HOW TO MANAGE CONSTRUCTION DISPUTES TO MINIMIZE SURETY AND CONSTRUCTION CLAIMS. PART 6: CHANGE ORDER AND EXTRA WORK CONSTRUCTION CLAIMS

HOW TO MANAGE CONSTRUCTION DISPUTES TO MINIMIZE SURETY AND CONSTRUCTION CLAIMS.  PART 6: CHANGE ORDER AND EXTRA WORK CONSTRUCTION Claims

Introduction

Construction is a business fraught with risk.  Disputes over even the smallest of issues can quickly escalate, with crippling consequences to the project and the parties.  Over the years, the construction industry has developed various methods of contractually allocating the risk of project delay and disruption.  Some of these methods include liquidated damages provisions, "no damages for delay" clauses, mutual waivers of consequential damages, provisions that limit liability, claims notice provisions, “waiver of damages clauses”, acceleration clauses, “time is of the essence” clauses, change order clauses, and provisions addressing responsibility for the adequacy of the construction plans and specifications.  Parties frequently litigate the sufficiency of these risk-shifting efforts in conjunction with the underlying merits of delay and disruption disputes.

Construction Claims & Disputes

In Part I of our series of how to manage construction disputes to minimize surety and construction claims, we addressed the construction delay claims and the methods typically used to analyze them.

We indicated there that the most frequently encountered claims include:

1.            Construction Delay Claims

2.            Disruption and Loss of Labor Productivity Claims

3.            Design and Construction Defect Claims

4.            Force Majeure Claims

5.            Acceleration or Compression of the Schedule Claims

6.            Suspension, Termination and Default Claims

7.            Differing Site Conditions Claims

8.            Change Order and Extra Work Claims

9.            Cost Overrun Claims

10.         Unacceptable Workmanship or Substituted Material Claims

11.         Non-payment Claims (stop notice (or Notice to Withhold) claims, mechanics’ lien (only for private construction projects) and payment bond claims)

Part 6 of this series discusses item 8 above: Change Order and Extra Work Construction Claims.

Change Orders

No architect or engineer ever produced a perfect set of plans and specifications.  It is not humanly possible to do so and it would be prohibitively expensive to do so especially on a large project that has many details.  There are too many details that need to be drafted and too many elements of the work must be coordinated in too many ways.  As a result, the plans and specifications cannot prescribe every detail of the work.  That is the reason the contract documents specify that whenever a detail is not provided, the contractor must submit draft details to the engineer for approval prior to installation or construction.   

Furthermore, every construction project is different.  Each is built by a combination of contractors who bring their workers and equipment/tools together, at a single location, for just that one job.  This creates sequencing and trade stacking issues, especially if a delay occurs in one part of the construction phase.  Work is often impacted by the unforeseeable: inclement weather, subsurface conditions, new building codes, unavailability of materials, and activities adjacent to, or sometimes through, the project site.  No set of plans and specifications can anticipate such conditions or events, nor do other factors that make the owner alter the project midstream.  This is why contracts allow owners to make changes in the work.

In most cases, some changes to the plans and specifications or the work contemplated by the contract will be necessary before completion of the project because of lack of detail, errors, omissions, improvements, or aesthetic, cost, or other concerns. Changes and extras can create disputes and careful planning in the contract stage is vital. Accordingly, every construction contract should include a change order clause (“Change Order Clause”), which provides the owner with a mechanism by which it is permitted to require alterations or additions so long as it agrees to compensate the contractor for the additional work.

There are numerous reasons why changes may occur on a construction project, including, but not limited to:

•      Unclear bid documents

•      Owner directed changes

•      Late, incomplete, or defective drawings; specifications, and other contract documents

•      Preferential changes by the owner

•      Misinterpreted contract requirements by the parties

•      Differing site conditions

•      New or revised codes/standards

•      Rework

•      Impacts/changes to the construction means and methods

•      Scope additions

•      Acceleration and/or schedule changes

Frequent sources of change orders in contract documents include:

•      Defective Specifications;

•      Illegal Restrictions;

•      Improvements in Time;

•      Incomplete Design;

•      Intention of the Contract Documents;

•      Lack of Design Discipline Coordination;

•      Latent Conditions;

•      Owner Changes; and

•      Updated Information

The pace of a construction project may be such that subcontractors are faced with a dilemma. They are often asked verbally to perform work they believe was not included in the original contract. Do they go ahead and do the work and risk not getting paid for it? Do they delay the project and take the time to get the change in writing signed by all parties? If they do this, they may risk being in breach of contract for not completing the project on time if a court later determines the work requested was contemplated by the original contract and a change order was not required.

A Change Order as defined in Section 7.2.1 of the A201, is a written document signed by the owner, contractor, and architect setting forth their agreement with respect to the change in the work, any adjustment to the contract time, and any adjustment to the contract sum. Using a Change Order is the preferred method to request a change in the work, because the agreement of the parties as to the change is set forth in writing. If the owner wants the right to make changes that are not included within the scope of work contemplated by the contract, the owner must specifically set out the owner’s right to do so in the contract.

If there were no changes clause in the contract, the contractor would have a right to build exactly what was called out in the plans and specifications.  The owner could order no changes without the contractor’s consent.  If the contractor refused to consent, the change could not be made.

That is why every competently drafted construction contract has a changes clause.  Even after a contract has been written to the satisfaction of all parties, reviewed by an experienced attorney if necessary, and is signed, the contract may need to be amended after the project begins.  A change in the design plans, the materials used, a foreseeable delay in the project completion date, whatever the cause of an alteration to the original terms of the contract, these amendments must be put in writing as “change orders.”  A proper change order lays out the specific modification to a contract term and how said modification affects the project budget. (See California’s Business and Professions Code Section 7159.6.)  Once a change order is signed by all parties it becomes a legally enforceable part of the contract.

The more time spent thinking about what a particular construction project will demand, and clarifying each aspect in writing using unambiguous language, the less opportunity there is for misunderstanding and confusion which can lead to long delays, bad reputations, and potential legal problems.

It is imperative that construction contracts provide a clear and concise directive in dealing with the fluid course every project takes. Doing so will greatly aid in avoiding the confusion and mistakes that often lead to costly and laborious legal action between disgruntled parties.  While there is no such thing as a perfect construction contract, this guide will address the importance of keeping control of costs by making a provision for change orders.

Much like a construction contract, there is no perfect set of construction plans. Even the most meticulous scope of work is subject to change due to any number of unforeseen circumstances before or during the construction process.  Should the client decide to make alterations to the design specifications, desired materials are unavailable or found to exceed the costs outlined in the budget, or conditions at the worksite require amendments to the original plan and/or changes in personnel, a provision for such changes should be made in the construction contract.

While it is impossible to predict every such event, a competently written construction contract includes a “changes” clause that accounts for the likelihood of a request to add to or delete from the original scope of work.  The language of these clauses does vary depending on the contract, but most contain provisions allowing the client unilateral powers to modify the plan and specifications, and compelling the contractor to perform said modifications.

Other common provisions include a means for both parties to agree on how the revisions will affect budget and schedule, and a means for both parties to agree on how to handle any disputes that may arise concerning same.  The changes clause also addresses the prudent legal protocol to follow when parties wish to move forward with adjustments to the original scope of work.

For the protection of all involved and as required by the California Contractors State License Board for residential projects, the clause should mandate that any modifications to the contract be done in writing, in the form of a change order, and specify the change in work. It should show any and all adjustments to the budget and schedule as finalized in the present contract.

Typically a change order is prepared by the architect or the contractor based on his/her discussion with the client. The change order must be signed by all relevant parties to ensure proper payment for the work performed.  On a more practical basis, if the owner wishes to preserve your working relationship with his contractor, having a written change order will prevent differences in memory and the resulting disagreements that go along with it.

Although the language in changes clauses varies from contract to contract – and those variations may have significance – most changes clauses cover the following points:

1.    The right of the owner to unilaterally modify the plans and specifications, and the duty of the contractor to perform the work as changed.

2.    Mechanisms for the owner and contractor to agree on the cost and time implications of the change.

3.    Mechanisms for resolving disputes over costs and time.  Typically, these mechanisms (a) require the contractor to maintain detailed daily records of the labor, services, equipment and material used for the changed work, and (b) specify markups that can be added to those costs to cover overhead and profit.

Elements for Recovery

Even if a CO is executed, recovery for extra work may be barred unless the contractor can show that he in fact performed work over and above what was required under the original contract.  The contractor must establish the following points to obtain additional compensation for extra work:

1)    the work was outside the scope of the original contract,

2)    the extra items or changes were ordered at the direction of the owner,

3)    the owner either expressly or impliedly agreed to pay extra,

4)    the extra items were not furnished voluntarily by the contractor, and

5)    the extra items were not required or made necessary through any fault or omission of the contractor. Duncan v. Cannon, 561 N.E.2d 1147 (Ill. App. Ct. 1st Dist. 1990) (labor and materials that are incidental and necessary to the execution of the contract cannot be regarded as extra work).  The issue of whether extra compensation can be successfully claimed is a fact-intensive question which turns on the extent of the added burden on the contractor's performance and the language in the contract. Any situation involving a disputed constructive change should be carefully documented by the parties, highlighting their communications and the actual impact on performance. In order to recover compensation, a contractor must be able to demonstrate the exact nature of the change and the owner's agreement to the change. Wilmette Partners v. Hamel, 230 Ill. App. 3d 248, 264, 594 N.E.2d 1177, 1189 (1st Dist. 1992); Curran Contracting Co. v. Woodland Hills Dev. Co., 235 Ill. App. 3d 406, 415-18, 602 N.E.2d 497, 504-05 (2d Dist. 1992).

Minor Changes in the Work

Section 7.4 of the A201 permits the architect to order minor changes in the work not involving an adjustment to the contract sum or the contract time. This could be problematic for the owner because the architect specifically has the power to bind the owner to such minor changes. Accordingly, depending on the degree of control an owner desires to exercise over the project, the owner may desire to modify the contract to provide that the order for minor changes should be signed by the owner and architect. 

Additional Work vs. Extra Work

Disputes about changes in the work become important when there is a disagreement as to whether work conducted by the contractor or subcontractor is “extra” work or “additional” work. Extra work is work which is outside the scope of the contract contemplated between the owner and contractor and, accordingly, will support a claim by the contractor for additional compensation or additional time to complete the project, or both. North Shore Sewer & Water, Inc. v. Corbetta Construction Co., 395 F.2d 145 (7th Cir. 1968). Additional work, on the other hand, is work which is within the original scope of the contract and stems from the tasks which were originally contracted for. Additional work will not be subject to additional compensation by the owner, but may permit an extension of time to complete the project. Id.

As noted above, Change Orders under the A101 and A201 require the parties, by their terms, to reach agreement upon the appropriate adjustment to the time for the contractor’s performance and the contractor’s compensation for the modifications described in the Change Order. As a result, disputes regarding whether work required by an owner under the contract constitutes additional work or extra work generally result from Construction Change Directives and minor changes in the work ordered by the owner or its representatives. The types of modifications owners and their representatives have sought to implement by Construction Change Directives and minor changes has proved to be legion. Some of the more common ones follow: (a) the owner directs the contractor to alter the sequence or timing of its work; (b) the owner seeks to “clarify” contract requirements that are vague or ambiguous with regard to performance standards; (c) the owner’s architect or engineer imposes excessive standards at the time of inspecting completed work; and (d) the owner’s architect or engineer seeks to make revisions to correct or revise arguably defective drawings or specifications. Changes of these types frequently can increase the cost of a contractor’s performance or the time it will take the contractor to complete the project. Most contracts will require the issuance by the contractor of a notice of claim for the extra work associated with a Construction Change Directive or a minor change in order for the contractor to preserve its rights to additional compensation or time.

Accordingly, careful documentation and notice to the owner of the contractor's claim are imperative. Wherever possible, the contractor should carefully detail the ways that the revised work is inconsistent with the original requirements, the impact to the schedule, and the other added costs.

Illinois courts clarified the elements of what constitutes additional work and what constitutes extra work in the 1967 case of Watson Lumber Co. v. Guennewig, 79 Ill. App. 2d 377 (1967). See e.g.: Stark Excavating, Inc. v. Carter Constr. Servs., 967 N.E.2d 465 (Ill. App. Ct. 4th. 2012). In Watson, a contractor built a home with a contract price of $28,206, but full payment was withheld by the owner due to disputes over the construction. The contractor sued to recover the full contract price, and made additional claims for extras which were furnished by the contractor. The court in Watson held that a contractor seeking to recover for extras must establish all of the following elements:

•    The work was outside the scope of the contract promises;

•    The extra items were ordered by the owner;

•    The owner agreed to pay extra, either by words or conduct;

•    The extras were not furnished by the contractor as his voluntary act; and

•    The extras were not rendered necessary by any fault of the contractor. (Watson at 390).

The specific type of change encountered affects both the enforceability of the requested change as well as the amount that will be paid for such change. As a general rule, an owner may only request changes which are within the general scope of the work described in the contract documents. Under Illinois law, a request falling outside the general scope of the parties' agreement will not be enforceable under the existing contract, but instead will constitute a new contract. Compare Bulley & Andrews, Inc. v. Symons Corp., 25 Ill. App. 3d 696, 701, 323 N.E.2d 806, 810 (1st Dist. 1975) with Kell v. Kosary, 93 Ill. App. 2d 400, 403, 236 N.E.2d 349, 351 (1st Dist. 1968).

In Kell, the contractor initially agreed to construct new living quarters and garage for the owner. The parties subsequently agreed that the contractor would renovate an old garage at the same location. The Court determined that the agreement to renovate the old garage could not be enforced as part of the initial construction contract, because the subject matter was so different, but instead constituted part of a separate oral construction contract. Kell, 93 Ill. App. 2d at 403, 236 N.E.2d at 351. By contrast, in Bulley, the owner modified the type of “rustification strip” used by the contractor, who was held to have consented to an enforceable modification of the contract, rather than to a new contract, because the modification was consistent with the scope of the existing contract. As a result, the contractor was prohibited from seeking additional compensation for the expanded (but consistent) scope of work in the modified contract. Bulley, 25 Ill. App. 3d at 701, 323 N.E.2d at 810.

The courts have provided little guidance for the determination of whether a proposed change falls within the general scope of an agreement or is beyond the scope. One court has defined such changes as those which fairly and reasonably fall within the contemplation of the parties when the contract was executed. Freund v. United States, 260 U.S. 60, 62 (1922).

Another court has suggested that the determination of whether a change is beyond the scope of the contract is a matter of degree and the ultimate determination can be reached only “by considering the totality of the change” both as to its “magnitude” and “quality.” Saddler v. United States, 152 Ct. Cl. 557, 561, 287 F.2d 411, 413 (Ct. Cl. 1961). The United States Court of Claims focused on whether the changes were such that the end product was substantially different from the work the parties originally agreed to provide. J.D. Hedin Constr. Co. v. United States, 347 F.2d 235, 258 (Ct. Cl. 1965).

Cardinal Change

Other methods, outside the contract, can produce recovery for the contractor for extra work.  The "cardinal change" doctrine is available when the quantum of changes or the magnitude of a change creates a fundamental alteration of the scope of the contract so that it essentially breaches the contract. Air-A-Plane Corp. v. U.S., 408 F.2d 1030 (Ct. Cl. 1969).  The “cardinal change  falls beyond the general scope of the contract.  Allied Materials & Equipment Co., Inc. v. United States, 214 Ct. Cl. 406, 409 (Ct. Cl. 1978).  Cardinal changes are unenforceable and may constitute a breach of contract.  In such a situation, the contractor may terminate performance and sue for damages. Id.

There is no exact formula for determining when a change, or series of changes, alters the scope of the contract, and thereby breaches the contract.  Wunderlich Contracting Co. v. U.S. , 351 F.2d 956, 966 (Ct. Cl. 1965).  Neither the number of changes, nor the character of the modifications is the determining factor. J.D. Hedin Constr. Co. v. U.S., 347 F.2d 235, 258 (Ct. Cl. 1965); Air-A-Plane Corp., 408 F.2d at 1033.

Constructive Changes

The A201 defines a construction change directive (“Construction Change Directive”) as a written order prepared by the architect and signed by the owner and architect directing a change in the work prior to an agreement on the adjustment to the contract time or contract sum. See Section 7.3.1 of the A201. This method is useful when the parties need to expedite the work and do not have time to gather the necessary information on price. Nonetheless, at the earliest possible time thereafter, the parties should finalize the changes to the contract price and time by way of a written Change Order.

The standard “Changes” clauses specify that a change can only be made to the contract by a written order. Contract provisions requiring changes to be approved in writing are common and enforceable. See Central Penn Indus., Inc. v. Department of Transp., 25 Pa. Commw. 25, 358 A.2d 445 (1976); Linneman Constr., Inc. v. Montana-Dakota Utils. Co., 504 F.2d 1365 (8th Cir. 1974).  See also American Institute of Architects Form A201, General Conditions for the Contract for Construction (1997 ed.). This contract requirement will generally be upheld by the Pennsylvania courts. One Pennsylvania decision has noted:

It is a well-established rule of law that where, by the terms of a contract with a governmental body, written orders for additional work are required, the contractor cannot recover for extra work without compliance with the contractual provisions.

Dick Corp. v. State Public School Bldg. Authority, 27 Pa. Commw. 498, 500, 365 A.2d 663, 664 (1976).

A common issue is whether a directive from an owner or the owner's representative constitutes a change at all. An owner may request a change to the procedure or timing of performance as a project progresses. Such situations may result in an increase to the contractor's cost of performance. In these situations, a contractor will want a written change order to document the change so that it can collect additional costs resulting from the directive.

Conversely, the owner's agent will resist issuing a change order in those instances where it is simply altering the timing or procedure for performing an agreed task. See Duncan v. Cannon, 204 Ill. App. 3d 160, 166, 561 N.E.2d 1147, 1151 (1st Dist. 1990) (labor and materials that are incidental and necessary to the execution of the contract cannot be regarded as extra work). The issue of whether extra compensation can be successfully claimed is a fact-intensive question which turns on the extent of the added burden on the contractor's performance and the language in the contract. Any situation involving a disputed constructive change should be carefully documented by the parties, highlighting their communications and the actual impact on performance. In order to recover compensation, a contractor must be able to demonstrate the exact nature of the change and the owner's agreement to the change. Wilmette Partners v. Hamel, 230 Ill. App. 3d 248, 264, 594 N.E.2d 1177, 1189 (1st Dist. 1992); Curran Contracting Co. v. Woodland Hills Dev. Co., 235 Ill. App. 3d 406, 415-18, 602 N.E.2d 497, 504-05 (2d Dist. 1992).

