Change Orders — Use Them, Understand Them, or Pay the Price (Part 2)

By failing to prepare, you’re preparing to fail. —Benjamin Franklin

By Jeffrey W. King, Jones Walker, LLP, Outside General Counsel for the WFCA

In Part I, the basics of change orders were explained. In a perfect world, a retailer or installation contractor prepares a “change order proposal” that specifies the changes, and the price for the extra work. Once the owner and retailer or contractor have agreed on scope, price, and schedule, a formal, written change order is prepared and signed by all parties. Then, the retailer or contractor proceeds to perform the changed work. But in reality, changes can arise suddenly, and there is pressure to keep to the schedule. The standard process is not always followed and change orders are often quickly drafted or not even reduced to writing. In the flooring industry, the installation contractor will often deal directly with the customer without informing the retailer, yet the installation contractor expect payment. The parties may also dispute over whether the work is a change or covered by the original agreement, or may not agree the costs for the change. In Part II, these issues will be discussed, with suggestions on how to avoid disputes.

Make Sure the Scope of Work is Clear and Complete

Most of the time disagreements relating to change orders center on whether an item is in fact a change order or rather something that was already included in the original contract. To avoid such disputes, it is imperative to make sure that the scope of work is well defined before signing an agreement. A complete and well defined scope of work will reduce any disagreement over what is included in the contract and what is an extra to the contract.

For example, does the agreement specify how the stairs will be finished—waterfall or Hollywood style? Similarly, is shoe molding going to be installed, will the subflooring be replaced or repaired, or is the padding or any vapor barriers specified? Without these clear understanding, the contractor or retailer is likely to hear “That is how it should be done,” “Why didn’t you explain this earlier,” or “I wanted the floors nailed down not glued?” While it is often difficult for the parties to absolutely define the scope of the job, detailed the specifications will ensure less problems or miscommunications.

In the flooring industry, the installation contractor will often deal directly with the customer without informing the retailer, yet the installation contractor expect payment.

Anticipate Unforeseen Site Conditions

Unforeseen site conditions can present unexpected challenges that impact the success of change order claims. Hidden subsurface conditions, environmental issues, or discoveries during the construction process can necessitate changes to the original scope of work. First, retailers or flooring contractors should conduct a thorough site inspection, to identify any potential problems. Second the agreement should specify that the agreement does not include any work for unforeseen site issues.

For example, who is responsible for moisture testing—the foundation subcontractor, the flooring contractor, the retailer, the installation contractor, or the general contractor. The agreement should clarify this responsibility and specify that any needed corrective action will require additional payment. Similarly, the agreement should specify that the flooring retailer or installation contractor is not responsible for correcting unforeseen site problems, such as water intrusion or mold when the existing floors are removed. Unless you addressed these contingencies in the agreement, these conditions can become a source of dispute between the flooring retailer and the owner.

Agree on Price

While it is best not to move forward on the change order without an agreement on price, that is not always practical The parties may not be able to agree on the costs, but scheduling issues demand may delay unworkable. In addition, due to the emergency nature of the change, there may not be sufficient time to fully consider the costs. If costs are not agreed upon before starting the work, the change order should specifically state that the costs are reserved for later determination and that the flooring retailer or installation contractor does not waive its right to fair reimbursement.

Beware of Delays

A change may disrupt the flooring retailer or installation contractor’s other work on the project or significantly delay the work. For example, need to order new or additional products is likely to delay the work. The retailer or installation contractor should address the impact of a delay to ensure they are appropriately compensated for any increase in costs as a result of the delay. Equally important is to ensure the retailer or installation contractor are not liable for any costs incurred by the owner, the general contractor, or other subcontractors as a result of the delay.

Document All Requests

During a construction and home improvement projects, change orders are often approved on the jobsite without a written document. While long existing relationships may cause flooring retailers or installation contractors to put faith in handshake agreements, an oral agreements do not always hold up in court. It is always recommended that a proper change order be documented and signed by the parties. A slight delay in the short term can dramatically decrease an expensive change order dispute at the end of the project.

Nonetheless, on the job requests are common. The changes are often minor, but can add up to significant costs. If the parties orally agree to a change order, the flooring retailer or installation contractor needs to document the request and the agreement to on costs. Contractual obligations, including the requirement for written orders, may be waived by the parties. Most agreements require the waiver to be in writing. Accordingly, the flooring retailer or installation contractor should send an email documenting the agreed upon change order. The email should state:

You have requested a change order to [specify changes]. The costs of the change order will be [amount]. Notwithstanding any provisions in our agreement, this email will serve as the needed documentation of the change order. Based on this agreement stated above, we are moving forward with the work on the change order. Please contact me immediately if you have any questions, or need further clarification.

