The argument as to whether or not a contractor has waived or reserved its rights in the construction change order process is a consistent component of construction contract claims and construction disputes. Several sub-issues which are the subject of this article occur with predictability during the change process:
1. Failure on the part of the contractor to provide the owner with notice that the work is considered “extra.”
2. Failure on the part of the contractor to secure a written change order to cover the “extra work.”
3. Acceptance of a change order by the contractor without reserving rights to additional time and/or costs.
FAILURE TO PROVIDE NOTICE TO OWNER
Most construction contracts contain some form of a changes clause. Such clauses, ranging from the GP-3 clause in GSA Standard Form 23-A to the more restrictive clauses in private construction contracts, are provided as a vehicle to allow the owner to make changes, either additive or deductive, to the scope of the contractor’s work. These clauses require that each change order be committed to writing and that timely notice be provided. In the absence of proper notice, the contractor may waive its contractual rights to seek compensation.
Contractual requirements for timely notification for extras are not employed for exculpatory or punitive purposes. If an owner is going to be held liable for a contractor’s additional costs, equity should allow the owner to control or mitigate those costs. A differing site condition, a directed or constructive change, or some other entitlement should not give rise to unrestrained cost overruns.
Compliance with a notice provision, while not necessarily providing the contractor with immediate compensation, will satisfy the duty to protest, which extends to both directed and constructive changes. Although exception to the notice requirement is often considered when a constructive change has as its cause a defective specification, the correction of such defect may result in a dispute as to whether or not it is a directed change. If the owner directs a change in the specifications (despite the fact that the owner may consider the change as part of the original contract), the contractor is advised to lodge a written protest as quickly as practical so as to provide the owner time to reconsider or maintain the said direction.
The duty to protest has had substantial attention that has resulted in landmark decisions upholding that duty:
Whenever the defendant orders work done which the plaintiff thinks is in violation of the contract, or in addition to its requirements, plaintiff is required to protest, or to secure an order in writing before doing it. It is basic in all Government contracts that the plaintiff cannot do work which it is not required to do by the contract, without registering a protest against being required to do it, or securing an order for extra work, and then later make a claim against the Government for additional compensation. J. A. Ross & Co. v. United States 115 F. Supp. 187 (1953).
Similar decisions have been reached elsewhere. In Enochs v. Christie 291 f2d 200 (1955), a subcontractor proceeded with extra work without timely notifying the prime that additional compensation would be requested. Although it was recognized that additional work was indeed performed, it was also recognized that “failure to make a claim for extra costs in the manner and within the time specified precludes recovery therefore.”
Providing Notice to Owner
The untimely submittal of a construction claim (or the filing of a lawsuit) for extra work will often be deemed to have been waived. Three arguments commonly employed by contractors to circumvent failure to provide contractual notice are:
1. The owner’s position or options were not prejudiced by lack of notice.
2. The specifications were defective, resulting in a constructive change not subject to the notice requirements set forth in the changes clause.
3. The owner “knew or reasonably should have known” that a claim would be forthcoming.
In both the first and second arguments, the matter of owner prejudiced by lack of notice bears consideration. Constructive changes, even if caused by defective specifications, will often be subject to the prejudice argument prohibiting contractor recovery for costs that may have been avoided or mitigated had the contractor given timely notice.
FAILURE TO SECURE WRITTEN CHANGE ORDER
Many of the arguments applied to the issue of timely notice are equally applicable to the circumstance when a contractor proceeds with extra work without obtaining a signed authorization, namely an extra work order or change order, for the work. Similar to the usual contractual clause for timely notice, a requirement for an executed change order is a typical precedent for payment.
A contractor will often be at considerable risk if it elects to proceed with extra work in advance of receiving a signed change order. On the other hand, in federal construction contracts, a contractor may not be precluded from receiving additional costs for work performed at the oral direction of the Contracting Officer, who provides assurance that a written change order is forthcoming. However, the various administrative boards are not consistent in their assessment of such oral direction.
A distinction can also be drawn in those instances where the owner fails to grant a change order because of an unwillingness to recognize that the work is extra. In such an instance, the contractor will not necessarily be denied additional compensation assuming that timely notice was provided.
In private contracts, care should be exercised in proceeding with work which was not authorized in writing. In a situation where the contractor proceeds with the extra work on the verbal promise that a change order will be issued, the contractor may be able to suspend work on the extra if a change order is not forthcoming. Such an action may prove to be vital to avoid waiving the right to additional compensation.