Procedure for Implementation of Change Orders.

Virtually all construction contracts have provisions requiring a written order signed by the owner for additional work. Nevertheless, Illinois, like most jurisdictions, has carved out an exception to the requirement for a written order where the party has waived it and knew of the change or accepted the work with knowledge of the change. See, e.g., Mendelson v. Ben A. Bornstein & Co., 240 Ill. App. 3d 605, 616-17, 608 N.E.2d 187, 194-95 (1st Dist. 1992) (owner who knew of the change waived written order requirement by not strictly enforcing requirement); Berg and Assoc., Inc. v. Nelsen Signal & Wire Co., 221 Ill. App. 3d 526, 535-36, 580 N.E.2d 1198, 1204 (1st Dist. 1991) (actions or words of parties can waive requirement that written order be required for extra work); Bulley & Andrews, Inc. v. Symons Corp., 25 Ill. App. 3d 696, 703-04, 323 N.E.2d 806, 811-12 (1st Dist. 1976) (owner ordered extra work, was aware that it was extra, and permitted it to proceed without an order, thereby waiving need for written authorization).

A contractor also must guard against following the directive of an owner's representative who does not have the authority to make changes on behalf of the owner. Typically, construction contracts designate the individuals having authority to make changes which are binding upon the owner.

Under Illinois law, a contractor working on a public project acts at its own peril if it follows the directive of an owner's representative who lacks the authority to issue change orders.

NOTICE PROVISIONS.

The parties to the construction contract should pay close attention to the notice provisions of the contract. Notice provisions (i) facilitate requests by the parties for possible modifications and revisions to construction contracts including change orders, and (ii) are necessary to facilitate the discussion between owners and contractors with respect to possible delays in the performance of the work and similar issues arising during the construction process. A typical notice provision will provide for the timing of the notice, the person to whom the notice must be given, the manner in which the notice must be served, and the subsequent documentation to be provided by the party giving the notice. Each contract is different, and the specific times and conditions under which notices are required by owners and contractors vary widely. Nevertheless, courts will generally enforce these provisions, which can impose unanticipated adverse consequences on a party that fails to comply with the notice requirements. See generally Sarnoff v. De Graf Bros., Inc., 196 Ill. App. 3d 535 (1st Dist. 1990).

When notice provisions are clear and unambiguous in a contract, courts will normally construe notice requirements in strict accord with their meaning in the contract. Dean Mgmt., Inc. v. TBS Const. Inc., 790 N.E.2d 934 (Ill. App. 3d 2003). Actual or constructive notice has been deemed adequate by courts in regard to contractors seeking additional compensation for work performed under the agreement when the notice provisions of the terms of the agreement were ambiguous. Id. Additionally, courts have not deemed a failure to strictly comply with the notice provisions of an agreement fatal to a claim. Suburban Auto Rebuilders, Inc. v. Associated Tile Dealers Warehouse, Inc., 902 N.E.2d 1178 (Ill. App. 3d 2009). Written notice requirements of change orders have been waived by courts when the conduct of the parties indicates their intent to waive such stipulations. See e.g.: Lempera v. Karner, 79 Ill. App. 3d 221 (Ill. App. Ct. 1979).

Regardless of whether or not a court may impose strict notice requirements on a claimant under a construction contract, careful attention should be given to the notice provisions in a construction contract to assure that the notice requirements are reasonable under the circumstances, and will provide adequate notice to all parties involved without causing unnecessary burden to either party.

The A101 and A201 provide good examples of the importance of notice provisions in construction contracts. As noted earlier, the time the contractor is required to commence the contract can be set by a notice to proceed from the owner. This is contemplated by Section 3.1 of the A101. The A201 includes more than 15 different circumstances under which one party must give notice to the other (including, among others, claims for changes in the work), and the timing requirements with respect to such notices vary. As a result, both the contractor and the owner should refer to the contract regularly to ensure compliance with the procedures for making and preserving claims under the contract. Moreover, each party should consider whether it would benefit to add a single page to the contract that laying out all of the notice rules and deadlines in a single place in a straightforward way. This 15 minutes of foresight could save substantial time and money during the course of construction, and could serve to reduce the possibility of litigation.

Limitations on the Owner’s Power to Order Changes

A.  Exceeding the Scope, or Defeating the Purpose, of the Contract

Although the changes clause permits the owner to make unilateral changes – and requires the contractor to perform the modified work – there is a limit to the owner’s power (Valley Construction Co. v. City of Calistoga(1946) 72 Cal.App.2d 839, 842, 165 P.2d 521 [“the right to make alterations in the plans is limited to changes that do not unreasonably alter the character of the work or unduly increase its cost”).   Whether the owner exceeds that permissible limit, is a question of fact (Valley Construction at 72 Cal.App.2d 842-44). By doing so, the owner breaches the contract (Amelco Electric v. City of Thousand Oaks (2002) 27 Cal.4th 228, 238, 38 P.3d 1120, 115 Cal.Rptr.2d 900 [“Under the cardinal change doctrine, the cardinal change ‘constitutes a material breach of the contract.’ [citation]  The contractor may recover breach of contract damages for that additional work.”]).

The permissible limit can be exceeded by an extraordinary increase in the quantity of work (Daugherty v. Kimberly-Clark Corp.(1971) 14 Cal.App.3d 151, 92 Cal.Rptr. 120), by an extraordinary decrease in the quantity of work (Hensler v. City of Los Angeles (1954) 124 Cal.App.2d 71, 268 P.2d 12; Boomer v. Abbett (1953) 121 Cal.App.2d 449,463-65, 263 P.2d 476), or by an extraordinary change in the quality of the work (Coleman Engineering Co. v. North American Aviation, Inc. (1966) 65 Cal.2d 396, 55 Cal.Rptr. 1, 420 P.2d 713 [change in the center of gravity of missile transportation trailers that plaintiff agreed to build]).

Hensler v. City of Los Angeles(1954) 124 Cal.App.2d 71, 268 P.2d 12, involved construction of a runway and taxiways for LAX across a state highway.  The city could not get timely consent from the state to detour the highway, so it deleted the affected work by change order.  Hensler laid concrete around this gap, and sued for his lost profits on the deleted work.  Held (124 Cal.App.2d at 78-80):

There is no question but that … the language of this agreement looks to a complete work of public improvement. …  By the terms of the agreement, plaintiff bound himself to deliver the completed work required of him.  The corollary duty assumed by the city was to permit plaintiff to consummate the work he had undertaken, subject to its right to make changes, within designated limitations, in order to complete the project more satisfactorily.  The deletions ordered by the engineer did not have for their purpose the satisfactory completion of that which both parties set out to accomplish; the fact is that the project was abruptly terminated in an unfinished state, thus leaving the so-called improvement unusable in connection with the existing runways.  Nor were those deletions unnecessary to the project — the court found that defendant completed virtually all the work deleted from plaintiff’s contract through the medium of a new contract with a different company. …

The power vested in the engineer to effect changes in the quantities of the work is not so extensive as to enable him to abrogate or change the contract which the parties executed [citations], nor does it authorize defendant to employ such right to defeat the object of the contract which is reasonably deducible from its terms.  The changes which may be ordered … must clearly be directed either to the achievement of a more satisfactory improvement or the elimination of work not integrally necessary to the project.  The purpose of such powers is to maintain a degree of flexibility in adapting conditions to the end sought.  However, the discretion committed to the engineer must be exercised within the framework of the contract and for the purpose of implementing the work originally intended.  It cannot be used in an arbitrary manner, divorced from the object and intention of the contract, for the purpose of legitimatizing the deletion of so integral a part of the work as to leave the improvement in an unfinished condition and still insulate the city from liability.  [citations]  Such a construction would render nugatory plaintiff’s fundamental rights under the contract and give to defendant an unconscionable advantage plainly not intended. …

In Boomer v. Abbett (1953) 121 Cal.App.2d 449, 263 P.2d 476, the federal government contracted with Abbett to build a 25 mile transmission line in northern California that required about 225 steel towers.  Abbett subcontracted to Boomer the erection of the towers.  The subcontract had a typical flow-down clause incorporating the prime contract into the subcontract.  The government issued a change order deleting one mile in the middle of the transmission line involving 16 towers.  Subcontractor Boomer sued Abbett for its costs of preparing to perform that work and its lost profits on that work.  In reversing a directed verdict against Boomer, the court explained (121 CA2d at 464-65):

We do not believe that the prime contract, as a matter of law, authorized the deletion of the 16 towers without liability except for an “equitable adjustment.”  There can be no doubt that the prime contract contemplated that some towers might be deleted during construction, and that such deletion could be made without liability.  But the contract also contemplated and provided that the transmission line was to be constructed.  It is a contract to construct a transmission line, not to construct about 225 towers.  It is one thing to delete towers found to be unnecessary in the construction of the transmission line.  It is quite another to delete an integral part of the work that results in the transmission line not being constructed.  This 1-mile gap in the transmission line was not bridged until four years after this dispute arose, and then by a wooden pole line. …

Under the cases, if the contract imposes a duty on the government to complete the construction of the structure involved in the contract, a “changes” clause does not authorize the deletion of an integral part of the work.  [citations]  These cases establish the law to be that under a changes clause the government has no power to change the essential nature or main purpose of the contract, but may only make changes incidental to the primary object of the contract.  The change order under such clauses may not essentially alter the project contemplated by the contract.

This construction of such clauses is not only in accordance with their obvious purpose, but is also strongly supported by public policy.  If the government were empowered by such clauses to alter materially the object of the contract, after construction had started, all bidders would have to take such possibility into consideration and materially raise their bids in anticipation of such losses, thus increasing the cost of public works.

Thus the question is, did the deletion of the 16 towers materially alter the fundamental object of the contract, or merely provide for a deletion incidental to the primary object of the contract?  This was a question of fact … that should have been left to the jury.

A change order, or group of change orders, that exceeds the permissible limit may be called a change in the scope of the work or change in the character of the work (Valley Const. Co. v. City of Calistoga(1946) 72 Cal.App.2d 839, 165 P.2d 521) or a “cardinal change” in the contract (Cray Research, Inc. v. Department of Navy(D.C.Dist. 1982) 556 F.Supp. 201).  Exceeding the limit may also be characterized as an “abandonment” of the contract (C. Norman Peterson Co. v. Container Corp. of America(1985) 172 Cal.App.3d 628, 218 Cal.Rptr. 592; Daugherty v. Kimberly-Clark Corp. (1971) 14 Cal.App.3d 151, 92 Cal.Rptr. 120; Opdyke & Butler v. Silver (1952) 111 Cal.App.2d 912, 917-19, 245 P.2d 306; but see Amelco Electric v. City of Thousand Oaks (2002) 27 Cal.4th 228, 115 Cal.Rptr. 2d 900, 38 P.3d 1120, where the majority purports to distinguish “abandonment” from “cardinal change” for purposes of local government contracts only [27 Cal.4th at 236-38], and the dissent explains why the distinction is nonsense which no other jurisdiction in the United States has adopted [27 Cal.4th at 248-253]).

Besides describing changes beyond the permissible limit by different names, the courts have also struggled to define the permissible limit.  It has been described as “what should be regarded as having been fairly and reasonably within the contemplation of the parties when the contract was entered into” (Freund v. U.S. (1922) 260 US 60, 63), or as prohibiting “changes [that] are of great magnitude in relation to the entire contract” (Coleman Engineering Co. v. North American Aviation, Inc. (1966) 65 Cal.2d 396, 406, 55 Cal.Rptr. 1, 420 P.2d 713), or as prohibiting changes “to the essential nature or main purpose of the contract … .  Thus the question is, did the [change] materially alter the fundamental object of the contract, or merely provide for a [change] incidental to the primary object of the contract?” (Boomer v. Abbett(1953) 121 Cal.App.2d 449, 464-65, 263 P.2d 476), or as prohibiting changes in “the character of the work or unduly increase its cost” (Valley Construction Co. v. City of Calistoga(1946)72 Cal.App.2d 839, 842, 165 P.2d 521).

The cardinal change/abandonment theory can be used by a subcontractor against a prime contractor (Sehulster Tunnels/Pre-Con v. Traylor Brothers, Inc./Obayashi Corporation (2003) 111 Cal.App.4th 1328, 1343-46, 4 Cal.Rptr.3d 655 [tunnel for City of San Diego]; Daugherty v. Kimberly-Clark Corp.(1971) 14 Cal.App.3d 151, 92 Cal.Rptr. 120 [private job]; Boomer v. Abbett (1953) 121 Cal.App.2d 449, 263 P.2d 476 [transmission line for federal government]).

The Relationship Between Extra Work and Change Orders

A.  General Rule:  Extra Work Requires a Change Order

Change orders should be issued when the contractor is required to do extra work.  Extra work is labor, services, equipment or materials provided by the contractor that was neither required by the contract nor expected to be included by the parties when the contract was executed (City Street Improvement Company v. Kroh (1910) 158 Cal. 308, 321, 110 Pac. 933 [“Extra work is, of course, work not included in the contract.”], C. F. Bolster Co. v. J. C. Boespflug etc. Co.(1959) 167 Cal.App.2d 143, 151, 334 P.2d 247; Frank T. Hickey, Inc. v. L. A. J. C. Council (1955) 128 Cal.App.2d 676, 683, 276 P.2d 52).

If the owner admits that extra work was required, a change order will be issued.  If the owner refuses to issue a change order, the contractor will usually proceed with the work and pursue a claim for extra work under either a breach of contract theory (Byson v. Los Angeles (1957) 149 Cal.App.2d 469, 473, 308 P.2d 765 [“Plaintiff could comply with the demands of the city [for extra work] and sue for breach of contract.”]) or an implied contract theory (City Street Improvement Company v. Kroh (1910) 158 Cal. 308, 323, 110 Pac. 933 [“In cases where extra work is caused by authorized deviations from a building contract, and no agreement is made regarding the price thereof, or payment therefor, the law implies an agreement by the owner to pay the reasonable value of the extra work. … and for the extra labor, the party is entitled to his quantum meruit.”]; Benson Elec. Co. v. Hale Bros. Assoc., Inc.(1966) 246 Cal.App.2d 686, 697-98, 66 Cal.Rptr. 73; C. F. Bolster Co. v. J. C. Boespflug etc. Co. (1959) 167 Cal.App.2d 143, 151, 334 P.2d 247).

B.  What the Contract Requires the Contractor to Do

Most extra work disputes arise when the contractor reads the plans and specifications differently than they are read by the owner or design professional.  These disputes are usually resolved by the parties doing a careful analysis of the contract documents, applicable reference documents, and customs and practices in the industry.  When the analysis reveals that extra work is required, the contractor is entitled to a change order.  If the dispute goes into arbitration or litigation, expert witnesses often will testify about what the contract documents and reference documents really require, or what the industry customs and practices are in these situations (e.g., Warner Constr. Corp. v. City of Los Angeles (1970) 2 Cal.3d 285, 291-93, 85 Cal.Rptr. 444, 466 P.2d 996).

Sometimes these disputes fall into patterns for which legal doctrines have been developed.  The underlying concept is that a contractor only has to build what the parties actually agreed would be built.  This concept leads to (1) the implied warranty that contract documents are complete and accurate, and (2) what amounts to another implied warranty that information made available to bidders accurately and completely represents the actual nature of the work (a breach of this inchoate warranty is now often described as a non-disclosure of material facts).  The implied warranty that contract documents are accurate and complete focuses upon what the contract documents actually require the contractor to do.  It is breached when the contract documents call for work that cannot be done or will not achieve the purpose of the project; therefore, extra work is required to produce the proper or desired result.  The implied warranty of accurate and complete bid information focuses upon all of the information made available to the contractor for preparation of its bid, not just the contract documents.  It is breached when the owner provides incomplete or inaccurate pre-bid information about job conditions, thereby misleading bidders about the scope or nature of the work, and, as a result, requiring extra work to produce the result anticipated by the owner.

Many situations otherwise falling under these doctrines are now addressed by a changed or differing site conditions clause.  That clause is not discussed here.

1.  Implied Warranty of Complete and Accurate Contract Documents

Both statutes and court decisions require the owner to provide the contractor with complete and accurate contract documents.  Any extra work required to correct deficiencies arising from inadequate plans or specifications must be paid for by the owner as either a breach of the implied warranty that that the contract documents are complete and accurate, or as a breach of a statutory duty to provide such contract documents.

Examples of the California statutes are:  California Government Code section 4004 (“Prior to the commencement of the public work, the engineer [defined to include engineers of the state, a county, a city and any “other district or political subdivision or agency of the state”] shall prepare and file in his office … full, complete and accurate plans and specifications …”), and California Public Contract Code section 1104 (“No local public entity [or] charter city … shall require a bidder to assume responsibility for the completeness and accuracy of … plans and specifications on public works projects, except on clearly designated design-build projects.”), section 10120 (“Before entering into any contract for a project, the department shall prepare full, complete, and accurate plans and specifications and estimates of cost, giving such directions as will enable any competent mechanic or other builder to carry them out.” On this statute see discussion in Welch v. State of California (1983) 139 Cal.App.3d 546, 559, 188 Cal.Rptr. 726), section 10503 (“Before entering into any contract for a project, the Regents of the University of California shall cause to be prepared estimates and either: ¶ (a) Complete plans and specifications setting forth such directions as will enable a competent mechanic or other builder to carry them out. … [or] Documents for the solicitation of bids on a design-and-build basis … [or] for construction manager mode of contracting … [or] on a cost-plus fee mode of contracting … [or] other contracting mode …”), section 10720 (“Before entering into any contract for a project, the trustees … shall cause to be prepared full, complete, and accurate plans and specifications and estimates of cost, giving such directions as will enable any competent mechanic or other builder to carry them out.”), sections 20124, 20391 and 20404 for counties, their highways, bridges and subways, section 20621 for county drainage  districts, section 20192 for municipal utility districts, section 20201 for public utility districts, and section 22039 for agencies that have joined the uniform construction cost accounting program.

The court case usually cited as the source for the owner’s implied warranty that the contract documents are complete and accurate is U.S. v. Spearin(1918) 248 U.S. 132, 63 L.Ed. 166, 39 S.Ct. 59.  The court held (at 248 U.S. 137-38):

[I]f the contractor is bound to build according to plans and specifications prepared by the owner, the contractor will not be responsible for the consequences of defects in the plans and specifications.  This responsibility of the owner is not overcome by the usual clauses requiring builders to visit the site, to check the plans, and to inform themselves of the requirements of the work … [¶]  “[T]he insertion of the articles prescribing the character, dimensions and location of the sewer imported a warranty that, if the specifications were complied with, the sewer would be adequate. … [¶] …  The breach of warranty … [made the Government] liable for all damages resulting from its breach.