Proper documentation is a key to avoid legal disputes.

Protect Against the Installation Contractor’s Change Orders

Most flooring sold by retailers is installed by an independent installation subcontractor. That subcontractor will be in the home and a customer commonly asks the subcontractor for certain changes. The subcontractor expects payment, but the customer may think these changes were just clarifications of what they paid for. To avoid these issues, your agreement with the installation subcontractor should specifically state that:

The installation contractor must obtain written approval from [Retailer] for any change orders, work outside of this agreement, price or cost changes, or any other changes in the scope of work whether or not requested by and/or approved by the customer. The [Retailer] shall not be responsible for any additional costs or fees without such written approval.

Be Aware of “Changes in the Work” Clause

Change orders are not the only way for an owner or general contractor to change the work. Many contracts also allow the owner to unilaterally change the work without agreement from the contractor through a “construction change directive” or “CCD”. A change order requires an agreement between the owner and the contractor as to scope, price, and time. When the parties cannot agree, the owner can issue a CCD and the contractor must carry out the change--even if the contractor does not know how much it will be paid for the extra work.

For example, under the AIA form contracts, the additional compensation or completion time due for the CCD will be determined by the architect instead of by agreement of the parties. If the contractor disagrees with the architect’s price, it can sue the owner. What the contractor cannot do is refuse to perform the work. Moreover, most contracts require the contractor to give the owner notice of the contractor’s contention and that it is working under protest, and to keep detailed records of the disputed work. Failure to carry out the work of a CCD is a breach of contract. The courts routinely enforce CCD provisions.

While an owner’s authority to require changes in the work is broad, it is not unlimited. The “cardinal change doctrine” protects contractors from changes in the work so fundamentally alter the original obligation undertaken by the contractor that it would be a breach of contract by the owner if the owner insisted the contractor perform the work. To illustrate, if an owner and a contractor entered into an agreement for installation of LVT, but the owner later decided on hard wood flooring, the cardinal change doctrine would relieve the contractor from installing hard wood floors. The cardinal change doctrine can also be invoked if the there are multiple change orders that fundamentally change the original work.

Don’t Forget to Communicate

One primary reason for disputes over change order claims is a lack of communication and coordination among the owner, design team, retailer, and subcontractors. To avoid this, the flooring retailer or installation contractor should regularly communicate with the parties, send clear documentation, and a proactively address potential issues. Do not wait to discuss any issues that may arise. Surprises are almost always a road to conflict.

Do Not Waive Your Claims

A flooring retailer or installation contractor can have the most-clear cut case of additional compensation, but lose its right to that compensation if they have not preserved their right to make a claim. One of the most frequent ways a changed work claim is lost is through the doctrine of accord and satisfaction. Acceptance of “final payment” may operate as a release of claims for extras, even if it is clearly not the retailer’s or contractor’s intention to release its claims. If the agreement specifies that acceptance of final payment operates as a release of the owner from all liability, the retailer’s or contractor’s acceptance of the final payment will waive any claims for change order payments. Even in the absence of such a clause, the owner or general contractor may try to designate acceptance of final payment a release of all claims. A retailer or installation subcontractor should preserve their rights to additional compensation by noting on the check endorsement that the check is cashed “under protest” or other words to that effect which show an explicit reservation of the right to make further claim against the owner or general contractor.

Understand Your Legal Options

Changes are going to happen on nearly every construction project and sometimes change order disputes are unavoidable. Flooring retailers or installation contractors have a number of legal options at their disposal. First, the retailer or installation contractor can file a mechanic’s liens, which put a legal claim on the property to ensure payment for completed work. The flooring retailer or installation contractor must make sure they comply with the requirements and deadlines, or they will lose this right. A retailer or installation contractor may also be able to file a bond or warranty claim. Here to, the claim must be within the required time periods under state law. Other options include a stop work notice. There is a risk with such action as they can lead to project delays and possible liability. Ultimately, the flooring retailer or installation contractor may have to pursue its claims in court.

Conclusion

It is essential that the retailer or installation contractor have followed the contractual requirements, and documented all changes and agreements. The retailer or installation contractor should always consult with legal counsel to explore their options, assess the risks, and determine the best course of action.

The information contained in this article is abridged from legislation, court decisions, and administrative rulings, should not be construed as legal advice or opinion, and is not a substitute for the advice of counsel ■