When a project owner and a contractor agree to the terms of a contract modification, the document typically contains “accord and satisfaction” and “waiver and release” language. The contractor acknowledges that this is a complete settlement of the entire matter and waives the right to any subsequent claim arising out of the change. But what happens if the project owner keeps issuing more and more change orders?
Multiple change orders have a cumulative impact on the cost of performing the work. The increased costs are primarily in the form of reduced labor and equipment efficiency. The costs are not directly tied to one particular change order, but they are real. How can the contractor claim these costs when the contractor has repeatedly “signed off” on each and every contract modification?
Contractors can expressly reserve the right to subsequent claims for cumulative impact costs. But this raises flags for owners who understandably want a change order firmly quantified. Owners do not want to commit to the marked-up direct costs of a change, while leaving the door open to additional claims for lost productivity or reduced efficiency.
How do you handle this situation? I welcome comments from both the project owner and contractor perspectives.
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Posted by: Todd Schneider | 08/11/2011 at 12:34 PM
Good comments. This happens a lot more than you think.
Posted by: KCconstrlawyer | 08/11/2011 at 12:51 PM
If you don't review your schedule and factor in the burden that each change order will bare, then you're probably not doing your job. As an owner, should I ask for a change order every time I see guys sitting on their butt and shooting the breeze? Of course not, but i should say something before it becomes a problem. Common sense can save a lot of legal fees.
Posted by: william pangelinan, jr. AIA | 08/11/2011 at 12:57 PM
The situation has been addressed on Federal Projects (where cumulative impact claims have been allowed) and in California which has also allowed these claims. Generally, the claimant must make the claim when it becomes foreseeable, and must identify the impact with specificity. The following language is typically found in the body of the Change Order:
"All costs/time impacts related to the matters set forth herein and any associated COR(s) are included."
I have advised clients to add the following at the end of such language:
"...except those that can not be determined at the time this Change Order is signed by Contractor."
By making this change, the claimant preserves its right to make a cumulative impact claim within the body of law governing such claims (at least at the Federal level and in California).
Josef M. Rodarti, Esq.
The Rodarti Group
Posted by: Josef M. Rodarti | 08/11/2011 at 01:06 PM
I agree with KCconstrlawyer. Every change order and impact to overall project is different, I would first and foremost look at the schedule. A baseline with updates and time impact analysis would give a generally good idea of what direction the project is heading.Obviously, there is possibility that more than time delay is at stake, but each project needs a specific review and assessment. I would again take the approach with an open mind and common sense, to save legal cost, should it comes to that phase.
Posted by: Phuong Nguyen, P.E, CM. | 08/11/2011 at 01:34 PM
There is also the added costs in processing the change orders. I recently finished a project that suffered from this problem. My project managers spent days writing up, explaining, justifying, quantifying, and verifying all the changes on the job. I spent more money on PM time for some of the changes than I did actually doing the work.
Owners expect that cost to be covered in a standard 10% OH&P markup but when you have swarms of CO's your management costs go through the roof.
Posted by: Lystra Pitts | 08/11/2011 at 01:48 PM
On federal projects, you should not habitually sign individual changes waiving impacts. The decision of the Federal Circuit in Bell/BCI v. United States holds that such waiver clauses are enforced, even if cumulative impact is not specifically mentioned.
Posted by: Charles Choyce | 08/11/2011 at 03:09 PM
This is a valid claim, but justifying the additional cost prticulerlly in building projects is very difficult. Some professionals advise that such claims can be justified by measured mile method, but the level of details required to justify the claim is very difficult.
Posted by: Naveen kumar | 08/11/2011 at 05:43 PM
To this point no one has mentioned the 'human elemant'. Relationships are key. We work in a 'tough business'. As an Owner, a former Consruction Manager in an AE firm and a GC's PM/Estimator, the longer I spend in construction the clearer it becomes that we are all members of a team whether or not we believe it. Pick your battles very carefully. The coment about too much PM time spent on CO's is true only if a PM is being required to manage more than one project. As an Owner, I am quick to listen to requests for compensation. We rely on contractors to complete the projects and want to encourage good relationships. We want to be known for fairness. All members of the construction team including the Owner must openly discuss issues as early as possible. We all know the way 'to the courthouse' and how costly litigation is. Who wants to make 'boat payments' to their attorney and irrevocably ruin business avenues. If the team doesn't pass the 'smell test' in the beginning - bail.
Further, if you really have to file a claim, it is essential to have kept good records. It is still cheaper to take a loss on a job than suffer the greater losses of reduced bonding, loss of key personnel, loss of focus on business in favor of claim management. I watched a GC slowly die as the result of one claim. $80K in legal fees and two years of key management time lost to the company was like gangrene. Ultimately the GC prevailed and was awarded $80K in compensation. A true 'Pyhrric Victory' If faced with an intransigent GC, AE or Owner the savy Sub will price the CO to cover these 'hidden costs' and hold his ground. Suggest the GC self-perform or get someone else to do the CO work. Freely and openly discuss the reasons why you are taking this aciton. Discuss, compromise and settle quickly. Move on.
Posted by: G Smith | 08/12/2011 at 04:56 AM
To avoid the cumulative impact multiple changes will undoubtly have on the Contractor's cost for performance, we have agreed to included in the settlement of change requests added monies to cover any overtime and/or inneficiencies. By paying for these costs upfront we are "hoping" that a cumulative impact claim is avoided.
Posted by: MNogueras | 08/12/2011 at 07:06 AM