California cases also find such an implied warranty in contract documents.  The seminal California case is probably Souza & McCue Construction, Co., Inc. v. Superior Court  (1962) 57 Cal.2d 508, 20 Cal.Rptr. 634, 370 P.2d 338.  There the contractor was allowed to amend its cross-complaint to allege that the city had concealed its breach of the warranty.  The court held (at 57 Cal. 2d 510-11):

A contractor of public works who, acting reasonably, is misled by incorrect plans and specifications issued by the public authorities as the basis for bids and who, as a result, submits a bid which is lower than he would have otherwise made may recover in a contract action for extra work or expenses necessitated by the conditions being other than as represented.  [citations]  This rule is mainly based on the theory that the furnishing of misleading plans and specifications by the public body constitutes a breach of an implied warranty of their correctness.  [citations]  The fact that a breach is fraudulent does not make the rule inapplicable.  [citations].

In Macomber v. State of California(1967) 250 Cal.App.2d 391, 58 Cal.Rptr. 393 the plans failed to accurately show the existing conditions into which a new spiral staircase had to fit.  The court observed (at 250 Cal.App.2d 397):

The State does not question the general rule that a contractor who, acting reasonably, is misled by incorrect plans and specifications and who, as a result, submits a bid which is lower than he would otherwise have made, may recover in a contract action for extra work necessitated because of the incorrect plans and specifications.  [citations]  Also, the State concedes that its plans and specifications were incorrect.

In Tonkin Construction Co. v County of Humboldt(1987) 188 Cal.App.3d 828, 233 Cal.Rptr. 587, the contract required work on a seawall to be completed within 40 working days of the notice to proceed, or the contractor would be assessed liquidated damages.  That work could not be performed without a dredge that was under contract with the Corps of Engineers.  The contract informed Tonkin that it had to coordinate scheduling with the Corps.  Despite all of Tonkin’s coordination efforts, the dredge did not timely arrive.  Tonkin recovered its extra work and standby costs.  Held at 188 Cal.App.3d 832:

Clearly an implied term of the contract herein was that once the notice to proceed was issued, the dredge would be available for work on the project.  The apparent intention of the parties was completion of the seawall within 40 working days of the issuance of the notice to proceed. …  This intention of prompt completion of the seawall could not have been effectuated absent an implied term that the County would insure the dredge’s availability for work on the project. …

Tonkin, acting as a reasonable public works contractor, was misled by this incorrect implied representation in its submission of a bid.  Tonkin justifiably relied on this representation in determining the cost of constructing the seawall.  Accordingly, it did not include in its bid the cost of maintaining the seawall for an indefinite period of time while awaiting the arrival of the dredge.  As the County impliedly warranted the correctness of these representations, it is liable for the cost of extra work which was necessitated by the dredge’s failure to arrive.

2.  Corollary to Implied Warranty of Complete and Accurate Contract Documents

A corollary to the implied warranty that the contract documents are complete and accurate is the absence of any duty of the contractor to correct defects in the contract documents by building something other than what the contract documents prescribe.  In Kurland v. United Pacific Insurance Company (1967) 251 Cal.App.2d 112, 59 Cal.Rptr. 258, the subcontract called for the air conditioning system to cool the building 30 degrees below the outside temperature.  However, the subcontractor did not design the system, and the subcontract required the system to be built according to plans and specifications provided by the owner.  The specified system was inadequately designed, and could not achieve the 30-degree temperature reduction.  The subcontractor refused to perform extra work to make the system achieve that goal.  The owner and prime contractor sued the subcontractor’s performance bond surety for the cost of that extra work.  They lost.  Held at 251 Cal.App.2d 117-19:

Our conclusion is that the subcontractor did not warrant or guarantee that the system embodied in the architect’s plans and specifications would produce the desired variation from outside temperature for the cooling of the apartment building.

Since the plans and specifications were prepared by the owners’ architect and not by the subcontractor, and since the subcontractor undertook to do the work in accordance with his specific proposal, we cannot reasonably conclude that the subcontractor assumed responsibility for the adequacy of the plans and specifications to meet the purpose of achieving “a 30 degree variation from outside temperature for cooling.”  The language upon which the plaintiff relies constituted a statement of the purpose sought to be achieved by means of the owners’ plans and specifications rather than an undertaking on the part of the subcontractor of responsibility for the adequacy of such plans and specifications as the design of a system capable of producing the desired result.

In the light of the reasoning which has been heretofore set forth in this opinion, we construe the “guarantee” as being an undertaking on the part of the subcontractor not that the system as designed was adequate to produce the results desired by the owners but that the subcontractor’s work pursuant to the plans and specifications would be done as effectively as possible to achieve those desired results.  Because of the defects in the design to which the subcontractor had to adhere, that goal could not be reached.  It would not be reasonable to construe the language of “guarantee” as being sufficiently broad to constitute a basis for a transfer to the subcontractor of responsibility for defective plans and specifications procured by the owners.

In Sunbeam Construction Co. v. Fisci(1969) 2 Cal.App.3d 181, 184, 82 Cal.Rptr. 446, the owner sought the cost to fix a leaking roof.  The court explained the owner’s argument (at 2 Cal.App.3d 184):

[The owner] concedes that the roof was constructed in a good and workmanlike manner and in exact conformance to the plans and specifications furnished by [the owner], which did not call for a pitch, slope or crown.  [The owner’s] sole contention is that a contractor is liable under an implied warranty for leaking of a roof covering where drainage of water is not provided by it, even though the contractor complies with the plans and specifications furnished which do not provide for drainage.

The court rejected the owner’s argument and affirmed a summary judgment in favor of the contractor.

Thus, when the contract documents tell the contractor what to do, but fail to adequately describe the work or conditions required to achieve the anticipated result, the contractor cannot be compelled to perform extra work to achieve that result without getting a change order for the extra work, or without compensation for the extra work if the contractor proceeds without a change order.

3.       Implied Warranty of Accurate and Complete Bidding Information

(Non-disclosure of Material Facts)

Turning to the implied warranty that bidding information is accurate and complete, the court case usually cited as the source of that warranty is Hollerbach v. U.S. (1914) 233 U.S. 165, 58 L.Ed. 898, 34 S.Ct. 553.  The contract was for repair of a dam; the existing conditions were misrepresented in the bidding documents.  The court held (at 233 U.S. 172):

[T]he specifications spoke with certainty as to a part of the conditions to be encountered by the claimants. …  this positive statement of the specifications must be taken as true and binding upon the Government … [U]pon it rather than upon the claimants must fall the loss resulting from such mistaken representations. …

The seminal California case is probably Gogo v. Los Angeles County Flood Control District (1941) 45 Cal.App.2d 334, 114 P.2d 65.  The contract required excavation of rock for a dam.  The agency represented both orally and in bidding documents that ongoing quarry operations would reduce the rock grade to a certain elevation.  It did not.  When the contractor came onto the job site, it had to remove over twice the estimated 52,000 cubic yards of rock.  Held (at 45 Cal.App.2d 341-42):

It may be stated generally that where the plans and specifications induce a public contractor reasonably to believe that certain indicated conditions actually exist and may be relied upon in submitting a bid, he is entitled to recover the value of such extra work as was necessitated by the conditions being other than as represented. [citations, including Hollerbach]   The facts of the instant case bring it within the foregoing rule.

The authorities are divided concerning the theory upon which recovery is allowed in this type of case. …  [T]he correct basis of recovery is on the theory that the action is one to recover damages for the misrepresentation by which the contract was induced.  (Hollerbach v. United States [233 U.S. 165, 34 S.Ct. 553, 58 L.Ed. 898] …)  It would be inequitable to permit defendant to enforce the literal terms of the contract which called for the excavation of “all materials” necessary to complete the job when plaintiffs were induced by defendant’s misrepresentation to submit a bid which was much lower than was warranted by the true facts.  If instead of stating in the specifications that West Slope Construction Company would excavate to rough grade, defendant had stated the true facts of which it had knowledge–that West Slope Construction Company was obligated by contract to excavate no lower than five feet above grade–the present situation would not have arisen.  Having failed to impart this knowledge to plaintiffs and having willfully or carelessly misrepresented the true situation, defendant is obligated to plaintiffs for the additional work occasioned.

The warranty of accurate and complete bidding information extends to subcontractors.  In Coleman Engineering Co. v. North American Aviation, Inc. (1966) 65 Cal.2d 396, 55 Cal.Rptr. 1, 420 P.2d 713, North American provided bidding documents to Coleman describing trailers North American needed to transport missiles it was building for the federal government.  Those documents indicated that the trailers’ center of gravity was different than North American actually wanted.  Coleman’s bid was based upon the information provided, so it refused to proceed with the revised center of gravity without a substantial price adjustment.  North American terminated the contract.  Coleman sued for its costs trying to perform; North American cross-claimed for the difference between Coleman’s bid and the cost to have another firm build the trailers.  Held (at 65 Cal.2d 404):

A contractor who, acting reasonably, is misled by incorrect plans and specifications issued by another contracting party as the basis for bids and who, as a result, submits a bid which is lower than he would otherwise have made may recover in a contract action for extra work necessitated by the incorrect plans and specifications.

In Warner Constr. Corp. v. City of Los Angeles(1970) 2 Cal.3d 285, 294, 85 Cal.Rptr. 444, 466 P.2d 996, the court describes a breach of the implied warranty that bidding information is accurate and complete as a cause of action for non-disclosure of material facts:

In transactions which do not involve fiduciary or confidential relations, a cause of action for non-disclosure of material facts may arise in at least three instances: (1) the defendant makes representations but does not disclose facts which materially qualify the facts disclosed, or which render his disclosure likely to mislead, (2) the facts are known or accessible only to defendant, and defendant knows they are not known to or reasonably discoverable by the plaintiff;  (3) the defendant actively conceals discovery from the plaintiff. [footnotes omitted]

Thus, the elements of a cause of action for breach of the implied warranty that bidding information is accurate and complete – or for non-disclosure of material facts – are: (1) information that was made available to the bidders contained material facts about the project, and (2) the contractor relied upon that information in preparing its bid, but (3) that information failed to disclose other material facts (a) that the owner concealed from the contractor, or (b) that the owner knew were not reasonably discoverable by the contractor, or (c) that significantly qualified the facts which were disclosed, or (d) that made the facts disclosed likely to mislead the bidder, and (4) as a result of its reliance, the contractor’s bid did not cover all of the work which was required.

Subsequent California cases follow the Warnerformulation.  In Welch v. State of California (1983) 139 Cal.App.3d 546, 188 Cal.Rptr. 726, the contract for repair of a bridge fender required work by divers.  The contract documents provided misinformation about the tides and current under the bridge.  Caltrans had recently repaired a nearby fender on the same bridge, had relied upon information from that project to design the one in this case, but failed to disclose any information about that project in the bidding documents for this project.  Strong currents interfered with diving, and high tides forced a change in construction methods from pouring concrete in place to precasting in sections.  Welch sued for the increased costs.  Held (at 139 Cal.App.3d 558):

The undisclosed information doubtless would have qualified or cast doubt upon any false impression of favorable tide conditions given by the tide data in the general note.  The failure to disclose such information compounded the effect of misleading half-truths in the general note.

Therefore, Welch had a cause of action for nondisclosure.

In Howard Contracting Inc. v. G. A. MacDonald Construction Co., Inc. (1998) 71 Cal.App.4th 38, 83 Cal.Rptr.2d 590, the contractor recovered damages for nondisclosure, because the agency failed to disclose construction constraints which it knew would be contained in permits that were not issued until after bid day.

4.  Determining Whether a Misrepresentation or Nondisclosure Occurred

When the contractor asserts a breach of the implied warranty of complete and accurate contract documents, the court will search the contract documents for an actual statement by the owner that misled the contractor.  When the court cannot find one, the contractor loses.  In Wunderlich v. State of California (1967) 65 Cal.2d 777, 784-785, 56 Cal.Rptr. 473, 423 P.2d 545, the Caltrans contract documents told bidders that “samples” taken from potential borrow sites “indicated” material of “satisfactory quality” for base, gravel blanket and mineral aggregate.  Caltrans offered access to its test results from those sites.  For the borrow site Wunderlich ultimately decided to use, an internal Caltrans memo, which was shown to Wunderlich’s estimator before bid time, reported tests showing 55% to 88% of the material passing a No. 4 sieve (material passing this sieve is sand, material not passing is gravel).  Wunderlich assumed from this information that the borrow site would yield the median amount of gravel (about 30%).  Wunderlich found much less gravel, and complained to Caltrans.  Caltrans performed new tests, which were consistent with the pre-bid tests.  Wunderlich sued claiming that Caltrans had warranted the quantity of gravel in the selected borrow pit.  The court rejected that argument (at 65 Cal.2d 783-85):

The Special Provisions state simply that samples had been taken from the pit, and that they appeared to point to the fact that there was suitable material in the pit.  There was no representation as to quantities in the source, or that a consistent proportion of materials would be found throughout the source. … [T]he memorandum … does not purport to disclose the average of overall condition of the Wilder pit.  It purports to explain, rather, that the pit was composed of sand and gravel, and expressly states that “some test holes encountered considerable coarse material, while others were practically all sand.”  It forewarns bidders that there might be more sand than anticipated …  Although the memorandum accurately reported the fact that borings results ranged from 55 percent to 88 percent sand, this would hardly seem to warrant the conclusion that the pit would average the median of that range, as claimed by plaintiffs. …

There is no positive representation as to the material content of the Wilder pit.  The state did little more than report the results of its testing. … and the plaintiffs were given or had access to the identical, accurate information that was available to the state.

What plaintiffs argue, in effect, is that by the presentation of its borings and tests, though accurately reported, the state assumes liability for the contractor’s erroneous assumption in bidding that the pit would average approximately a fixed percentage of gravel. …

In the instant case … [a]ll the information the State had concerning the soil conditions was available to claimant and claimant had been invited to make an investigation of its own.  Under these circumstances, the State is not chargeable for claimant’s loss. …

When the contractor asserts a nondisclosure of material facts, the court will search for an impact on the contractor’s bid from information that was withheld or from half-truths in the bidding information.  When it cannot find any, the contractor loses.  In Wiechman Engineers v. State of California (1973) 31 Cal.App.3d 741, 107 Cal.Rptr. 529, the contract documents offered access to soil borings which showed substantial subsurface boulders, and Weichman’s estimator’s own site visit revealed many boulders on the surface.  When the boulders Weichman encountered made construction of the road much more difficult and time consuming, Weichman sued for nondisclosure of the boulder information Caltrans had.  The court rejected Weichman’s argument, holding (at 31 Cal.App.3d 752-53):

Here, there was no representation of any kind as to subsurface conditions.  Absent such a representation, there was no disclosed fact which was likely to mislead plaintiff.

Secondly, knowledge of the boulderous condition was not known or accessible only to the state, nor did the state have such facts as were not known or reasonably discoverable by plaintiff, if plaintiff had made what would have been admittedly a reasonable and prudent inquiry.

As previously pointed, out, section 5-1.05 of the Special Provisions of the contract provided in part: “Where such investigations [of subsurface conditions in areas where work is to be performed] have been made, bidders or Contractors may, upon written request, inspect the records of the Department as to such investigations . . . .”

Nothing in this language in any way limited accessibility or precluded plaintiff from obtaining all information available if it desired to inquire.  Thus, there was no concealment of the boulderous condition on the job site or the test hole surveys.  The record clearly shows actual visibility of boulders in the job area, a fact readily apparent and knownto plaintiff before the bid was submitted, as evidenced by Barkley’s detailed testimony.

Finally, Barkley, the very person entrusted with the responsibility to investigate and prepare the contractor’s bid, not only assumed the state had test information as to the road subsurface, but testified he simply decided not to inquire about the same, fully mindful of the fact that the movement of rocks and boulders necessarily would be involved in the performance of the contract.  We observe that had plaintiff elected to examine the available test hole surveys, it merely would have confirmed what onsite observations disclosed; namely, that the work of construction was to be undertaken in a boulderous area and the degree and nature of the condition would be something to consider when submitting a bid.  Plaintiff elected to make its decision in this regard based on its own expertise in performing the work and its own judgment that further inquiry as to subsoil conditions was not required.

A public entity is not liable for an imprudent or careless investigation on the part of a contractor. …

See also Jasper Construction, Inc. v. Foothill Jr. College Dist. of Santa Clara County  (1979) 91 Cal.App.3d 1, 153 Cal.Rptr. 767.

5.       Effect of Disclaimers

Since commercial contracts seek protection against the unknown, it is not surprising that owners (both public and private) have long sought to insulate themselves from the mysteries that lie beneath or within the subject work area.  Federal agencies first recognized the unfairness caused by this reasoning.  Contractors were expected to be able to predict the conditions and applicable costs of performing work, while being unable to seek additional compensation from the government if the contractor’s “crystal ball” wasn’t accurate on a particular occasion.  Government information was not mandatory, which left the contractor in a position to assume all risks involved.

Federal contract clauses attempt to balance the risk between the parties.  Private contracts, however, do not necessarily possess the uniformity of provisions found in all federal contracts.  Courts interpreting private contracts have demonstrated little uniformity in their decisions as to the effectiveness of exculpatory language vis-a-vis changed conditions.  One reason for this is the vast variety of types of general conditions to be found in private contracts.  Changed condition clauses range from the very explicit to nonexistent, and exculpatory provisions may be generously added.

Differing site claims interpreted under state laws clearly illustrate the principle that each case stands on its own facts, based on various states’ interpretations. Case law precedent becomes less compelling given the different circumstances that may arise from one contract to the next.  Not only will the facts giving rise to the claim always differ, but the provisions upon which the claims (or defenses to the claims) are based may vary by only as much as a phrase and still affect the outcome.