CHANGE ORDER ACCEPTANCE ABSENT RESERVATION OF RIGHTS
Perhaps the most common argument arising from the performance of construction change order work is that of acceptance and waiver. The typical scenario has the contractor protest the requirement to perform extra work. The owner and contractor then enter a negotiation leading up to agreement as to the cost for the extra work. A change order is prepared and executed and all problems are seemingly resolved. Several months later, the contractor submits a claim for additional time and monetary compensation to cover the ripple effect or other impacts of the change. The owner will often disagree. Who prevails? In general, a contractor may be barred from asserting a contract claim, since a change order absent any reservation will be deemed to constitute full settlement and agreement. This will be particularly true if the change order contains language to the effect that acceptance of the change order constitutes full agreement as to its expressed conditions. In any event, it is important that the contractor not inadvertently waive or release its right to receive or release its right to receive compensation for all of its perceived extra costs. A statement on the change order which cites that the payment accepted is solely for the direct costs and a reservation for ripple and impact costs is thereby made will usually suffice. The contractor is advised to consult with its attorney or expert during this process.
Contemporary Construction Contract Reservation of Rights Language
The readers of Em@il Construction Reporter newsletter might be interested in different types of language contained in change orders in recent Holloway disputes:
1. “This change order represents full and final settlement of all claims arising out of this modification including all claims for delays and disruptions resulting from, caused by, or incident to such modifications.”
2. “This change order is comprised of the estimated direct costs associated with the change. As such, is does not include costs associated with delay, impact and labor productivity loss. Contractor continues to reserve the right to file a cumulative impact claim in future for direct and indirect costs not included in this change order.”
3. “At this time, the contractor cannot determine the future impact and/or indirect costs associated with this change order. Therefore, the contractor reserves the right to submit a claim to the owner when such costs have been determined.”
The contractor associated with each paragraph above experienced varying degrees of success in recovering additional monies for extras. For example, the contractor in example No. 1 filed a subsequent claim seeking to recover impact costs that could not have been known at the time the change order was executed. The trial court judge disagreed and denied recovery.
Due to the likelihood of extra work, it is to a contractor’s advantage to study and follow the applicable changes clauses. Particular attention should be paid to timely notice requirements, as well as to any language which may address whether or not a contractor can proceed with extra work prior to receipt of a signed change order.
Lastly, a contractor should pay close attention to the full extent to which it has priced the change, both in cost and time. Acceptance of a change order that expressly denotes that it is full and complete payment for the extra work may bar subsequent damages unforeseen at the time. If the potential exists for subsequent cost impacts or ripple effects because of the change, an expressed reservation of rights to such costs should be noted in the acceptance of the change order.
RELATED CASE CITATIONS
Korshoj Const. Co., IBCA 321, 1964 BCA ¶ 4206; Borrowdale Co., ASBCA 10000,65-1 BCA ¶ 4849; Comp. Gen. Dec. B-152346 (22 Nov. 1963); Industrial Research Assocs., Inc., DCAB WB-5, 67-1 BCA ¶ 6309; Honeywell, Inc., VACAB 1166,76-1 BCA ¶ 11745; ITT Commercial Services, Inc., GSBCA 4210,75-1 BCA ¶ 11218; Hensel Phelps Const. Co., ASBCA 12976, 71-1; Dittmore-Freimuth Corp. v. United States, 390 F.2d 664 (Ct. CI.1968); Harding, Inc., DCAB PR-44, 65-2 BCA ¶ 5261; Propper Mfg. Co., GSBCA 3579,73-2 BCA ¶ 10029; Human Advancement, Inc., HUDBCA 77 -215-CI5, 81-2 BCA ¶ 15317; West Land Builders, VABCA 1664,83-1 BCA ¶16235; Fletcher Aviation Corp., ASBCA 7669,1962 BCA ¶4192; Weaver Const. Co., ASBCA 12577,69-1 BCA ¶7455; Precision Tool & Engrg. Corp., ASBCA 14148,71-1 BCA ¶8738; Chimera Corp., ASBCA 18690,76-1 BCA ¶11901; Hawaiian Airmotive, ASBCA 7231, 65-2 BCA ¶ 4946; Mishara Const. Co., IBCA 869-8-70, 72-1 BCA ¶ 9353; L.P. Rosenman Corp., GSBCA 4265,77-2 BCA ¶12843; Eggers & Higgins v. United States, 403 F.2d 225 (Ct. CI. 1968); Gardner Const. Co., DOTCAB 70-18,73-2 BCA ¶10342; Husman Bros., Inc., DOTCAB 71-15,73-1 BCA ¶9889; OnsrudMachine Works, Inc., ASBCA 14800, 71-2 BCA ¶9013; Electrical Enterprises, Inc., IBCA 971-8-72, 74-1 BCA ¶10528; Vaught Co. v. Rich Co., 439 F.2d 895 (8th Cir. 1971); Progressive Enter- prises, Inc., ASBCA 17360,73-1 BCA ¶10065; R.R. Tyler, AGBCA 381,77-1 BCA ¶12227; JEMCO, Inc., ENGBCA 3879,77-2 BCA ¶12749; John Murphy Const. Co., AGBCA 418,79-1 BCA 1113836; Jo-Bar Mfg. Corp. v. United States, 535 F.2d 62 (Ct. CI. 1976).