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REDUCING CHANGE ORDER DISPUTES AT THE TIME OF YOUR CONTRACTBruce E. Loren, Esq. and Kyle W. Ohlenschlaeger, Esq. | Dec 08 2018

Change order disputes have always been a significant portion of any construction attorney’s practice, and dealing with change orders are generally the biggest points of contention for general contractors and subcontractors as well. When asked to review our client’s contracts, we often encounter two competing provisions on the issue. The first requires a written change order for the subcontractor (or general contractor in a prime contract) to be entitled to additional compensation. This provision takes on many forms, but generally looks like this:

The Subcontractor expressly acknowledges that commencing work without a written change order executed by the Owner and General Contractor waives any claim to additional sums or time.

The second provision deals with the subcontractor’s (or general contractor in a prime contract) obligation to continue its work if there is a dispute over a change order, and generally reads:

In the event of a claim or dispute arising out of or relating to this agreement, the Subcontractor shall carry on the Work and maintain the job progress schedule as directed by the Contractor…In no event shall delay in the resolution of any dispute excuse the prompt performance of the Work.

On their own, these two provisions seem relatively harmless and even logical. A subcontractor should get a signed change order before proceeding with the work and a dispute over the work should not slow the progress of the work. Unfortunately, in practice these two provisions combine to put subcontractors in an almost impossible situation. The subcontractor asked to perform disputed change order work still needs to perform the work, as failure to do so can result in a breach of the contract or potentially subject the contractor to delay claims. At the same time, due to these competing contract provisions, the subcontractor may be waiving its right to additional compensation by proceeding with the work without a signed change order.

The typical circumstances are: (1) the general contractor (or owner) asks for work to be completed that the subcontractor believes is out of its scope, thus requiring a change order; (2) the general contractor claims that it is in the subcontractor’s scope and the subcontractor needs to proceed; (3) the subcontractor cites the contract, indicating that it will not perform additional work without a signed change order, as required by the first provision listed above; and (4) the contractor responds with a letter informing the subcontractor that it is in breach of the second provision for failing to maintain the job progress and, if the breach is not cured, the subcontractor will be terminated and/or back-charged for the work. The subcontractor is then left with a Hobson’s choice. If the subcontractor performs the work, it has done so without a signed change order and has potentially waived its right to additional monies. If the subcontractor refuses and the work is later determined to be in its scope, it can be subject to excessive back-charges, delay claims and, in some cases, liquidated damages.

We often have recommendations on how subcontractors can best protect their rights when faced with this situation. However, the far better solution is to address the problem at the time of the original contract. This can be done by adding language to the provisions above. Including the following language at the end of the first provision allows the subcontractor to reserve its right to additional compensation in the event the contractor attempts to force it to proceed without a signed change order:

Subcontractor shall not be required to commence change order work without written direction by Contractor to proceed, and Subcontractor reserves all rights to seek additional monies upon receipt of such written direction.

Similarly, supplementing the second provision with the following language can also help protect the subcontractor’s rights:

Should Subcontractor, upon Contractor’s written direction, proceed with any work that is subject to a claim or dispute, Subcontractor does so under a reservation of all rights to additional compensation.

Although the addition of the above language will not prevent change order disputes, it will allow the subcontractor (or general contractor with a change order dispute with the owner) to proceed with the work without fear of losing its right to seek payment. Even with the inclusion of these additional provisions, the subcontractor should also provide notice at the time it begins what it considers extra work. At a minimum, the subcontractor should submit a proposed change order (changing contract price and time, if applicable), even if it knows that the owner will reject the proposed change order.

Finally, assuming the change order dispute cannot be resolved, the change order work completed by the subcontractor essentially becomes a claim to be paid on a time and materials basis. As a result, we recommend keeping complete records (including time sheets, labor costs and materials costs) for any work performed that is subject to a disputed change order.

Bruce E. Loren and Kyle W. Ohlenschlaeger of the Loren & Kean Law Firm are based in Palm Beach Gardens and Fort Lauderdale. Loren & Kean Law is a boutique law firm concentrating in construction law, employment law, and complex commercial litigation. Mr. Ohlenschlaeger focuses his practice on construction law and a wide range of commercial litigation disputes. Mr. Loren has achieved the title of “Certified in Construction Law” by the Florida Bar, exemplifying the Bar’s recognition of this expertise. The firm’s construction clients include owners/developers, general contractors, specialty contractors in every trade, suppliers and professional architects and engineers. Mr. Loren and Mr. Ohlenschlaeger can be reached at bloren@lorenkeanlaw.com or kohlenschlaeger@lorenkeanlaw.com or 561-615-5701.