The courts refuse to allow general disclaimers to overcome either of the implied warranties.  In U. S. v. Spearin (1918) 248 US 132, 137, 63 L.Ed 166, 39 S.Ct 59, the court held that the implied warranty that the contract documents are complete and accurate is not overcome by the general clauses requiring the contractor, to examine the site, to check up the plans, and to assume responsibility for the work until completion and acceptance.  The obligation to examine the site did not impose upon him the duty of making a diligent enquiry into the history of the locality with a view to determining, at his peril, whether the sewer specifically prescribed by the Government would prove adequate.  The duty to check plans did not impose the obligation to pass upon their adequacy to accomplish the purpose in view.  And the provision concerning contractor’s responsibility cannot be construed as abridging rights arising under specific provisions of the contract.  [¶]  Neither § 3744 of the Revised Statutes, which provides that contracts of the Navy Department shall be reduced to writing, nor the parol evidence rule, precludes reliance upon a warranty implied by law.  [footnotes omitted]

In Hollerbach v. U.S. (1914) 233 U.S. 165, 58 L.Ed. 898, 34 S.Ct. 553, paragraph 20 of the specifications declared that:

quantities given are approximate only, and that no claim shall be made … on account of any excess or deficiency …  Bidders … are expected … to visit the locality of the work, and to make their own estimates of the facilities and difficulties attending the execution of the proposed contract, including local conditions, uncertainty of weather, and all other contingencies.

And, specifications paragraph 70 required each bidder to “visit the site … and ascertain the nature of the work … and obtain the information necessary to enable him to make an intelligent proposal.”  Nonetheless, the court rejected the argument that these clauses insulated the owner from its positive misrepresentations of job site conditions in other clauses, holding (at 233 U.S. 172):

[I]t would be going quite too far to interpret the general language of the other paragraphs as requiring independent investigation of facts which the specifications furnished by the Government as a basis of the contract left in no doubt.  If the Government wished to leave the matter open to the independent investigation of the claimants it might easily have omitted the specification as to the character of the filling back of the dam.  In its positive assertion of the nature of this much of the work it made a representation upon which the claimants had a right to rely without an investigation to prove its falsity.

California courts follow the same rules.  In E. H. Morrill Company v. State of California (1967) 65 Cal.2d 787, 789-90, 423 P.2d 551, 56 Cal.Rptr. 479, the contract stated, “Boulders … vary in size from one foot to four feet in diameter.  The dispersion of boulders varies from approximately six feet to twelve feet in all directions, including the vertical.”  However, the boulders found were substantially larger and more concentrated.  Held (at 65 Cal.2d 791-93):

[T]he complaint states a cause of action for recovery on a theory of breach of implied warranty …

The responsibility of a governmental agency for positive representations it is deemed to have made through defective plans and specifications “is not overcome by the general clauses requiring the contractor, to examine the site, to check up the plans, and to assume responsibility for the work. …” (United States v. Spearin, 248 U.S. 132, 137 [63 L.Ed. 166, 39 S.Ct. 59].)  Accordingly, the language in section 4 requiring the bidder to “satisfy himself as to the character . . . of surface and subsurface materials or obstacles to be encountered” cannot be relied upon to overcome those representations as to materials and obstacles which the state positively affirms in section 1A-12 not to exist, and plaintiff was entitled to rely and act thereon.

Even when the disclaimers are more specific, California courts are inclined to read them narrowly to preserve a contractor’s implied warranty claim.  In Warner Constr. Corp. v. City of Los Angeles(1970) 2 Cal.3d 285, 85 Cal.Rptr. 444, 466 P.2d 996, the test-hole logs had a warning:

The test-hole information on these plans shows conditions found only at the date and location indicated.  Bidders are cautioned that the city in no way warrants that such information is representative of conditions at any other location, or at any other time.  Groundwater levels, particularly, are subject to change.

City argued that this warning disclaimed the warranty, but the court held (at 2 Cal.3d 292):

[W]e find, on closer examination, that the warranty and the disclaimer pass each other without collision.  The warranty describes the subsurface conditions at the test holes, but says nothing about conditions elsewhere on the site.  The disclaimer states that “the test-hole information … shows conditions found only at the date and location indicated,” and cautions bidders that the city does not warrant that the data is representative of other locations, but it in no way disclaims the accuracy of the test-hole logs.  Reading the two together, we conclude that the bidder takes the risk in making deductions from accurate test data, but the city retains responsibility for any inaccuracy in the data.  [footnotes omitted]

Welch v. State of California (1983) 139 Cal.App.3d 546, 551, 188 Cal.Rptr. 726, holds:

Although the contract between Caltrans and Welch contains a provision requiring on-site inspection by contractors as well as other general disclaimers of warranty, it does not absolve the State from responsibility for positive and material misrepresentations contained in the plans and upon which a contractor had a right to rely.  [citations]  There is no provision in the contract specifically disclaiming any responsibility on the part of the State for the accuracy of the tide data contained in the general note.

In Tonkin Construction Co. v County of Humboldt(1987) 188 Cal.App.3d 828,233 Cal.Rptr. 587, the county argued that the contractual requirement that Tonkin coordinate scheduling with the Corps of Engineers constituted a disclaimer as to the exact time of the dredge’s arrival.  Held (at 188 Cal.App.3d 833-34):

[T]he facts of the instant case do not reveal an explicit disclaimer with respect to the County’s implied representation of the dredge’s availability.  Absent a contract provision specifically disclaiming responsibility on the part of the public body for the accuracy of the contested information, general disclaimers of warranty will not absolve the public body from responsibility for positive and material misrepresentations contained in the plans and upon which a contractor had a right to rely.

However, when the disclaimer is precise and is contained in the same contract clause as the representation on which the breach of warranty claim is based, the disclaimer may be enforced.  In Wunderlich v. State of California (1967) 65 Cal.2d 777, 56 Cal.Rptr. 473, 423 P.2d 545, the court held that there was no representation concerning the quantity of gravel Wunderlich could expect in the borrow site.  The court also pointed out (at 65 Cal.2d 785-86):

[A]ny representation as to the quantity of materials in any of the sources described by the state was explicitly and clearly disclaimed by an express provision of the Special Provisions.  At the outset of the same paragraph in which the representation is found, the bidders are referred to section 6 of the Standard Specifications.  That section provides expressly that when sources of material are designated, the contractor shall satisfy himself as to the quantity of acceptable materialwhich may be produced at the source, and disclaims state responsibility for the quantity of acceptable material.  Hollerbach[v. U.S. (1914) 233 U.S. 165, 58 L.Ed. 898, 34 S.Ct. 553] and the other cases relied upon by plaintiffs to establish liability of the state do not stand for the proposition that the government may never effectively disclaim the intention to warrant conditions.  In the Hollerbachcases there was no specific disclaimer [citation], just as there was no indication to bidders of the basis upon which the statement had been made.  In the instant case, however, the very paragraphs containing the alleged warranty contain direct references to disclaimer paragraphs and to a specific disclaimer of the attributes of the source allegedly warranted.

Given this background, no hard and fast rules can be given regarding disclaimers and their effect on changed condition clauses. The following cases demonstrate why this is true:

A contractor was required to dredge to a minimum depth of 38 feet in a designated area.  Boring logs included in the bidding documents specified sand, silt and limestone fragments.  However, solid, heavy rock was encountered when dredging began.  The owner denied the contractor’s DSC claim on the basis that, among other things, the boring information only represented a general indication of the materials likely to be found adjacent to the boring holes.  The court found that the boring information which was furnished was misleading since it did not, in fact, give a general indication of the materials likely to be found.  Cruz Construction Co., Inc. v. Lancaster Area Sewer Authority, 439 F. Supp. 1202 (E.D. Pa. 1987).

While constructing an irrigation pumping system, the contractor encountered conditions materially different from those indicated in the plans and brought suit for its additional costs under the DSC clause in the contract (identical to the federal DSC clause).  The owner (State of Montana) contended that exculpatory language in the contract required that the contractor make an affirmative effort to inquire about discrepancies in the plans.  The Court held that the exculpatory clauses relied on by the State did not waive, eliminate or modify the contractor’s right to rely on the representations made in the plans; nor did they eliminate its right to rely on the DSC clause.  Stock & Grove, Inc. v. United States, 493 F.2d 629 (Ct. Cl. 1974).

A contractor was denied recovery of extra costs paid to its excavation subcontractor for the removal of a substantial quantity of unanticipated rock, because, among other things, (1) the test boring data made available to bidders by the owner was specifically excluded from the contract, and (2) the data was obtained only upon the contractor’ s unqualified release of the owner from any liability.  Thus, the contractor was not justified in relying on the boring data. (The contract did not contain a “Changed Conditions” clause.) Sornsin Construction Co. v. Montana, 180 Mont. 248, 590 P.2d 125 (1978).

C.       What the Contract Requires the Owner to Do

Besides prescribing the work that the contractor must do, the contract also assures that the contractor will be allowed to proceed with that work.

1.  Site Access and No Interference

Except as specifically allowed by the terms of the contract, the owner cannot interfere with the contractor’s performance of the work; to the contrary, the owner must facilitate the contractor’s performance.  Acts or omissions of the owner, beyond what the contract permits, can disrupt the contractor’s orderly performance of the work, delay performance of some work, or require the performance of some work to be accelerated.  Extra work is often the result.  For that extra work, the contractor is entitled to a change order (Civil Code sections 1655, 1656).  This concept was explained in Gray v. Bekins (1921) 186 Cal. 389, 395, 199 Pac. 767:

In every building contract which contains no express covenants on the subjects there are implied covenants to the effect that the contractor shall be permitted to proceed with the construction of the building in accordance with the other terms of the contract without interference by the owner and that he shall be given such possession of the premises as will enable him to adequately carry on the construction and complete the work agreed upon. Such terms are necessarily implied from the very nature of the contract and a failure to observe them not consented to by the contractor constitutes a breach of contract on the part of the owner entitling the contractor to rescind, although it may not amount to a technical prevention of performance.

This rule has been regularly reiterated in various contexts:  Lapp-Gifford Company v. Muscoy Water Company (1913) 166 Cal. 25, 30, 134 Pac. 989 (“Appellant having contracted for the construction of a pipe-line over a fixed and determined route, the law implies a covenant either that it possesses or will procure a right to construct such pipe-line over the route specified.”); Bomberger v. McKelvey (1950) 35 Cal.2d 607, 613, 220 P.2d 729 (“[The contract contained] an implied covenant that plaintiffs would be given possession of the premises for the agreed purpose at a reasonable time to be chosen by them. … Defendants’ conduct in forbidding plaintiffs to enter, therefore, was sufficient not only to excuse their performance but also to constitute a breach or anticipatory breach of the contract.”); COAC, Inc. v. Kennedy Engineers (1977) 67 Cal.App.3d 916, 920, 136 Cal.Rptr 890 (“District owed appellant a legal duty not to hinder, delay, interfere with or prevent his performance. …  where plans, specifications and conditions of contract do not otherwise provide, there is an implied covenant that the owner of the project is required to furnish whatever easements, permits or other documentation are reasonably required for the construction to proceed in an orderly manner.”); Howard Contracting Inc. v. G. A. MacDonald Construction Co., Inc.(1998) 71 Cal.App.4th 38, 50, 83 Cal.Rptr. 2d 590 (“The rule is well settled that in every construction contract the law implies a covenant that the owner will provide the contractor timely access to the project site to facilitate performance of work.  When necessary permits relating to the project are not available or access to the site is limited by the owner, the implied covenant is breached.”).

ADJACENT PROPERTIES

The latent characteristics of properties adjacent to a construction site may not be fully apparent during the contractor’s pre-bid site investigation. If the owner is aware of possible adverse conditions involving adjacent properties, such conditions should be included in the bid documents. On the other hand, even the owner and designers might not be aware of and/or might not have considered the adjacent property’s potentially adverse effects on construction. Conditions that can potentially cause schedule delays and additional costs may include:

A seasonal watercourse that drains precipitation into excavations

Heavy vehicle traffic that restricts or delays perimeter site mobility and access

Concurrent construction excavation activity that causes unanticipated delays and effects

These kinds of conditions can be difficult to recognize before they begin to affect the work. Accordingly, once they appear, the contractor is advised to attempt to quantify them and notify the owner.

BUILDING CODE COMPLIANCE

The architect and its sub consultants are most often responsible for ensuring that the design meets the requirements of all entities having jurisdiction over the project. Whether it is ceiling headroom, provisions for the handicapped, the number of exits or handrail configurations, engineering and design are the responsibility of the design professionals. Conversely, contractors are most often only responsible for construction means and methods and performing the work per the requirements of the contract documents.

The initial indications of a designer’s failure to meet building code requirements will often come from a contractor’s construction experience, as opposed to design experience. For example, a flashing or exterior finish insulation system (EFIS) detail may be shown completely different from the way the contractor has always seen it in the past. Once an apparent building code violation has been observed, the process may or may not proceed in a straightforward manner, depending upon the owner’s and architect’s responses

BUILDING PERMIT PLAN APPROVALS

Permit plan approval is similar to building code compliance in that it is the designer’s responsibility to incorporate all building code requirements into the documents and satisfy the local building department. The process of applying for and securing the building permit should be little more than the clerical formality of delivering the plans, specifications, and fee to the building department. If schedule delays are experienced because the building department discovers a design error or flaw, that schedule delay typically belongs to the owner and/or the designer. A more common problem is having the permit granted but conditioned on some additional modification to the design. This may not delay the job start, but could result in additional work and costs.

The contractor should not wait until it is moving onto the site to pick up the building permit. It is advisable to file the documents and permit application immediately upon contract award. If a problem is encountered and the permit is likely to be delayed, the contractor should confirm with the responsible building department representative that mobilization and temporary office setup can proceed, pending correction of the design. Before leaving the building department, the contractor might even establish with the building inspector the fastest way to communicate with all interested parties that the changes will need to be incorporated into the design.

EASEMENTS AND RIGHTS OF WAY

The contractor’s access to the site should be clearly identified in the contract. If adequate site access is apparent, the contractor should proceed. Potential change orders usually involve a partial or total restriction of site access. If the contractor can demonstrate that the restrictions are contrary to that which could reasonably have been anticipated at the time of bid, compensation may be justified. To anticipate and avoid such problems, the contractor should review the contract documents looking for potential restrictions to access and for items such as easements, parking, traffic patterns, and businesses at the immediate perimeter of the contract limit lines. If an easement exists, the contractor should request a complete description from the owner of all conditions of the easement. In most cases, site access interferences occur with little or no warning. The first indication might be when job cost reports indicate that job productivity and efficiency have been impacted.

SOIL BORINGS AND SUBSURFACE DATA

Geotechnical and soil boring data provide the contractor with information regarding subsurface characteristics of the site. Contractors should review and develop an understanding of geotechnical data to gain insight into how such data will affect construction. From these data, the contractor can begin the process of assessing the relative ease or difficulty of working at a site. For example, a high percentage of fine particles and low moisture content suggest that construction vehicle traffic may cause surface problems. Water and fine particles could rise to the surface and make the work areas impassable or difficult to access. Under these circumstances, the contractor may need to construct and maintain a temporary road of gravel or crushed stone throughout the construction period.

Considerations related to soil boring locations include:

Relevance to the construction areas - If the geotechnical engineer provides boring data only around the perimeter of the site, the soil conditions in the middle of the site present only some uncertainty. If the boring locations within the building footprint are asymmetrical, they could fail to disclose the existence of subsurface rock.

Water consistency throughout the site - The contractor may have prepared his bid based on a geotechnical report that used few boring points relative to the size of the site. The contractor should review boring data and soil characteristic information and look for inconsistencies in the depths of the borings, erratic boring locations, and the relationship between boring locations and construction areas. In addition, the contractor should analyze water table information and consider where the table will be in dry and wet seasons. When the contractor encounters undisclosed subsurface conditions that are inconsistent with the geotechnical and boring data, the contractor may have a basis to seek additional compensation.

INTERFERENCE FROM UTILITIES

The locations of pre-existing utilities such as storm and sanitary sewer, telephone, power, and water on a site are normally indicated on the plans. This information is typically made available to, the designer(s) by the respective utility companies. Incorrect information often comes from two sources:

errors in the respective utility companies’ recordation or transmittal of as-built information, and

errors on the plans.

A contractor is free to plan activities, locate temporary facilities, stockpile materials, and sequence the work around or between the utilities as required. However, before any excavation is performed, there is usually some entity to contact to reconfirm the exact locations of the utilities. As a precautionary measure, the contractor should endeavor to confirm that the information is consistent with the information on file with the respective utility and that the information has not changed since the information was originally provided to the designer.

The contractor can assume significant risk if it begins work in the vicinity of a utility without verifying its most current status with the respective authority. If damage is done to the utility under these circumstances, the responsibility may rest with the contractor. On the other hand, if the verification process reveals changed information regarding the utility, adversely affecting the work, this clearly justifies a change order.

TEMPORARY UTILITIES

The contractor’s estimator will typically make sure that temporary utilities have been accommodated in the bid estimate. Therefore, unless some qualification was included in the original agreement, the absence of temporary power and other utilities at the site will typically be difficult for the owner to accept as a changed condition. The rare cases where extra costs for temporary utilities become justified often go back to changed conditions between the time the project was bid and the time that the work actually begins at the site. If it can be demonstrated that the conditions observed at the time of bid with respect to temporary utilities were materially different from those when work begins, the contractor may be justified in requesting compensation for additional actual costs.

2.  Third Party Cooperation

Another ramification of the contractor’s right to perform the work is the owner’s duty to obtain third party consent or cooperation necessary to perform the contract.  If the owner fails to do so, regardless of the reason for the failure, the contractor is entitled to a change order for any extra work or delay arising from the third party’s failure to consent or cooperate (Klauber v. San Diego St. Car Co.(1892) 95 Cal. 353, 30 Pac. 555; Hensler v. City of Los Angeles (1954) 124 Cal.App.2d 71, 268 P.2d 12).  Note, however, that the owner’s duty can be altered by the contract.  By the terms of the contract, the contractor may become responsible for obtaining necessary third party consent or cooperation, e.g., pulling building permits.

V.  Contract Clauses Designed to Defeat Extra Work Claims

Owners, design professionals, and other consultants to owners, have created dozens of contract clauses that are designed to control and prevent extra work claims.  Courts will first look closely at the specific language of these clauses in the context of the contract to determine what they require.  Often that is different from what the owner or contractor contends.  Some of the typical clauses and how the courts have interpreted them are discussed below.

A.  Written Change Order Required for Extra Work

Many contracts require a written change order before the contractor performs any extra work, and declare that the failure to  get one is a bar to, or waiver of, all claims for the extra work.  In Acoustics, Inc. v. Trepte Constr. Co.(1971) 14 Cal.App.3d 887, 92 Cal.Rptr. 723, section 29 of the contract General Conditions required defects in the contract documents to be brought to the State Architect for resolution and “[s]hould the Contractor proceed with the work affected without instruction from the State Architect, he shall be responsible for any . . . added cost resulting therefrom.”  Enforcing this clause, the court rejected the extra work claim (at 14 Cal.App.3d 912), because:

Compliance with contractual provisions for written orders is indispensable in order to recover for alleged extra work. …  [¶]  [provisions] of the General Conditions established conditions precedent to the right of Trepte to claim or receive additional moneys for allegedly extra work, and Trepte’s failure to comply with these conditions releases the State from liability therefor.

