Mark Gentry, partner at HKA, contributed to this alert.
Changed work on construction projects is frequent and ranges from small to large changes. That is particularly true now, given COVID-19 disruptions and the new reality that exists after the pandemic. While owners may dislike change order requests, owners should recognize that some level of change is inevitable — particularly in the post-pandemic construction world. Going forward, owners should consider including contingency in the budget to deal with this new reality. Accounting for legitimate and predictable changes sooner rather than later and obtaining agreement that the payment fully resolves the issue can mitigate a larger dispute down the road. In addition, many contractors may be willing to trade prompt payment for the change for a cost discount. An owner that has acknowledged, processed and paid for change orders on a timely basis appears to be far more reasonable than one that has refused to do so.
Unresolved and unpaid changes can result in disputes over the cost and schedule impacts, and sometimes those disputes result in arbitration or litigation. However, regardless of the size or outcome of the change, there are basic steps you can take to make the process easier and recovery more defined.
1. Identify the changed work.
To know if the contractor’s work is actually “changed,” read the contract, drawings, specifications and other project records to understand in detail the scope and expectations in performing the contractor’s original scope of work. Identify and provide written documentation as to what exactly is different. Now what?
2. Re-read your contract.
What does it say? Are you to provide notice to the other party of the change? What are your notice timing requirements? Does the change need to be in writing before you proceed? Does there need to be a change order? Your contract likely has a procedure to follow for changed work. Seek legal assistance if you don’t understand a particular provision.
Generally, contracts require that notice of the change be given to the other party. Once you identify the change, provide notice promptly in accordance with relevant contractual provisions (making sure to send to the parties identified in the contract and in the format the contract specifies). Similarly, contracts may require approval by both parties to proceed, which is often in the form of an executed change order.
3. Consider your insurance options.
Depending on the changed condition, you may want or need to put insurance carriers on notice of the change in work. Review your contract and/or insurance policies to determine if, how, and when insurance carriers should be notified.
4. Document the work.
Ideally, you are already following your procedures for documenting project status. If not, start now! The changed work should be tracked and recorded in as much detail as possible — including detailing what the contractor is going to do to mitigate the impact of the change. The change may be tracked in schedules, daily logs, photographs, other contemporaneous project records, or all of the foregoing. Consider creating a designated space in the project file for documentation of the changed work.
If the changed work can be differentiated from the base scope work the contractor is already doing, consider opening specific cost codes in your financial reporting system to track the changed work. If the nature of the change is a productivity impact or differing conditions, tracking the impacts is more challenging. Do your best to describe the impacts and how and why it is different than your expectations. The more documentation, the better.
5. Involve others.
Discuss the impacts of the changed work with other project team members — both internally and with your project partners. Consider appointing someone on your team to oversee documenting impacts and gathering documentation from other team members.
Be open to asking for help from outside resources for how best to document the impacts. External claims expert Mark Gentry and his HKA team specialize in assisting clients in documenting changed work and quantifying the resultant impacts. In addition, the attorneys of Faegre Drinker can assist in analyzing your contract and developing best practices for your changed work.
6. Be prepared for dispute resolution.
Your contract also likely provides for a dispute resolution procedure. If the changed work issue is not resolved quickly, review your contract to determine next steps.
Contractors may be used to experiencing changed work on projects, but this may be a new experience for owners. It has never been more important to exercise good project management practices such as documenting the work. Documentation and analysis of your contract will benefit you in any project and could be greatly helpful in any disputes — whether resolved early or through a trial.