Top Ten Construction Clauses: Change Orders and Change Directives

Top Ten Construction Clauses: Change Orders and Change Directives

Construction contracts typically provide for changes in the scope of work through change orders, construction change directives and orders for minor changes.  AIA Document A201-2007 and the ConsensusDocs Standard Agreement similarly define a “Change Order” as a written instrument or order signed by the owner and the contractor that reflects the parties’ agreement to a change and any adjustments in the contract price or time.  By contrast, a “Construction Change Directive” (AIA A201-2007) or “Interim Directed Change” (ConsensusDocs) is a written order unilaterally issued by the owner directing a change in the work before the parties have an agreement on any adjustment in the contract price or time.  Once an agreement is reached, a change order is submitted to document the adjustments.  In the absence of an executed Change Order or a Change Directive, the contractor is not obligated to perform changes in the work that impact contract price or contract time.  Time and again, however, the contractor proceeds with the work anyway.

Legal pitfalls

One oft-litigated aspect of changes in the scope of work centers on notice requirements.  A lack of adequate written notice can turn an otherwise simple matter of contract administration into a costly legal fight.  For example, it is not uncommon for a contractor to discuss changes in the work with the owner and then perform the work without first submitting a written change order request.  When the contractor later submits a request for payment for the additional work, the request is denied for failure to include an approved Change Order and litigation ensues.

Differences in state law generate confusion around the enforceability of oral agreements for changes in the work.  In Williamson Pounders Architects, P.C. v. Tunica County, Mississippi, an architect sued Tunica County to recover funds allegedly owed for additional work outside the original scope of the contract.  Although the parties met to discuss the changes, the architect did not submit a written change order request to the County.  Applying Mississippi law, the court held that the firm was not entitled to compensation for the additional work because (i) the parties’ discussion of the additional work did not satisfy the contract’s notice requirement; and (ii) Mississippi law prohibits the formation and enforcement of oral contracts against such entities.  Other courts similarly require adherence to a contract’s written notice requirements, including the case of American Mfrs. Mut. Ins. Co. v. Payton Lane Nursing Home, Inc. in the Eastern District of New York.

By contrast, courts in several other jurisdictions permit the parties to waive the contract’s written notice requirements.  For instance, in Circle Y Construction, Inc. v. WRH Realty Services, Inc., the Northern District of Georgia permitted a contractor to recover payment for additional work performed at the owners’ direction in the absence of a executed change order.  Applying Georgia law, the court held that the parties’ course of conduct throughout the project evidenced a series of enforceable oral agreements.  Consequently, the owners’ failure to pay for the additional work due to the lack of a written change order constituted a material breach of an oral contract.  This casts uncertainty on the enforceability of such contract provisions and emphasizes the importance of detailed contract administration.

Mitigating legal risks

Given the discord in court interpretations concerning contractual notice requirements for changes in the scope of work, proper notice and dispute documentation is essential to forestall costly litigation.  Consider these take-away points from the case law:

  • Know the jurisdiction that governs any dispute arising under the contract.Some jurisdictions will permit waiver of a written change order requirement based on the conduct of the parties or satisfaction of certain criteria.Others will require compliance with the contract language.

  • Clearly define the scope of the work in the governing agreement to assist a court in determining whether any disputed work qualifies as a change in scope.

  • Leave a defensible paper trail.Make sure there is a written record of any change order request or discussion of changes in the scope of the work.

  • Follow up change directives with a written change order request or documentation of the contractor’s disagreement, if any, with the issued directive.

For contract preparation and administration recommendations on this or other clauses and for help understanding the law to interpret change orders and change directives, contact the author, Donald A. Rea, vice chair of the firm’s Construction Practice – or the attorney at the firm with whom you are regularly in contact. Don can be reached at 410.332.8680 or drea@saul.com. The leaders of Saul Ewing’s Construction Practice include:

 

Garry R. Boehlert, co-chair
202.295.6617 • gboehlert@saul.com

George E. "Ned" Rahn, Jr., co-chair
215.972.7165 • nrahn@saul.com

Donald A. Rea, vice chair
410.332.8680 • drea@saul.com

Doreen M. Zankowski, vice chair
617.912.0913 • dzankowski@saul.com