Most construction contracts provide that the contractor shall not proceed with any extra or changed work until a written change order has been issued.  It is not uncommon, however, for contractors, in an effort to keep the project on schedule, to perform extra work after receiving oral authorization and assurances that a written change order would be forthcoming.  Most contractors have heard this:  “Please go ahead with the extra work so as not to delay the project and we will send you a written change order when we have time to complete the paperwork.”  This practice of performing extra work based on an oral authorization may be common, but it can also be very risky for the contractor—especially on a public contract. 

In a California case, a California appellate court ruled that any oral authorization to perform extra work was insufficient because the contract required all changes to be in writing.  P&D Consultants, Inc. v. City of Carlsbad, 190 Cal. App. 4th 1332 (4th Dist. 2010).  The owner’s prior actions in approving verbal change orders was of no avail for the contractor.

Five Situations Where You May Be Able To Avoid A Contractually Mandated Written Change Order

Almost all written construction contracts require that the contractor obtain a written change order as a condition to payment for the additional work. However, owners customarily direct contractors to perform the work and promise that they will subsequently negotiate a fair price for the work. Almost every contractor can recite an example of such a promise that is then ignored by the owner when the time for payment arises.

Written change order provisions are placed in contracts so that the owner is assured that it will expressly approve any changes to the scope of work. In addition, such provisions are designed to give the owner timely and ample notice of the change in scope so it can investigate the claim and then either avoid the additional cost or take steps to mitigate the additional expense. Courts have routinely upheld such provisions when the additional work was performed without any notice to the owner.

However, the courts will be less inclined to enforce the written change order requirement when the owner has timely notice and orally induces the contractor to perform the changed work. Similarly, courts will not find it equitable to enforce such clauses against subcontractors when general contractors induce them to perform the additional work with a promise that they will be paid for the work at a later date.

The remainder of this article will review five legal theories that have been approved by California courts as a legal basis for avoiding the written change order provision in private works contracts when the owner knowingly approved the additional work. The article will then discuss written change requirements for California public works projects.

Private Works

1. Oral Waiver of the Written Change Order Provision

The doctrine of waiver has long been accepted by the courts. In essence, the courts treat appropriate action or conduct of the owner as waiver of the written change order provision. Quite simply, if the other party orally approves the additional work, it acts in a manner that is inconsistent with that party’s intent to rely on the change order provision. As a result, the court will treat that conduct as a waiver of the clause and allow the contractor to recover the value of the additional work. (See for example Howard J. White v. Varian Associates (1960) 178 Cal App 2^nd 348).

It should be noted that many contracts include additional clauses that seek to avoid such waiver arguments. In addition, some contracts include clauses that state that only certain personnel can approve change orders. For example, the provision may limit the change order approval to home office personnel rather than field personnel. Under appropriate circumstances, such anti-waiver provisions have been upheld by the courts as valid.

2. The Owner May Be Estopped From Relying On The Clause

The doctrine of promissory estoppel has been applied to a number of construction contract disputes. Promissory estoppel occurs when a party makes a promise to the other which the other party would reasonably rely on to take action based on the promise. If the owner promises to pay for the work and then allows the work to proceed it will be estopped from denying the promise to pay for the work.

3. A Requirement For A Written Change Order Can Be Rescinded By The Parties

As in the case of waiver, the parties can effectively rescind the written change order provision by their conduct. If the contractor and the owner orally agree that written change orders are not necessary the courts will treat the provision as being rescinded by the parties.

4. Allowing The Owner To Receive The Improvements Without Compensation Would Unjustly Enrich The Owner

This legal theory is based on the concept that once the work is complete the owner will have the permanent benefit of it and the contractor will not be able to repossess the work. However, the owner can only be unjustly enriched if the contractor was induced to perform the additional work by fraud, coercion, mistake, request or coercion by the owner. Thus the claim must be based on some action of the owner that resulted in the contractor performing the additional work.

5. California Statutory Law Allows A Written Contract To Be Orally Modified

California Civil Code section 1698 allows a written contract to be modified when the oral change order agreement is executed by the parties or if the change order is supported by new consideration. California courts have held that if the contractor fully completes the additional change order the oral modification to the contract is deemed executed by the parties and is thus effective. The section also states that it does not preclude “in an appropriate case the application of rules of law concerning estoppel, oral novation and substitution of a new agreement, rescission of a written contract by an oral agreement, waiver of a provision of a written contract, or oral independent collateral contracts.” Thus, the section does not prohibit the four other legal theories that have been applied by California courts to uphold oral change orders.

California Public Works

California public entity contracts are based on state and local procurement laws. The laws typically require approval for the changed scope of work before it is performed. For example, the Public Contract Code requires the county board of supervisors to approve change orders if the amount exceeds a certain threshold amount. However, the board may authorize the inclusion of a clause in the contract that allows for county employees to approve any work that is necessary for proper completion of the work.

Most public works projects include written change order provisions. The courts will uphold such provisions since they give the public entity timely notice of the change in scope so it can investigate the claim and then either avoid the additional cost or take steps to mitigate the additional expense.

1. A Public Agency’s Misrepresentation Maybe Allow A Contractor To Avoid The Written Change Order Clause

If the public entity was actively negligent in the design of the project or misrepresented the conditions that the contractor would encounter, the courts will not enforce the written change order requirement. Thus, if the contractor can establish that the public agency knowingly and positively misrepresented the site condition such clauses can be avoided. Generally, there is an implied warranty that plans and specifications are complete. If a showing can be made that the plans and specifications were inaccurate and that the public agency provided statements, although unintentional, that mislead the contractor, a contractor can recover the value of the extra work.

2. Reliance On The Statements Of A Public Official May Not Allow A Contractor To Avoid The Written Change Order Provision

While California courts will allow a contractor to avoid a written change order clause if a private owner promises to pay for the additional works, they will not permit a public works contractor to rely on such unauthorized statements to avoid the provision. However, if the contract vests a certain official or the project architect or engineer with the authority to approve the oral change order the courts will enforce the oral change order.

3. If An Unauthorized Public Official Orally Orders The Work, Proceed Under Written Protest

As previously stated, most public works contracts authorize certain public officials to approve change orders so that any additional work that is necessary for proper completion of the work is performed. If an unauthorized public official demands that the change order proceed, the contractor should give prompt notice that such work will be performed under protest. If the contract has a clause that sets forth the method of notifying the public agency of such a change order, those requirements should be followed. If the contractor provides timely written notice that it is proceeding under protest, the courts may not enforce the requirement for a written change order.

Conclusion

Construction contracts typically include a requirement that change orders be in writing. If such a provision exists, a prudent contractor will insist that all change orders be in writing. If the owner, or the prime contractor if the agreement is between a general contractor and a subcontractor, chooses to disregard the requirement of a written change order, confirm the instructions in writing.  The written confirmation should be provided to the other party and the architect, if any.

TIP: AVOID THE VERBAL CHANGE ORDER

Change order disputes take up a large portion of a construction lawyer’s day. Almost half of all lawsuits (and attorney’s fees) in construction law involve the issue of the right to payment for verbal or unsigned change orders.  Was the extra work necessary and reasonable?  Was the extra work authorized?  Can the contractor include these charges in his construction lien?  Is a verbal promise to later execute a change order binding, and if so, for how much?

Instead of paying attorneys to deal with these issues in a lawsuit, we suggest some practical ways to avoid these disputes.  At a minimum, you can strengthen your position even if you have no choice but to record a lien or file a lawsuit.  These suggestions apply to general contractors seeking payment from an owner, as well as to subcontractors seeking payment from general contractors (even though there are some differences between the two situations).

Governments have other defenses for public projects that will not be discussed here.

The typical contract provision dealing with change orders includes requirements that: (1) only certain people can authorize change orders (typically officers, not PMs or supers); (2) the change order must be in writing and signed to be enforceable; (3) the change order can only be for extra work directed by the owner/GC and not for work that can be inferred from the original scope; (4) the contractor must give notice of the claim for extra work within a short period of time after discovering the claim; (5) the subcontractor is not entitled to payment unless the GC is paid by the owner for this extra work; and (6) the contractor must perform the work even if there is a dispute over the change order.

Subcontractors who perform extra work without a written and signed change order often hear these defenses from the GC:

•        We never knew you expected to claim extra money. You never gave notice. Now, it is too late for us to seek payment from the owner.

•        Sure, we knew it would be some extra cost, but had we known how much this was going to cost, we never would have asked you to perform the work.

•        Our project manager did not have the authority to agree that you would be paid for this extra work.

•        Only if and when we get paid for from the owner, we will pay you for your share of the money collected.

General contractors often hear similar defenses from the owner, including:

•      The work was not extra; it was inferred from the plans.

•      You are not entitled to a change order because the plans stated that the GC would use "first class material" or that, in the event of any contradicting provisions, the "most stringent requirement would apply.”

Avoid getting to the point where you have to argue about whether you should be paid for the change order.  Start with the negotiation of the contract.  Because the contract often states that claims for extra money or time are not binding unless they are in writing, it is reasonable for you to add language such as: “Contractor shall not be required to begin any extra work without a change order executed by all parties.”

After the work begins, typical scenarios include:

Scenario Number 1: In the field, the owner or the GC directs you to perform work that you believe entitles you to extra money and/or time, but the work needs to be done now and there is no time to prepare a written change order or wait for the change order to be signed. The GC or subcontractor should:

•      Hold off on performing the work as long as possible as if you were playing a “game of chicken.” You may be at a stage that you can refuse to call for inspections that will “slow” down the project.  The experienced contractor knows that, once they complete the work without a signed change order, your leverage is gone and parties will find excuses not to pay you.

•      If you must begin with the work, immediately send the owner/GC a confirming email stating: "Without a signed change order, you have directed us to perform __________, which we believe entitles us to extra compensation and/or time.  The cost and/or extra time are unknown at this time.  We will continue to perform the work and make a formal claim for which the owner/GC will be responsible after the cost and time become known.  If this is inaccurate in any way, let us know in writing immediately."

•      Send the owner/GC a proposed change order as soon as possible, but certainly within the time required by the contract, even if you don't yet know all the costs or time impact.  To be safe, instead of stating "zero" in the request for extra time, insert "Unknown at this time."  However, when costs and time become known, send a revised proposed change order immediately.

•      Follow the contract requirement for calculating cost. Most likely, this will be cost plus a percentage or unit price. You need to keep great records of your costs, including keeping separate time records for the extra work and having the owner or GC's representative sign the time records each day.

Scenario Number 2: You submit a proposed change order, but there are delays in signing and the owner/GC directs you to start work. The GC or subcontractor should:

·         Send this email: "You have directed us to begin the work in proposed change order ___ despite the fact that we have not yet received a fully executed change order. We will proceed as directed in reliance that the proposed change order is acceptable to you. If this is inaccurate in any way, let us know in writing immediately."

Scenario Number 3: Progress payments and partial releases. It is not uncommon for owners or GCs to require a "clean" release.  In other words, a release with no reservation of any outstanding claims.  To avoid a waiver of your claim for extra work not yet agreed to, first, try to insert a statement that: "This release does not waive any claims for extra work arising from ____________________".

If the owner or GC refuses to pay you with this language added, send the partial release with a separate email or letter stating the same. This is not great, but at least gives you an argument.

Scenario Number 4: You are subject to liquidated damages for failure to achieve a certain milestone, typically substantial or final completion.  But, you never delivered proposed change orders requesting additional time.  Or, you first raise these owner delays at the end of the project when the owner or GC are trying to set off liquidated damages from your last payment. In this case:

•      Most likely, you are taking a discount on the money you have rightfully earned. Learn from your error and, for the next project, be diligent and send proposed change orders to increase the contract time as soon as the cause for the delay occurs.

•      Respect the time deadlines for notice in the contract.  If your claim is made timely, it avoids the argument that "we can't check the validity of the claim now, months later" or "it is too late to back charge another contractor for the delay".

Overall, create a strict procedure for your company to make claims for extra work or time. Who will be responsible for making sure that these requirements are complied with and how? Follow the contract requirements for authorized signature, timing of notice, and calculation of the claim.  All of these items are within your control and failure to comply just gives the other party (and its attorney) an easy excuse to dispute the claim.

If you have no choice but to perform the work without an agreed signed change order, then do the next best thing to strengthen you claim – make disclaimers, send emails and letters, and try to resist the new work as long as possible.

With a smart plan in place to avoid change order disputes, you can also avoid contributing to your construction law attorney’s retirement plan.

The importance of following change order provisions in a construction contract was emphasized yet again in a recent federal court decision:  Carolina Conduit Systems, Inc. v. MasTec North America, Inc.

 In this case, Carolina Conduit, a subcontractor, sued the general contractor, MasTec, for the cost of installing additional flowable fill due to a change in the configuration of duct banks.  Although the design documents called for the duct banks to be constructed in a vertical configuration, field conditions required that the duct banks be built in a horizontal configuration, necessitating additional flowable fill.  Upon this discovery in December, 2008, Carolina Conduit’s president and project manager met with MasTec personnel, who informed Carolina Conduit “not to worry” about the additional fill and costs because plenty of funds were available.  Carolina Conduit proceeded to work on the project throughout the following spring.  In May, 2009, Carolina Conduit’s president again discussed the extra cost of the duct banks and MasTec’s vice president again advised “not to worry” and that Carolina Conduit would be compensated.

At the close of the project, MasTec refused to pay Carolina Conduit for the extra flowable fill.  After suit was filed, MasTec requested the court to grant it summary judgment and dismiss the claim for extra flowable fill.  MasTec asserted, among other things, that the parties’ contract contained a provision governing changes to the scope of work:  “any additional work outside the original scope of work shall be handled through a change order specifying pricing and/or Unit prices approved by [the Owner].”

In opposing summary judgment, Carolina Conduit argued that the contract’s requirements were ambiguous, and that the parties had modified the contract, either by oral agreement or in their course of dealing.

The court ruled in MasTec’s favor while succinctly stating Virginia law applicable to change order provisions:

Virginia law provides that contractual provisions containing written change order requirements are binding upon the parties to the contract . . . .  Contractual provisions requiring written change order requirements maintain order and predictability in the construction business, and are meant to avoid subsequent disagreement and prevent controversy . . . .  For this reason, where there is a method under the contract by which a party can insure the recovery of the cost of extra work, that party is not entitled to recovery where it fails to follow that method.

The court held that since Carolina Conduit failed to follow the change order provision, it could not recover any excess cost.  The court rejected the argument that the design was ambiguous, again noting that regardless of that assertion, Carolina Conduit did not follow the change order provision.

The court also quickly disposed of Carolina Conduit’s argument that the parties had modified the change order provision.  The court determined that MasTec’s statements “not to worry” about additional cost were not sufficient to prove that MasTec had waived the change order requirements.  The court also noted that Carolina Conduit submitted multiple change orders during and after the close of the project on other issues which contradicted the argument that the parties had waived the change order provision.  Finally, the court noted that Carolina Conduit could point to no instance where MasTec ignored the change order provision; hence, there was no evidence of course of dealing indicating a modification to the change order requirements.

This case marks the second time in a year that a federal court applying Virginia law has ruled against a subcontractor who failed to follow a contract’s change order provision.  See Artistic Stone Crafters v. Safeco Ins. Co., see also WM Construction Alert, 10/13/2010, “Stone Crafters, Inc. v. Safeco Insurance:  A Reminder of the Importance of Lien Waivers and Change Order Provisions.”

Rare Exception: Court Allows Recovery For Verbal Extra Work Claim

Most construction contracts have a standard provision requiring changes in the work or directions to perform extra work to be made in writing.  Courts generally hold that a contractor who fails to obtain the required written authorization will not be paid for such work.   

However, a contractor or subcontractor who performs extra work will not automatically lose his extra work claim just because he failed to follow the contract provision requiring written authorization.  Courts are hesitant to deny a just claim for extra work and have found that contractual requirements for written orders can be waived under certain circumstances.   

 In the recent case of Penava Mechanical Corp. v. Afgo Mechanical Services, Inc., an appellate court ruled on whether recovery may be had for orally directed extra work despite the contract provision that an extra work claim must be supported by written authorization.  

Background  

Absolute Electrical Contractors, Inc. entered into a subcontract with general contractor Richter & Ratner Contracting Corp.  The parties’ subcontract contained a so-called “no- oral modification clause.”  Pursuant to the clause, all changes in the work or directions to perform extra work were to be made in writing or were otherwise not compensable.    

During the course of construction, representatives of the general contractor verbally directed the subcontractor to work overtime.  The representatives also orally agreed to pay for this premium time over and above the contract price, as they had previously paid for other overtime work throughout the project.

 The promised overtime payment was in lieu of an extension of time to finish the work.  In addition, the general contractor’s project manager testified that he instructed the subcontractor not to bother with the “tickets” that were usually prepared by the subcontractor for such extra work and formed the basis for change orders issued, but rather directed the subcontractor to “just get the work done.”  The subcontractor sued when the general contractor refused to make payment for the subcontractor’s overtime.
In defense, the general contractor argued that the subcontract’s no-oral modification clause barred any claim by the subcontractor, since the direction to perform overtime work and promise to pay at a premium rate were made orally, and were not in writing.  In addition, the general contractor argued that the subcontractor had waived any claims to the overtime pay pursuant to the express language of the lien waivers signed by the subcontractor.    

The general contractor moved for summary judgment, which the trial court granted.  The subcontractor appealed. 

Decision  

The appellate court reversed the trial court, denying the general contractor’s motion for summary judgment and directing a trial on whether the subcontractor had been paid in full for the overtime work performed.    

According to the appellate court, under New York law, oral directions to perform extra work, or the general course of conduct between the parties, may modify or eliminate contract provisions requiring written authorizations or notice of claims.  The appellate court relied heavily on the verbal directions by the general contractor to the subcontractor to perform the overtime work and verbal promises to pay the subcontractor.

 The court also relied on the general contractor’s verbal direction that the subcontractor not bother with the work tickets that would form a written basis for a formal change order.  Under these circumstances, the court held that the general contractor cannot argue that it did not have to pay for the overtime.  
As to the general contractor’s argument that the claims had been released, the appellate court held that since the subcontractor was required to sign these waivers whenever it received partial payment, and since payments were made after waivers were given, the parties treated the waivers as mere receipts of the amounts stated in the waivers, not as complete waivers of all claims to that point.  

