Chicago area, but work nationwide. Most of the problems we've run in to are the result of not getting information up front.
We require our subcontractors to provide us their hourly rates for their various trades. this includes overtime rates, markups on materials purchased or used,ect.
This information is made part of the contract between the CM and subcontractor.
This information, coupled with daily work reporting / communication between the CM's general superintendent and the subcontractors foreman helps keep an accurate handle on the cost of change directives.
Posted by: Jerry T. | 07/02/2010 at 11:18 AM
In my form contracts and subcontracts, I always try to include negotiated mark up percentages on any extra cost, which affords the opportunity (and the implicit right) to perform an audit of extra cost documentation and, therefore, holding payment until that cost can be verified. There's not much you can do to force someone to supply paperwork, but withholding payment is usually a pretty good motivator.
Posted by: Gavin McGee | 07/03/2010 at 09:28 AM
We have completed work on a contract for a large city in Southeast Pennsylvania six months ago and have 10 unresolved claims against the city totaling in the tens of thousands of dollars. We bid various changes as per request of the owner & sent in detailed labor and material back ups. The mark ups are regulated by contract. The owner rejected the bids and directed us to proceed on "force account". After the work was completed and detailed accounts of actual costs were submitted, the city's project coordinator arbitrarily reduced the amounts in a uninformed "settlement by determination". We are now faced with legal fees dealing with an unresponsive legal department of the owner.
Posted by: Ted Nickles | 07/11/2010 at 06:40 PM