ConstructionAdvisorToday

Change Order Limitations Can Lead to Mischief

Bruce Jervis, Editor
Construction Claims Advisor

Change order limitations are sometimes imposed on public works contracts by statute, regulation or the contract itself. The underlying policy is to protect the project budget and the integrity of the public procurement process by limiting the expansion of the contractual scope of work. A limitation typically states that if the estimated cost of a change order exceeds a certain percentage of the original contract price, the additional work must be put out to bid.

Change order limitations can lead to devious tactics, however. In a recent California case a public project owner and its construction manager tried to circumvent a ten percent limit in a site work contract in order to avoid the delay of competitive bidding. New grading work was to be added to the general building contract and the building contractor would sub the work to the site contractor.
   
The project owner never amended the building contract and the building contractor wouldn’t pay the site contractor for the “subcontracted” work. The owner and CM settled with the site contractor. But when the site contractor sued the building contractor, the purported subcontract was ruled an unenforceable sham.

I am interested in your experiences with change order limitations. Are the justified and are they effective? Or are they simply an invitation for mischief?

Featured in Next Week's Construction Claims Advisor:

• California Supreme Court Rules on Public Project Owner’s Undisclosed Information
• “Standstill” Provision Amounted to Unenforceable Lien Waiver
• Proposal Downgraded Due to Scheduled Early Completion

Subcontractor "Pass-Through" Claims Still a Matter of Controversy

Subcontractor “pass-through” claims, sponsored by a prime contractor against a public project owner, are both useful and controversial. A pass-through claim results from a claim liquidation agreement between the prime and the sub. The prime agrees to pursue the project owner, at the prime’s expense, for the subcontractor’s increased costs. The prime will pass through the recovery, if any, to the sub. In return, the sub agrees to accept only what the prime is able to recover from the owner and otherwise hold the owner harmless.

Much Maligned "Total Cost Method" Gets New Life

The “total cost method” of quantifying construction claims has always had a bad reputation. The technique compares the cost of the work as bid with the cost of the work as performed and attributes all the cost increase to the acts or omissions of the project owner. It has been considered a bad practice because it is imprecise and it lacks proof of causation by the owner. Now, however, the technique has been resurrected as the “modified total cost method.” And it is enjoying success.

Unilateral Resolution of Unpriced Changes

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.

Shared Risk of Owner Non-payment

Several months ago we addressed the risk of owner nonpayment. Should the risk be borne solely by the prime contractor who, of course, elected to contract with the project owner? Or should subcontractors share this risk?

The question arises in the context of “pay-if-paid” clauses in subcontracts. The subcontractor gets paid for its work only if the prime contractor receives payment from the project owner for the sub’s work. These clauses are controversial. And their enforceability is increasingly subject to challenge.

Tension Between Arbitration and Mechanic's Lien Rights

There has always been a tension between the right to arbitrate disputes and the right to place a mechanic’s lien on the project owner’s property. Arbitration is a creature of contract. The parties to a construction contract have mutually agreed to resolve their disputes through binding arbitration. As with any contractual right, however, the right to arbitrate can be waived through conduct inconsistent with the assertion of that right.

Flawed Quantity Estimates and Unbalanced Bidding

A reader recently raised an interesting question regarding a quantity estimating error and unbalanced bidding. The contractor in question had been quite certain a quantity estimate in a bid schedule was greatly understated. The contractor assigned an inflated unit price to this item, while bidding other items basically at cost. The contractor was awarded the contract, only to have the project owner delete the item with the understated quantity. The reader asked if this was permissible.

Quantifying Lost Labor Productivity

When a contractor is forced to work out of sequence, in a stop-and start fashion, or in a congested work area, labor costs can skyrocket. Known as “lost productivity” or “labor inefficiency,” this can be a major element in many delay claims. But it is a cost which is difficult to quantify and prove.

Should Contract Claims Be Consolidated in a Single Action?

While construction contracts usually require the contractor to provide prompt notice of an occurrence giving rise to a claim, the actual adjudication of the claim – the determination of owner responsibility and the recovery of costs – is another matter. Contracts frequently mandate an attenuated process of nonbinding mediation and other administrative procedures. A final decision on the merits of the claim may be years away.

The Role of the Owners Representative

Many milestones in a construction project are established or acknowledged through certification by a third party designated by the project owner. This individual, stipulated in the construction contract, is typically the project architect or engineer. It may be a different owner’s representative. But the operative word is owner’s representative.

The denial of certification or a delay in certification can be very costly for a contractor. The contractor, however, has very little influence over or leverage with the certifier. The certifier is the agent of the owner with a duty to protect the owner’s interests. The certifier has few obligations to the contractor, possibly just the obligation to avoid bad faith or fraud.