Comment  

While courts routinely seek to enforce the express terms of an agreement that was freely negotiated, courts also seek to prohibit bad-faith dealings.  Here, where the general contractor verbally promised payment, and verbally stated that written work tickets were not necessary to protect the subcontractor’s right to payment, the court would not allow the general contractor to rely on the subcontract’s provisions to the contrary.     

A prudent contractor or subcontractor, however, should not ignore the contractual requirement for written extra work orders in the hope that a court may make an exception and find a waiver of the contract provisions under particular circumstances.  He should insist on a written order in the form specified by the contract provisions before he performs any extra work.  A written extra work order will ensure his right to be paid for performing such work.    

Beware of Orders for Extra Work without Authority

In the California case, the City of Carlsbad hired P&D Consultants (“P&D”) to provide civil engineering and other services for the redesign of a municipal golf course to satisfy numerous conditions imposed by the California Coastal Commission.  The original contract price was $556,745.  The written contract stated that no amendments, modifications, or waivers of contract terms would be allowed unless there was a written agreement signed by both parties.

During the design phase of the project, the City often requested that P&D perform extra work.  When this happened, P&D would typically submit a proposed change order with a fixed price to the City’s project manager, and the project manager provided the City with the information for its preparation of an amendment to the contract.  The City typically took several weeks to execute an amendment and the project manager frequently authorized P&D to begin the extra work before it received a signed amendment.  The parties, following this process, signed Amendments Nos. 1 through 4, which increased the contract price by $63,525.50 for extra work.

After execution of Amendment No. 4, P&D raised concerns about additional extra work the City wanted that P&D believed was beyond the scope of the contract documents.  The City’s project manager notified P&D that the City had “finally reached resolution on what we expect to be the final changes for the golf course per the Coastal Commission.”  The City’s project manager asked P&D to prepare a final projected scope of work and the cost to finish all of the design services to complete the plans and specifications.

P&D, as instructed, submitted a proposed change order for Amendment No. 5 totaling $209,956, which included $69,073 for extra work already performed and $139,833 for the cost “to complete services for final plan submittal and City approval.”  The City was not happy.  The City’s project manager objected to the proposal claiming that the amount was excessive, it included charges for work already specified in the written contract documents, and it exceeded the maximum sum the City had set aside for completion of the design services.  The City’s project manager sent P&D an email stating:  “We have limits for both our purchase order authority and this proposed Amendment No. 5.  We are now at those limits.  No further costs will be authorized nor should be to finish these design packages.”  The City’s project manager told P&D that the breakdown of the costs for the extra work needed to “get below” $100,000.

The parties subsequently negotiated and signed Amendment No. 5, which authorized that the extra work be done on a time and materials basis with a cap of $99,810.  As was customary, at the City’s project manager’s direction P&D began the work several weeks before the City executed the amendment.  P&D completed the work and subsequently sought compensation from the City for additional work that P&D claimed was not covered by Amendment No. 5.  When the City refused to pay, P&D sued the City seeking to recover $109,093.

P&D Wins at Trial

P&D’s trial theory was that the contract’s written change order requirement was modified by the City’s project manager’s oral authorization of the extra work for which P&D sought payment, and by the parties’ conduct in handling Amendments Nos. 1 through 5 whereby P&D would commonly begin performance, as directed by the project manager, before any writing was executed.

At trial, the City’s project manager, John Cahill, testified that after P&D submitted its proposal for Amendment No. 5, P&D began seeking payment for extra work it claimed was beyond the scope of that amendment.  Cahill also testified that P&D’s project manager, Charles Moore, threatened that if the City did not pay the additional amount, P&D would discontinue work.  In Cahill’s view, the work was not extra, but rather work that was included in Amendment No. 5.  He believed that Amendment No. 5 “was a complete, final projection of all costs and work by P&D” necessary to complete the design.  Cahill nonetheless told Moore, “if you feel strongly that you’ve got additional work outside the contract and the amendments, put it together with the proper backup and the City will evaluate it.”  Cahill denied preparing a sixth amendment and he did not recall whether he told Moore he would do so.

Moore testified that Cahill told him that the City was running out of money for the project, and when Moore objected to P&D continuing with extra work, Cahill told Moore to keep working and that he would “take care of it”—words that almost all contractors have heard at some time.  Apparently accepting P&D’s version of the facts, the jury found the City liable for breach of contract and awarded P&D the full amount of damages it requested, $109,093.

P&D Loses on Appeal

The California Court of Appeal reversed the jury award.  The court ruled that any oral authorization by the City’s project manager for extra work beyond the work contemplated in Amendment No. 5, or the parties’ conduct in which they supposedly modified the written change order procedure based on the handling of Amendment Nos. 1 through 5, is insufficient to bind the City.  The court stated:  “The plain language of the contract limits the City’s power to contract to the prescribed method.  By ostensibly relying on Cahill’s oral authorization or direction to begin or perform extra work without a written change order, P&D acted at its peril.  The purpose of including a written change order requirement in a municipal works contract is obviously to protect the public fisc from the type of situation that occurred here.”

Despite the jury award, the court ruled that P&D could not recover for extra work without a written change order as required by the contract.  Instead of getting more than $109,000 for the extra work it performed, P&D got nothing and was ordered to pay the City $6,614.69 for defective or incomplete work and was also ordered to pay the City’s appeal costs.

Lessons Learned

When dealing with a public entity, contractors must be aware of the risk of performing extra work without a written change order as many courts are likely to enforce a public contract’s requirement for written change orders.  These strict limitations on the authority to contract (or to modify a contract) will often trump the public entity’s oral instructions to begin the extra work immediately before the written change order is executed.  Remember, the words “we will take care of you” may not always mean what you think. 

Waiver of the Written Change Order Requirement

However, the written change order requirement can be waived.  In Weeshoff Construction Company v. Los Angeles County Flood Control District (1979) 88 Cal.App.3d 579, 589-90, 152 Cal.Rptr. 19, the court held:

California decisions have . . . established that particular circumstances may provide waivers of written “change order” requirements.  If the parties, by their conduct, clearly assent to a change or addition to the contractor’s required performance, a written “change order” requirement may be waived. [citations]

In the present case, there is much evidence to support plaintiff’s claim that the district intended to force it to utilize temporary pavement on Whittier Blvd.  Trial testimony included: (1) prior to April 20, 1973, plaintiff’s procedure for filling his contractual requirement to restore three traffic lanes daily had been to backfill excavations with hard packed sand (a procedure which was found by the trial court to comply with contract requirements); (2) on April 19, 1973, the district’s senior construction specialist, T. D. Russi, issued a written memorandum directing plaintiff to provide a method of operation which would restore three traffic lanes on Whittier Blvd. at commute hours as required by contract; (3) on April 20, 1973, the district advised plaintiff that if, by April 22, he had not provided sufficient traffic lane restoration, the district itself would commence restoration procedures; (4) when plaintiff inquired of Russi how he must comply, he was verbally ordered to “fix it.” (5) On April 22, the district itself placed temporary pavement on a portion of Whittier Blvd. and informed plaintiff that the cost incurred by district for such restoration would be deducted from plaintiff’s final payment.  Thereafter, plaintiff used temporary pavement to restore Whittier Blvd. at the end of the day and removed the temporary pavement before beginning work each morning. …  [¶]  [I]t is clear that the district, by its conduct, exerted an intentional attempt to affect a contractual change without complying with the change order provision. …  We find there is substantial evidence to support the trial court’s finding that by its conduct, the district did intend to waive the contractual provision requiring a written change order …

See also Frank T. Hickey, Inc. v. L.A.J.C. Council(1954) 128 Cal.App.2d 676, 682-83, 276 P.2d 52.

The written change order requirement can also be overcome by oral modifications to the extent the modifications have been performed (California Civil Code section 1698[b]).  Oral change orders are enforced on this basis (Healy v. Brewster (1967) 251 Cal.App.2d 541, 551-52, 59 Cal.Rptr. 752).  As the court pointed out in Girard v. Ball (1981) 125 Cal.App.3d 772, 785, 178 Cal.Rptr. 406, there is a “commonly known custom and practice in the construction industry where oral agreements frequently modify or extend written agreements.”

The written change order requirement also can be rescinded (McFadden v. O’Donnell (1861) 18 Cal. 160, 164-65 [“Whether the contract provided against extra work except agreed to in writing, is immaterial; for the parties could rescind this provision in the contract if they chose and agree to alterations by parol.”]).

Notwithstanding clauses purporting to prevent modifications of the contract, the parties’ conduct can effect such modifications, including abandonment of the written change order requirement (Opdyke & Butler v. Silver (1952) 111 Cal.App.2d 912, 916, 245 P.2d 306 [“The parties to a written contract . . . are as free to alter it after it has been made as they were to make it, and all attempts on their part by its terms to tie up their freedom of dealing with each other will be futile. …  To this end parol agreements will be as effective as written ones. …  And implied agreements satisfactorily established will have all the force of express ones.”]; Bettelheim v. Hagstrom Food Stores, Inc. (1952) 113 Cal.App.2d 873, 249 P.2d 301 [held, lease provision prohibiting waivers unless in writing was waived; “[e]ven a waiver clause may be waived by conduct.”]).

B.  Notice Requirements and Extra Work Claim Forfeitures

Many contracts require specific notice of claims for extra work, changed conditions or other matters, and frequently declare the claims to be released or waived if the notice is not timely or properly given.

Contracts are to be interpreted reasonably – to avoid unusual, extraordinary, harsh, unjust or inequitable results; to avoid forfeitures; and to avoid placing one party at the mercy of the other (California Civil Code sections 3542 & 3520; Yamanishi v. Bleily & Collishaw, Inc.(1972) 29 Cal.App.3d 457, 462-63, 105 Cal.Rptr. 580; Hertzka & Knowles v. Salter(1970) 6 Cal.App.3d 325, 335, 86 Cal.Rptr. 231; Hawley v. Orange County Flood etc. Dist. (1963) 211 Cal.App.2d 708, 713-16, 27 Cal.Rptr. 478).  This doctrine often impels a court to find ways to interpret notice requirements to avoid forfeitures.  

For example, a notice requirement can be construed as a covenant, or promise by the contractor, instead of a condition precedent to recovery (California Civil Code section 1436; Restatement Contracts 2d section 226).  The courts prefer interpreting the language as a covenant, rather than a condition, in order to avoid a forfeiture of the contractor’s claim (California Civil Code sections 1442, 1670.5, Restatement Contracts 2d section 227; Hawley v. Orange County Flood etc. Dist. (1963) 211 Cal.App.2d 708, 713, 27 Cal.Rptr. 478).  When the notice requirement is found to be a covenant, the owner is entitled to recovery, as an offset against the contractor’s claim, whatever damages the owner actually suffered from not getting timely notice.

The general rule on forfeiture clauses is set forth in Universal Sales Corporation, Ltd. v. California Press Manufacturing Company(1942) 20 Cal.2d 751, 771, 128 P.2d 665 (“Forfeitures are not favored by the courts, and if an agreement can be reasonably interpreted so as to avoid a forfeiture, it is the duty of the court to avoid it.  The burden is upon the party claiming a forfeiture to show that such was the unmistakable intention of the instrument. [citations]  ‘A contract is not to be construed to provide a forfeiture unless no other interpretation is reasonably possible.’ [citations]”)

In D. A. Parrish and Sons v. County Sanitation District (1959) 174 Cal.App.2d 406, 344 P.2d 883, the contract required written notice of a claim within 10 days after discovering the factual basis for the claim, and, it provided: “The Contractor’s failure to notify the Owner within such ten (10) day period shall be deemed a waiver and relinquishment of any such claim against the Owner.”  In refusing to enforce this forfeiture, the court held (at 174 Cal.App.2d 414):  “[A] forfeiture clause, such as this, will not only be strictly construed [citation] but has been interpreted by this court not to apply to claims arising from breaches of the contract caused by the other party.”

Besides interpreting the contract requirement as a covenant or rejecting the forfeiture, courts find that the owner got “constructive notice” thereby satisfying the contract requirement (e.g., Welding, Inc. v. Bland County Service Authority(Va. 2001) 541 S.E.2d 909 [mention of the claim issues in the progress meeting minutes was found to satisfy the notice requirement]) or courts find that the notice would serve no useful function in the context of the case.

Finally, the courts also have inherent equitable power to relieve parties from the failure to perform conditions which result in a forfeiture (California Civil Code section 3275; Restatement Contracts 2d section 229; O’Morrow v. Borad (1946) 27 Cal.2d 794, 800-01, 167 P.2d 483).

C.  No-Damage-for-Delay Clauses

Extra work often causes delays in completion of the project.  Many contracts have a no-damage-for-delay clause.  California cases and statutes limit the enforceability of those clauses.

In Milovich v. City of Los Angeles(1941) 42 Cal.App.2d 364, 108 P.2d 960, the contract required the city to timely provide steel pipe for the water line Milovich was building.  It failed, but asserted the no-damage-for-delay clause as a bar to Milovich’s delay damages claim.  In rejecting the city’s argument, the court narrowly construed the contract language against the city, and observed (at 42 Cal.App.2d 378):

To uphold appellants’ contention in this regard would be to give to the language of the contract a construction at variance with equitable principles and to clothe the appellant department with an unconscionable advantage over the contractor, by permitting the former to make amends for its contractual derelictions, delays and neglect by simply extending the time within which the contract could be completed regardless of the financial loss accruing to the contractor.  This we cannot do in the absence of a plain, unequivocal intention on the part of the contracting parties, as evidenced by the language of the contract, to restrict the remedy of the contractor to that of obtaining an extension of time.

In McGuire & Hester v. City etc. of San Francisco (1952), 113 Cal.App.2d 186, 189, 247 P.2d 934, work on a water line took more than twice the contract time, because the city failed to timely obtain rights of way, thereby pushing the work into winter weather.  Section 49 of the contract provided:

Apart from granting the Contractor extensions of time for unavoidable delays, no payment or allowance of any kind shall be made to the Contractor by way of compensation or damages on account of any hindrance or delay from any cause in the progress of the work or any portion thereof, whether such delay be avoidable or unavoidable.

In refusing to enforce this no-damage-for-delay clause, the court observed (at 113 Cal.App.2d 189)

Nowhere [in the contract] is there the slightest suggestion that defendant will be absolved from damages caused by its not keeping its agreement to secure rights of way prior to the starting of the work.  To construe that language in section 49 . . . to mean that it was thereby intended by the parties that the only remedy for the contractor, when the city broke its solemn agreement to procure rights of way in advance, was for the contractor to obtain an extension of time to do the work, would be to give the clause and the contract as a whole a strained, unreasonable and unfair interpretation.

In Hawley v. Orange County Flood Control Dist.(1963) 211 Cal.App.2d 708, 712, 27 Cal.Rptr. 478, the contract provided:

[I]f the contractor suffers any delay caused by the failure of the District … to supply necessary plans or instructions … the contractor shall be entitled to an extension of time … but shall not be entitled to any damages for such delay.

The trial court found that, given the job conditions, the district had compelled Hawley to keep a sewer trench open for an unreasonable time (2 months), and, as a result, the trench caved-in, dislocating the sewer line, opening up joints in it, and allowing sewage to leak and flood the trench.  Hawley sued for the clean-up costs.  At the close of his evidence, the trial court granted a nonsuit, believing that the no-damage-for-delay clause precluded any recovery.  The appellate court reversed.  First, it extensively reviewed California, out-of-state and federal cases which refused to enforce no-damage-for-delay clauses when the delay was caused by events the parties did not contemplate at the time the contract was executed, such as an owner’s breach of contract.  Then, the court concluded (at 211 CA2d 717) that “whether or not the delay damage clause was intended by the parties to prevent recovery under the peculiar circumstances here involved resolves itself into a factual question requiring the weighing of all the facts presented.”

For public works projects, these California cases have been codified into California Public Contract Code section 7102.  That statute makes unenforceable any public works prime contract or subcontract clause that limits damages for delay when the “delay is unreasonable under the circumstances involved, and not within the contemplation of the parties.”  In Howard Contracting, Inc. v. G. A. MacDonald Construction Co., Inc. (1998) 71 Cal.App.4th 38, 83 Cal.Rptr.2d 590, the contract allowed time extensions for unforeseen events, but not damages, unless the event was an unreasonable and unanticipated delay caused by the city.  The city contended that, given the facts in the case, Howard was only entitled to time, not damages, under the limited no-damages-for-delay clause in the contract.  In rejecting that argument, the court held (at 71 Cal.App.4th 49-51):

[Public Contract Code] Section 7102, however, specifically prohibits public agencies from requiring “the waiver, alteration, or limitation of . . . applicability of [the statute’s restrictions on no-damage-for-delay clauses and renders] [a]ny such waiver, alteration, or limitation . . . void.”  Even before the adoption of section 7102, California courts generally held that “no damage for delay” clauses in public contracts did not apply to delays arising from a breach of contract caused by the other party to the contract. [citations]

. . . The trial court found the delays were caused by the City’s breaches of contract and implied covenant [to provide timely access to the project site] in failing to disclose known restrictions on project performance, to obtain necessary permits, and to provide timely access to perform the work.  Those findings render the “no damage for delay” provision in the contract inapplicable. … [or] a basis exists for concluding that the delays were unreasonable and not within the contemplation of the parties.

D.  Accord and Satisfaction Language in Change Orders

Language in the contract or language in a change order frequently attempts to turn a change order into an accord and satisfaction (California Civil Code sections 1521-1523) for all potential disputes related to the change, for example, delay or impact claims.  Sometimes the courts will buy these efforts and bar the related claims (Huber, Hunt & Nichols, Inc. v. Moore (1977) 67 Cal.App.3d 278, 302, 136 Cal.Rptr. 603), other times they will not (Semas v. Bergmann (1960) 178 Cal.App.2d 758, 761, 3 Cal.Rptr. 277.

The party claiming an accord and satisfaction has the burden of proof (Higson v. Montgomery Ward & Co. (1968) 263 Cal.App.2d 333, 343, 69 Cal.Rptr. 497).

