April 29, 2010

Why change orders are often a good thing

Millstein

In the construction industry, changes are inevitable. Most changes amount to simple matters and, therefore, are processed in an efficient and timely manner. On larger projects, however, changes often turn into complicated and contentious matters.

Recently a client who is a roofing subcontractor, working on a large municipal project, was faced with an interesting situation involving downspouts. The client was adamant: Downspouts were not part of its scope. The problem was that the downspouts were not part of anyone’s scope. They were simply overlooked when the divisions were drafted.

The prime contractor ordered my client to install downspouts, claiming that it was close enough to the roofer’s scope to warrant that my client perform the work. A directive was issued, even though payment was not promised. My client called for advice: He would lose the slim profit margin built into the job if he was forced to install downspouts for free.

The issue came down to whether or not there was a change directives clause in the subcontract. A change directives clause would give the prime contractor the power to literally order changes to the subcontract. In this case, the subcontract incorporated the main contract, and the main contract included a change directives clause.

The only solution, therefore, was for my client to perform the work. However, the work would not be free; downspouts were not included in the roofer’s scope of work. My client first notified the prime that it would be making a claim for the additional work. Under the claims provision of the contract, the prime was obligated to pass this claim through to the owner.

My client was ordered to proceed, which it did. Upon completion, my client submitted an invoice, along with a formal notice of claim, as outlined in the disputes clause. In this case, the window for filing a claim was 10 days, which is fairly generous considering that some contracts allow for only one or two days before the claims deadline bars future claims.

Because this was a large project, the disputes clause was quite involved. After a claim was submitted, and unless a resolution was reached, there were several steps involved. First the architect renders a decision, then mediation must occur, and finally arbitration would be scheduled. In other words, getting paid would not be simple. However, if my client had simply said “no”— and refused to perform — there was a very real chance that a harsh result could have met him. Had my client failed to install downspouts, the prime contractor could have hired another contractor and then back-charged my client for the work.

I was involved with a case similar to this situation five years ago. The subcontractor was an installer of commercial sprinklers. In its agreement, the subcontractor had excluded electrical work. The plans and specifications omitted an electrical hookup that ran from the pump to the sprinklers. The subcontractor refused to perform the electrical work, claiming it was not covered under the contract.

And the subcontractor was right — electrical work was specifically excluded from the contract. But the subcontractor was also wrong — it should have followed the contract, performed as instructed, and then submitted an invoice upon completion. In our case, the subcontractor did not perform. As a result the prime contractor back-charged the subcontractor and, by the time the case reached arbitration, the owner was not responsible for the charge either.

Essentially, the owner received the work for free because the claim had not been submitted in a timely manner, according to the disputes and changes provision. The subcontractor received a harsh lesson and the prime contractor was left with some scars from litigation, but otherwise escaped without harm.

The lesson here is simple: When it comes to notice provisions, always follow the letter of the contract.

In Washington, this is essential. In a 5-4 decision in 2003, the Washington Supreme Court made this point perfectly clear. A contractor on a public works project had failed to comply with the procedures for making a claim for delay under the contract, and the claim was denied by the county.

The Supreme Court barred the contractor’s claim, even though the county had received actual notice of a pending delay claim. The contract required specific notice, which the contractor failed to provide in a timely manner, and the court therefore refused to allow the contractor’s claim for additional compensation.

The next time you are faced with a situation where you have a claim on a project, remember this: Change is good.

And it was for my roofer client, who ended up not only bettering its reputation as a team player, but even enjoyed a bit of a profit by installing the downspouts. The claim was properly documented and submitted, the prime contractor submitted the claim to the owner, and the owner paid the entire balance.

When it is properly documented, that old saying is often true. Change is good.

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Seth Millstein graduated from the University of Oregon School of Law in 2002; and from the University of Washington with a master of law degree in taxation in 2003. He’s been practicing real estate and construction law in Seattle since 2004, primarily representing owners and contractors, both subs and primes.

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