Further, all language in the contract, and in any change order purporting to be an accord and satisfaction, must be interpreted to give effect to the mutual intention of the parties (California Civil Code section 1636; Rabinowitz v. Kandel (1969) 1 Cal.App.3d 961, 965, 81 Cal.Rptr. 897).  That generally permits looking at the circumstances surrounding the execution of the contract or change order, and the conduct of the parties (California Civil Code section 1860; California Metal Enameling Co. v. Waddington (1977) 74 Cal.App.3d 391, 395-96, 141 Cal.Rptr. 443).  These sources frequently provide a basis for avoiding or minimizing the effect of the language in question.

E.  Disclaimers

Disclaimers in contract documents are common.  Typically they say that, if the true conditions on the job are different from information provided in the contract documents, then the owner is not responsible for the difference, so the difference cannot be the basis for an extra work claim.  The disclaimers are usually coupled with a clause requiring the contractor to inspect the site, and rely only upon the information gathered by the contractor.  Information that would have been discovered in the inspection also cannot be the basis for extra work claims.  See the discussion of disclaimers above.

F.  Excuse, Waiver and Estoppel

Whatever the language in the contract, conduct by the parties may excuse performance, waive performance, or estop the party entitled to performance from claiming it.

Any performance required by a contract can be excused by various acts, conditions or events (California Civil Code sections 1440, 1441, 1511, 1512, 1515; Restatement Contracts 2d sections 246 & 247; Peter Kiewit Sons’ Co. v. Pasadena City Jr. College Dist. (1963) 59 Cal.2d 241, 243-45, 28 Cal.Rptr. 714, 379 P.2d 18).

When a contractor’s extra work claim arises from willful acts or omissions of the owner, or a violation of law, then any performance required of the contractor to perfect his claim may be excused (California Civil Code section 1668; Klein v. Asgrow Seed Co. (1966) 246 Cal.App.2d 87, 54 Cal.Rptr. 609; Halliday v. Greene (1966) 244 Cal.App.2d 482, 53 Cal.Rptr. 267; but see limitations on this doctrine in Cregg v. Ministor Ventures (1983) 148 Cal.App.3d 1107, 196 Cal.Rptr. 724; Tokio etc. Co. Ltd. v. McDonnell Douglas Corp.(2d Cir. 1980) 617 F.2d 936).

Any performance required under a contract can be waived.  Examples:  Written change order requirement (Weeshoff Constr. Co. v. Los Angeles County Flood etc. Dist. (1979) 88 Cal.App.3d 579, 590, 152 Cal.Rptr. 19), written claim requirement, even with a contract clause declaring it cannot be waived (Transpower Constructors v. Grand River Dam Authority(10th Cir. 1990) 905 F.2d 1413); Bettelheim v. Hagstrom Food Stores, Inc. (1952) 113 Cal.App.2d 873, 249 P.2d 301 [held, lease provision prohibiting waivers unless in writing was waived; “[e]ven a waiver clause may be waived by conduct.”]).

Any party by its conduct can be estopped to rely upon (prevented from relying upon) any requirement in the contract (Maurice L. Bein, Inc. v. Housing Authority (1958) 157 Cal.App.2d 670, 681-82, 321 P.2d 753).

CONTRACTOR'S RIGHT TO ABANDON FOR UNPAID EXTRAS

When the contractor has not followed the claims procedure set forth in the contract and there is no "Change Order" or "Construction Change Directive," but the contractor has performed extras for which he has not been paid, can the contractor suspend work and abandon the project?

The answer to this question should be found in an analysis of whether there is a legal obligation for the owner to pay.  As a general rule, when one party to contract commits a material breach of that contract, the other party is discharged or excused from any obligation to perform. Hernandez v. Gulf Group Lloyds, 875 S.W.2d 691, 693 (Tex. 1994). Nonpayment sometimes qualifies as a justification for abandonment.  See The Brooklyn & Ownes Screen Mfg. Co. v. U.S., 97 Ct.C. 532 (1942); Overstreet v. U.S., 55 Ct.C. 154 (1920).   However, at least one case has held that, in this context, "nonpayment" refers to nonpayment of agreed contract amounts, but not to claims for additional payments which are not yet resolved. See, DWS, Inc. , ASBCA 33245, 87-3 BCA ¶ 19960, 29 G.C. ¶ 265. That case involves a government contract that was not a construction contract. Nevertheless, it can be used as authority that nonpayment of extras does not justify abandonment.

Oxford Dev. Corp. v. Rausauer Builders, Inc., 304 N.E. 2d 211, 216 (Ind. 1973), on the other hand, held that nonpayment of extras justified abandonment in the context of a construction contract. A distinguishing factor in Rausauer , however, is that the court found a legal obligation on the part of the owner to pay for the extras. It is, therefore, reasonable to conclude that absent a legal obligation to pay, there is no right to abandon performance for nonpayment of extras. That result is consistent with the contractual scheme of the AIA 201. Art. 4.3.4 specifically requires the contractor to proceed diligently with performance of the work pending final resolution of claims.  Furthermore, Art. 4.5.3 requires the same during the arbitration process.

Once the legal obligation to pay for the extras is established, and all other criteria justifying abandonment exist, the contractor is entitled to "walk the job" for the nonpayment of extras.  It should be noted that in some jurisdictions, a contractor can lose the right to abandon performance once it has been obtained. In those jurisdictions, a contractor is put to an election at the time that a material breach occurs. The contractor may abandon performance or continue performance and sue for damages. Board of Regents of Univ. of Tex. v. S&G Constr. Co.,529 S.W.2d 90 (Tex. Civ. App.--Austin 1975, writ ref'd n.r.e.).  Continued performance after the material breach can constitute a waiver of the right to abandon. It is unclear how long a contractor's continued performance must be before a waiver occurs.  It would appear that due to the factually intensive nature of the analysis of the existence of the right to abandon, no practitioner can predict the outcome with any degree of certainty.  To counsel a contractor to abandon performance for nonpayment of extras is risky at best. However, situations exist where it is not only advisable, but it is the only realistic course of action for the contractor.

Drafting Tips

One drafting consideration from the owner's perspective is to include a requirement that the contractor commence and continue performance, including any changed work, pending necessary modifications or amendments to the contract price or time. Standard contract language typically provides the owner with the right to order the contractor to proceed with disputed work, unless the work is so far beyond the scope of the contract as to constitute a cardinal change.

From the contractor's perspective, it is important to articulate who has authority on behalf of the owner to direct and approve changes in the work. The contract should include a clear designation of authority, and a mechanism that permits the contractor to verify authorization of a change or extra work order without violating any contractual duty or direction to proceed with disputed work.

Generally, even if the contractor disputes an ordered change, it must proceed with the work and seek recourse through the contract's respective claims and disputes provisions.

Standard of Proof

Some courts have held that a contractor's extra work claim must be proven by a higher evidentiary standard — clear and convincing evidence. Duncan v. Cannon, supra.

There Must Be Extra Work

Labor and materials which are incidental and necessary to performance of the contract cannot be regarded as extra work for which a contractor or builder may recover. Likewise, "general" or undocumented discussions may be inadequate to prove and present a CO claim.

Time May Also Be Affected

The presence or absence of CO's may have a bearing not only on price and cost, but may also affect time of completion to shorten or extend time allowed for the substantial completion and final completion of the work.

Change Order or Change Directive?

Watch out for proposals or plans originally presented by a party as a CO, for which mutual agreement is required, but if agreement is lacking the same or similar work and changes are then cast or re-labeled as a "Construction Change Directive" or an "Interim Directed Change."

Does Extra Work Allowance Include Contractor Overhead and Profit?

Be sure to review and determine whether the CO provision, and any CO proposed and agreed upon, includes allowance for contractor overhead and profit (added or deleted), implicitly or explicitly. 

Reservation of Rights

An owner, architect or engineer in charge may issue and approve a CO with a reservation of rights. Sample language would be that, "Neither this Change Order nor the extension of time of performance granted hereunder, constitute an admission that Owner is responsible for any delays or hindrance to past or future work under the contract." Travelers Casualty and Surety Company v. Dormitory Authority — State of New York, 2010 U.S. Dist. LEXIS 88320 (S.D.N.Y. 2010).

Sample Clauses:

Article 7 of the AIA A201 General Conditions of the Contract for Construction©:

§ 7.1.1 Changes in the Work may be accomplished after execution of the Contract, and without invalidating the Contract, by Change Order, Construction Change Directive or order for a minor change in the Work, subject to the limitations stated in this Article 7 and elsewhere in the Contract Documents.

§ 7.1.2 A Change Order shall be based upon agreement among the Owner, Contractor, and Architect; a Construction Change Directive requires agreement by the Owner and Architect and may or not be agreed to by the Contractor; an order for a minor change in the Work may be issued by the Architect alone.

§ 7.2.1 A Change Order is a written instrument prepared by the Architect and signed by the Owner, Contractor, and Architect, stating their agreement upon all of the following:

1) the change in the Work;

2) the amount of the adjustment, if any, in the Contract Sum; and

3) the extent of the adjustment, if any, in the Contract Time.

§ 7.3.3 If the Construction Change Directive provides for an adjustment to the Contract Sum, the adjustment shall be based on one of the following methods:

1) mutual acceptance of a lump sum properly itemized and supported by sufficient substantiating data to permit evaluation;

2) unit prices stated in the Contract Documents or subsequently agreed upon;

3) cost to be determined in a manner agreed upon by the parties and a mutually acceptable fixed or percentage fee; or

4) as provided in Section 7.3.7.

§ 7.3.5 Upon receipt of a Construction Change Directive, the Contractor shall promptly proceed with the change in the Work involved and advise the Architect of the Contractor's agreement or disagreement with the method, if any, provided in the Construction Change Directive for determining the proposed adjustment in the Contract Sum or Contract Time.

The AIA© documents identify three different types of possible changes: (1) Formal Change Orders, agreed upon and signed by both the owner and the contractor; (2) Construction Change Directives, signed only by the owner; and (3) Field Orders, signed by the architect for only minor changes in the work.

ConsensusDOCS© refer primarily to two situations, the Change Order and the "Interim Directed Change" –

§ 8.1 CHANGE ORDER — § 8.1.1 The Contractor may request or the Owner may order changes in the Work or the timing or sequencing of the Work that impacts the Contract Price or the Contract Time. All such changes in the Work that affect Contract Time or Contract Price shall be formalized in a Change Order. Any such requests for a change in the Contract Price or the Contract Time shall be processed in accordance with this Article 8.

§ 8.1.2 The Owner and the Contractor shall negotiate in good faith an appropriate adjustment to the Contract Price or the Contract Time and shall conclude these negotiations as expeditiously as possible. Acceptance of the Change Order and any adjustment in the Contract Price or Contract Time shall not be unreasonably withheld.

§ 8.2 INTERIM DIRECTED CHANGE - § 8.2.1 The Owner may issue a written Interim Directed Change directing a change in the Work prior to reaching agreement with the Contractor on the adjustment, if any, in the Contract Price or the Contract Time.

§ 8.2.2 The Owner and the Contractor shall negotiate expeditiously and in good faith for appropriate adjustments, as applicable, to the Contract Price or the Contract Time arising out of an Interim Directed Change. As the Changed Work is performed, the Contractor shall submit its costs for such work with its application for payment beginning with the next application for payment within thirty (30) Days of the issuance of the Interim Directed Change. If there is a dispute as to the cost to the Owner, the Owner shall pay the Contractor fifty percent (50%) of its estimated cost to perform the work. In such event, the Parties reserve their rights as to the disputed amount, subject to the requirements of Article 12.

Under ConsensusDOCS©, the Owner must pay the Contractor 50% of the estimated cost to complete the disputed work, whereas no such obligation exists under the AIA forms. This is an added protection and leverage for the Contractor, but can also benefit the Owner by insuring that the project can move forward while the parties negotiate details.

Federal Acquisition Regulations - § 52.243-5 Changes and Changed Conditions 

CHANGES AND CHANGED CONDITIONS –

a) The Contracting Officer may, in writing, order changes in the drawings and specifications within the general scope of the contract.

b) The Contractor shall promptly notify the Contracting Officer, in writing, of surface or latent physical conditions differing materially from those indicated in this contract or unknown unusual physical conditions at the site before proceeding with the work.

c) If changes under paragraph (a) or conditions under paragraph (b) increase or decrease the cost of, or time required for performing the work, the Contracting Officer shall make an equitable adjustment (see paragraph (d) upon submittal of a proposal for adjustment (hereafter referred to as proposal) by the Contractor before final payment under the contract.

d) The Contracting Officer shall not make an equitable adjustment under paragraph (b) unless—

1) The Contractor has submitted and the Contracting Officer has received the required written notice; or

2) The Contracting Officer waives the requirement for the written notice.

e) Failure to agree to any adjustment shall be a dispute under the Disputes clause.

ARCHITECT LIABILITY TO THE OWNER IN THE CHANGE ORDER PROCESS

The design professional can have liability to the owner in the change order process. Generally speaking, an action against an architect/engineer by the owner can be based on either contract or tort law, or both.  Under contract law principles, an architect may be liable to the owner based upon the breach of the contract between the parties.  Williams Engineering, Inc. v. Goodyear, 496So.2d 1012 (La. 1986).  Under tort theory, an owner can bring a claim against the architect based upon the breach of a legal duty owed to the owner.  Corcoran v. Sanner , 854 P.2d 1376 (Colo. 1993).  Sometimes, the limitations periods (which can be different) will dictate the type of action an owner is allowed to bring.

Under tort theory, absent a provision to the contrary, implicit in every contract between an owner and an architect is the duty of the architect to "exercise the care of those ordinarily skilled in the business."  Nelson v. Commonwealth of Virginia, 368 S.E.2d 239, 243 (Va. 1988) quoting Surf Realty Corp. v. Standing, 78 S.E.2d 901, 907 (Va. 1953).  A breach of that duty entitles the owner to damages.  Proof of professional negligence by an architect ordinarily requires expert testimony.  Allied Properties v. John A. Blume and Assoc., Eng'rs, 102 Cal.  Rptr. 259, 265 (1972).

Where the architect's duties include formulating changes to the project, initiating the change order process, and processing change orders, it would appear that he must perform those functions under the standard of negligence expressed above.  Hence, failing to process change orders in a timely manner could constitute professional negligence on the part of the architect.  If such failure is established, the architect should be liable to the owner for all damages proximately caused thereby.

For example, a design professional can be liable for delays.  Under the AIA B141 , an architect is specifically obligated not to delay the work on the project.  AIA B141 Art. 2.6.12.  When the time for occupancy of a building is delayed due to the negligence of the architect, an owner may recover damages for the loss of the use of the building, including lost profits.  Northern Petrochemical v. Thorsen & Thorshov, Inc., 211 N.W.2d 159 (Minn. 1973).   One court has gone as far as to award delay damages to an owner against the architect that were based upon the liquidated damages specified in the prime contract (between the owner and contractor).  E.C. Ernst, Inc. v. Manhattan Constr. Co. of Texas , 387 F.Supp. 1001 (S.D. Ala. 1974), modified on other grounds, 551 F.2d 1026 (5th Cir. 1977).  It follows that delays caused by the architect negligently performing change order functions should render the architect liable to the owner for the delay damages.

However, some jurisdictions have held that in actions against an architect based upon negligence, economic damages are not recoverable unless accompanied by physical property damage or bodily injury.  Sandarac Ass'n., Inc. v. W.R. Frizzell Architects, Inc.,609 So. 2d 1349 (Fla. 1992), review denied, 626 So.2d 207 (Fla. 1993).  This is commonly referred to as the "economic loss doctrine." The applicability of this doctrine will depend on the jurisdiction of the lawsuit.

As mentioned above, an architect owes contractual duties to the owner in addition to duties of care implicit to the professional services. For example, an architect can be liable under the contract between the owner and architect when the architect fails to properly supervise the project adequately.  First Nat'l Bank of Akron v. Cann, 503 F. Supp. 419 (N.D. Ohio 1980) affirmed, 669 F.2d 415 (6th Cir. 1982). Hence, if for some reason the owner does not pursue the architect for negligence in the change order process, the architect can still be liable for breach of its contractual duties.

If the contractual duties of the architect include active involvement in the change order process and the scope of that process includes the use of Construction Change Directives, it would appear that the architect would owe the duty to perform that function under the same professional standard as exists for all other functions performed by the architect.  Hence, where there are numerous changes and the change order processing has been slow, the failure of the architect to use, or recommend that the owner use, Construction Change Directives should be actionable conduct based upon both tort and contract principles. It follows that if delays occurred that could have been prevented by using Construction Change Directives, the architect should be liable to the owner for all resulting delays as well as all other damages.  

It should also be noted that one reason change orders may be necessary is because of substandard plans or specifications prepared by the architect. An architect may be liable to an owner for defective or inadequate  plans and specifications.  Huber, Hunt & Nichols, Inc. v. Moore , 136 Cal. Rptr. 603.  Therefore, if defective plans and specifications are the reason for numerous change orders that result in delays to the project, the architect should be liable to the owner for all the resulting damages.

CONSTRUCTION CHANGE DIRECTIVE

The Construction Change Directive procedure detailed in Art. 7.3 of the AIA 201 is a means to compel a contractor to perform extra work even though, for whatever reason, there is no agreement as to price or time adjustments.  This is sometimes called "force account" work.  The procedure calls for the issuance of a written directive from the owner and architect containing proposed price and time adjustments.  The contractor does not agree to the terms of the directive, but is allowed to include the price adjustments in future pay requests, Art. 7.3.2, 7.2.2 and 7.3.1.  If the owner and contractor do not ultimately agree to the adjustments, the matter is referred to the architect for determination.  Art. 7.3.7.

The Construction Change Directive is an innovative procedure designed to contractually obligate the contractor to perform force account work while, at the same time, providing the contractor with some security that he will be given some compensation for it.  The contractor is allowed to include in its "pay applications" requests for payment for changes authorized by the directive. Art. 9.3.1.1 and 7.3.7.  Hence, use of the procedure provides contractors, subcontractors and suppliers with at least some degree of cash flow during the course of the project.  The Construction Change Directive assures the owner that the project will not be delayed because of a lack of agreement with the contractor for an adjustment as to price or time for extra work. With the issuance of the directive, the contractor is given written documentation providing (1) that a change has, in fact, been ordered and (2) a precise description of the scope of the change.

The Construction Change Directive is one approach to force account work.  However, it is not unusual for public entities to use much more strict procedures to compel contractors to perform force account work, and to administer payment therefor.

In order to prove a constructive change or extra work claim, here is what you should do:

Review your contract.  There should be a "Changes", "Alterations", or "Extra Work" clause.  Generally, the clause permits the owner to order the change in the work that has been requested.

Confirm change in writing.  If the changes clause requires the contractor to have a written change order prior to commencing work, then you should make sure written approval has been given.  You would be surprised at the number of disputes arising from supposedly "approved changes" that were never formally approved or reduced to a writing.

Track your notice provisions.  Again, the contract contains the notice provisions regarding changes and the contractor will be required to prove that it complied with those notice requirements.

Prepare for both entitlement and quantum.  The contractor will be required to show that the work was, in fact, additional work required by the owner.  A written change order will go a long way to establishing this claim, but the contractor also has to be prepared for the case when the change is disputed by the owner.  The contractor should keep track of the extra costs it is claiming for proof at mediation or trial or arbitration.

Five Situations Where You May Be Able To Avoid A Contractually Mandated Written Change Order

Almost all written construction contracts require that the contractor obtain a written change order as a condition to payment for the additional work. However, owners customarily direct contractors to perform the work and promise that they will subsequently negotiate a fair price for the work. Almost every contractor can recite an example of such a promise that is then ignored by the owner when the time for payment arises.

Written change order provisions are placed in contracts so that the owner is assured that it will expressly approve any changes to the scope of work. In addition, such provisions are designed to give the owner timely and ample notice of the change in scope so it can investigate the claim and then either avoid the additional cost or take steps to mitigate the additional expense. Courts have routinely upheld such provisions when the additional work was performed without any notice to the owner.

However, the courts will be less inclined to enforce the written change order requirement when the owner has timely notice and orally induces the contractor to perform the changed work. Similarly, courts will not find it equitable to enforce such clauses against subcontractors when general contractors induce them to perform the additional work with a promise that they will be paid for the work at a later date.

The remainder of this article will review five legal theories that have been approved by California courts as a legal basis for avoiding the written change order provision in private works contracts when the owner knowingly approved the additional work. The article will then discuss written change requirements for California public works projects.

Private Works

1. Oral Waiver of the Written Change Order Provision

The doctrine of waiver has long been accepted by the courts. In essence, the courts treat appropriate action or conduct of the owner as waiver of the written change order provision. Quite simply, if the other party orally approves the additional work, it acts in a manner that is inconsistent with that party’s intent to rely on the change order provision. As a result, the court will treat that conduct as a waiver of the clause and allow the contractor to recover the value of the additional work. (See for example Howard J. White v. Varian Associates (1960) 178 Cal App 2^nd 348).

It should be noted that many contracts include additional clauses that seek to avoid such waiver arguments. In addition, some contracts include clauses that state that only certain personnel can approve change orders. For example, the provision may limit the change order approval to home office personnel rather than field personnel. Under appropriate circumstances, such anti-waiver provisions have been upheld by the courts as valid.

2. The Owner May Be Estopped From Relying On The Clause

The doctrine of promissory estoppel has been applied to a number of construction contract disputes. Promissory estoppel occurs when a party makes a promise to the other which the other party would reasonably rely on to take action based on the promise. If the owner promises to pay for the work and then allows the work to proceed it will be estopped from denying the promise to pay for the work.

3. A Requirement For A Written Change Order Can Be Rescinded By The Parties

As in the case of waiver, the parties can effectively rescind the written change order provision by their conduct. If the contractor and the owner orally agree that written change orders are not necessary the courts will treat the provision as being rescinded by the parties.

4. Allowing The Owner To Receive The Improvements Without Compensation Would Unjustly Enrich The Owner

This legal theory is based on the concept that once the work is complete the owner will have the permanent benefit of it and the contractor will not be able to repossess the work. However, the owner can only be unjustly enriched if the contractor was induced to perform the additional work by fraud, coercion, mistake, request or coercion by the owner. Thus the claim must be based on some action of the owner that resulted in the contractor performing the additional work.

5. California Statutory Law Allows A Written Contract To Be Orally Modified

California Civil Code section 1698 allows a written contract to be modified when the oral change order agreement is executed by the parties or if the change order is supported by new consideration. California courts have held that if the contractor fully completes the additional change order the oral modification to the contract is deemed executed by the parties and is thus effective. The section also states that it does not preclude “in an appropriate case the application of rules of law concerning estoppel, oral novation and substitution of a new agreement, rescission of a written contract by an oral agreement, waiver of a provision of a written contract, or oral independent collateral contracts.” Thus, the section does not prohibit the four other legal theories that have been applied by California courts to uphold oral change orders.

California Public Works

California public entity contracts are based on state and local procurement laws. The laws typically require approval for the changed scope of work before it is performed. For example, the Public Contract Code requires the county board of supervisors to approve change orders if the amount exceeds a certain threshold amount. However, the board may authorize the inclusion of a clause in the contract that allows for county employees to approve any work that is necessary for proper completion of the work.

Most public works projects include written change order provisions. The courts will uphold such provisions since they give the public entity timely notice of the change in scope so it can investigate the claim and then either avoid the additional cost or take steps to mitigate the additional expense.

1. A Public Agency’s Misrepresentation Maybe Allow A Contractor To Avoid The Written Change Order Clause

If the public entity was actively negligent in the design of the project or misrepresented the conditions that the contractor would encounter, the courts will not enforce the written change order requirement. Thus, if the contractor can establish that the public agency knowingly and positively misrepresented the site condition such clauses can be avoided. Generally, there is an implied warranty that plans and specifications are complete. If a showing can be made that the plans and specifications were inaccurate and that the public agency provided statements, although unintentional, that mislead the contractor, a contractor can recover the value of the extra work.

2. Reliance On The Statements Of A Public Official May Not Allow A Contractor To Avoid The Written Change Order Provision

While California courts will allow a contractor to avoid a written change order clause if a private owner promises to pay for the additional works, they will not permit a public works contractor to rely on such unauthorized statements to avoid the provision. However, if the contract vests a certain official or the project architect or engineer with the authority to approve the oral change order the courts will enforce the oral change order.

3. If An Unauthorized Public Official Orally Orders The Work, Proceed Under Written Protest

As previously stated, most public works contracts authorize certain public officials to approve change orders so that any additional work that is necessary for proper completion of the work is performed. If an unauthorized public official demands that the change order proceed, the contractor should give prompt notice that such work will be performed under protest. If the contract has a clause that sets forth the method of notifying the public agency of such a change order, those requirements should be followed. If the contractor provides timely written notice that it is proceeding under protest, the courts may not enforce the requirement for a written change order.

Conclusion

Construction contracts typically include a requirement that change orders be in writing. If such a provision exists, a prudent contractor will insist that all change orders be in writing. If the owner, or the prime contractor if the agreement is between a general contractor and a subcontractor, chooses to disregard the requirement of a written change order, confirm the instructions in writing. The written confirmation should be provided to the other party and the architect, if any.

A Change Order Checklist

It is inevitable that change orders will be issued during the course of a construction project. The change in the scope of work can result in the increase of the contract completion time and/or the amount of compensation paid. This article shall provide a checklist that can be followed to help ensure that the contract change order clauses are complied with when a contractor seeks a change order.

From a lawyer’s point of view, a change order is simply an amendment to the construction contract.  Since it is an amendment to the contract it is important to comply with the contract change order clauses. Typically, changes in the scope of work can be made expressly through instructions from the other party or constructively. A constructive change order occurs when the other party effectively requires that work outside the contractually agreed upon scope of work be performed. In all but the least sophisticated contracts there are different change order contract provisions for express and constructive change orders.

The express change order provisions set forth how the change is be documented and the means for pricing the change order. The constructive change order provisions will typically include such provisions along with a notification requirement.

Most contracts have specific requirements for how change orders are to be processed. It is not uncommon for the owner to deny a change order based on an assertion that the contract change order clauses were not complied with by the other party. It should be noted that there are defenses to such allegations, which were discussed in a previous article.

Since most change orders are initiated in the field it is advisable to have a checklist for change orders for field personnel to follow. Contractors should create such a checklist and make it company policy for personnel to comply with it. Such a checklist should, at a minimum, include the following:

1. Have the change order contract provisions been reviewed relative to notice, form, timing and pricing of the proposed change order?

2. Has adequate and timely notice of the changed condition, extra work, and additional time requirements been given to the other party?

When is the deadline for submitting claims?

Contracts will typically require written notification on claims for compensation to be submitted within a certain time period. The time period can range from between 7 to 21 days after a contractor is aware of an event giving rise to a claim. Failure to provide notice within the prescribed time period may result in a claim being barred. Therefore, contractors should be wary of any such notice provisions and deadlines for making claims for changes.

It is important that the notice provisions be complied with when the change in scope of the work is first observed. A common defense to a change order proposal is the failure to give timely notice which prevents the other party from documenting the changed conditions, document the additional work and/or make an informed decision to proceed with the additional work.

3. Is there a method for logging the submission, response and payment of the change order ? If so, has the proposed change order been logged in?

The time that another party takes to respond to a change order can have a direct impact on the timely completion of the contract work. A change order log allows a contractor to track the time between submission and approval of the change order. It also serves as a method for reminding the field personnel to follow-up on a tardy response.

4. Does the proposed written change order provide sufficient information so that the other party can determine why the additional work and/or additional time requirements are outside the agreed scope of work? Have you provided back-up documentation for the change order?

It is advisable to reference all the relevant general conditions and specifications. If you have photographs, entries from daily job logs, relevant correspondence, including such documentation with your change order may speed the acceptance and payment of the change order.

5. Is the proposed change order priced in a manner that complies with the contractual change order requirements? If the change order can be fully priced until the work is complete, are you providing pricing updates in accordance with the contract requirements (e.g. daily, weekly, monthly) ?

Most contracts provide for three basic means for pricing change orders; the choice of which method is left to the owner. They include an agreed fixed amount, time and materials or a requirement that the contract proceed with the work with cost to be negotiated at a later date based on data that is developed during the additional work. If you cannot agree on the exact amount before the additional work is commenced, many contract clauses require the contractor to notify the owner of the exact cost of the work on a regular basis. The clause may provide that the failure to comply with such a requirement may result in a waiver of the claim.

6. If the change order is on a force account basis (i.e., the other party requires you perform the work on a time and material basis), have you complied with the contractual provisions for evidencing that work is being performed? Does the contract require a representative of the other party to sign such documentation? If so, are you complying with that requirement?

It is important to have force account work documented in accordance with contract. Many require that a specific project representative review and acknowledge that the work was performed on a daily basis.

7. Does the proposed change order include a component for any additional time that may be required for the change order? If so, does the time component explain how the project will be impacted?

8. If you are uncertain as to how the proposed change order will impact the overall time for completion of the project and/or impact other work, have you reserved your right to claim such impacts (e.g., loss of productivity, delays, ripple costs, acceleration) at a later date?

The overall impact on a single change order or a series of change orders may not be realized until well after the additional work is commenced. If you are uncertain as to the impact of the change, it is wise to reserve your rights to make a claim for such impacts. It is also advisable to track the impact of the change on the job. A means for tracking the impact could include a time line. In a columnar format, the key date and then a description of what occurred on that date should be set forth. Key dates should, at a minimum, include: (a) when the claim work was discovered, (b) when the claim work was reported, (c) when the claim work was started, and (d) when the claim work was completed.

On some projects the number and extent of change orders are well in excess of what the parties contemplated when they entered into the construction contract. If the size, nature and number of change orders becomes well in excess of that contemplated by the parties, the contractual method for fairly compensating the contractor may not be applicable. As a result, the doctrine of a cardinal change has been developed by the courts. Generally, a cardinal change occurs when the contractor is required to perform work that is such a nature, quantity and/or impact that is dramatically beyond the types of changes the parties contemplated when they entered into the contract. Maintaining detailed documentation of how the excessive changes impacted the job is necessary for proving a cardinal change.

9. If the change order has been denied, have you complied with the contract clauses for later submission of that change order as a claim resolution process? Have you continued to track the costs and impacts of the additional work?

Such documentation should include daily job logs, schedules, photographs, bid documentation, relevant provisions of the plans and specifications, project correspondence, change order pricing estimates and documentation, job cost reports and employee time records for the subject work. Ideally, a separate file should be established to include the aforementioned documents and to track the status of the claim.

Have a provision in the original contract specifically stating that all change orders will be in writing.

Insist that the contract terms be followed and require all change orders to be in writing and signed and dated by the parties involved. The change orders should refer to the original contract terms and note what was included and why the newly requested work requires a change order.

The change order should spell out exactly what the new changes are and spell out how the work is changed from that originally requested. It should present an estimation of the costs that will be incurred based on the changes, establish a new deadline and the payment terms for the additional work and/or materials.

If working on an hourly rate, confirm the hourly rate for the additional work required under the change order.

Do not agree to a change order that is open-ended.

There are times when subcontractors believe they are being asked to do work not covered in the original contract, but the contractor or owner disagree and think the requested work was included in the original contract. This can be prevented if the original contract designates either the project engineer or architect as the decision maker in the event such an issue comes up.

Other things subcontractors can do to protect themselves legally and to minimize disputes over payment include:

Confirming in writing any conversations with contractors concerning matters subcontractors consider changes to the original contract.

Taking photos, preferably videotapes, of work at various s stages of the project.

Keeping all documents and receipts that support their claim that the work order was changed from the terms of the original contract.

Attorneys experienced in construction law and contracts can review the original contracts and work requested to assist in determining whether a change order is required and help with all related construction claims.

Conclusion

The failure to comply with a contractual change order may result in the denial of a substantial change order. Thus, it is important to establish a policy for the processing of change orders. The checklist set forth in this article is not intended to be all inclusive of the items that should be included, but rather represents a sample of items that may be included.

Irrespective, the starting point for every checklist are the contract change order provisions. Based on the author’s experience in prosecuting change order disputes in the courts, the importance of familiarizing yourself with and subsequently complying with change order contract provisions cannot be stressed enough. It is strongly recommended that a contractor require field personnel to read and understand the importance of those provisions. By requiring field personnel to gain an understanding of those requirements, the contractor has made a large step in successfully processing change orders.

Avoid Five Costly Mistakes Made By Government Construction Contractors

Although not intentional, contractors tend to make the following mistakes which can cost them thousands or millions in construction projects.

Failure to understand how the various FAR clauses impact your ability to have equal footing with the agency.  Federal contracts are primarily written for the benefit of the agency.  Having your people trained in the various clauses can save the company a substantial amount of money.

Not understanding the difference between a Request for Equitable Adjustment and a CDA claim.  There is a difference between the two. Having a government construction lawyer to guide you around the lurking pitfalls can also save you thousands in unnecessary attorney fees.

Failures to submit a construction claim that meets the CDA requirements. Both small and large contractors make fatal procedural and substantive errors then submitting their claims. See information on Contract Disputes Act and Pass Through Claims. There are statutory requirements that you must meet including getting the contracting officer’s final decision. Failure to meet them can create delays and even rejection.

Not understanding what constitutes a Contracting Officer’s final decision. Your construction claim must have a CO’s final decision before you can appeal to the Court of Federal Claims or Board of Contract appeals.

Failure to properly address cure notices. When a contracting agency believes that you are a performance risk, a cure notice is forthcoming.

Prepare, Negotiate and Litigate Construction Claims in Federal projects allow contracting officers (COs) great latitude in resolving disputes. However, you may often find your company trying to negotiate a claim that you know has merit.

Avoid Costly Pitfalls With Requests for Equitable Adjustment Claims: An important part of the government construction claims process is understanding the nuances between a CDA claim and a Request for Equitable Adjustment. Develop Internal Policies and Controls: Given the mandated increased oversight on federal contractors, both small and large companies are targeted for audits and investigations.

Get Help With Government Construction Proposal Writing: Bidding on government contracts is very tough business. Whether you are writing proposals for Army Corps Projects, Navy projects or for another agency, you want to strengthen your technical proposals, construction bid bond submissions and management approaches.

Federal Construction Contracting for Small Businesses: The laws associated with government contracting include a wide array of complex regulations that dictate how you perform. For example, small businesses are restricted to certain guidelines under teaming agreements and joint venture contracts.  Issues arise concerning SBA size standards and limitation in subcontracting requirements. At the law office of Watson & Associates our government construction law attorneys provide legal advice on matters pertaining to:

·         Prime and subcontracting agreements

·         Size standard disputes

·         Subcontracting plans

·         Teaming agreements

·         Joint venture agreements

·         Filing construction claims

·         Addressing construction defect disputes

Metropolitan Engineering, Consulting & Forensics (MECF)

Providing Competent, Expert and Objective Investigative Engineering and Consulting Services

P.O. Box 520

Tenafly, NJ 07670-0520

Tel.: (973) 897-8162

Fax: (973) 810-0440

E-mail: metroforensics@gmail.com

Web pages: https://sites.google.com/site/metropolitanforensics/

https://sites.google.com/site/metropolitanenvironmental/

https://sites.google.com/site/metroforensics3/

We are happy to announce the launch of our twitter account. Please make sure to follow us at @MetropForensics or @metroforensics1

Metropolitan appreciates your business.

Feel free to recommend our services to your friends and colleagues.

Metropolitan has been engaged by design-build engineering firms, general contractors, and specialty subcontractors to prepare and substantiate differing site conditions claims and has been engaged by project owners and public agencies to evaluate claims submitted by contractors.  Metropolitan has in-house multidisciplinary expertise of engineers, geologists, construction management professionals, and schedulers to analyze all aspects of DSC claims.  The results of our development and evaluation of DSC claims have been presented in discussions with our clients, written reports, and testimony at review board hearings, arbitrations, mediations, and trials.

In general, Metropolitan has expertise to evaluate issues related to:

·         Entitlement (technical merits of claim)

·         Cost analysis 

·         Delay impacts

·         Disruption

·         Productivity Loss

·         Acceleration

·         Design defects

·         Construction defects

In Metropolitan’s evaluations of entitlement, our engineering and construction professionals have used their education, training, and expertise to address issues related to the following types of site conditions: 

·         Excavation and trench failure 

·         Embankment failure 

·         Pile-driving refusal  

·         Rock suitability for drilled shafts 

·         Import fill suitability 

·         Borrow source characterization 

·         Unsuitable material 

·         Subgrade suitability 

·         Embankment/subgrade R-value 

·         Construction equipment mobility  

·         “Pumping” and “rutting” of subgrade 

·         Expansive soil 

·         Collapsible soil 

·         Liquefiable soil 

·         Cobbles and boulders (particle size) 

·         “Running ground” 

·         Sinkholes 

·         Excessive ground moisture 

·         Groundwater and seepage 

·         Groundwater pumping rates and volumes 

·         Rock rippability 

·         Back-cut slope stability 

·         Unmapped landslides 

·         Faults 

·         Ground fissures 

·         Hazardous materials (naturally occurring and manmade)