Why You Need Written Authorization of Change Orders

In Artistic Stone Crafters, Inc. v. Safeco Ins. Co. of Am., a subcontractor sued the general contractor and its surety, seeking payment on a change order claim based on verbal authorizations for the change work. The U. S. District Court for the Eastern District of Virginia dismissed the subcontractor’s claim, reasoning that the subcontractor (a) waived the right to assert the claim by signing a lien waiver form and (b) failed to procure a written change order from the GC in advance of performing what it considered to be additional work.

The Case

The issues in Artistic Stone are common to many construction projects: The subcontractor entered into a subcontract with the general contractor to install new floor tiles on a cafeteria renovation project at a U.S. Government installation.

During the course of the project, the subcontractor performed approximately $100,000 of additional work on the project, although only approximately $25,000 was memorialized in written change orders. The subcontractor performed the remaining $75,000 of additional work at the oral direction of the GC’s operations manager, who allegedly told the subcontractor that “clerical problems” were holding up the issuance of written change orders for this additional work.

At the end of the project, the GC tendered payment to the subcontractor for the full base contract sum, plus the amount of two written change orders, but did not tender payment for the $75,000 of additional work performed by the subcontractor at the oral direction of the GC.

Nonetheless, the subcontractor signed a “Subcontractor Final/Partial Waiver of All Claims for and Right of Lien” (the “Final Release”) and accepted the payment tendered by the GC. Ultimately, the subcontractor filed suit against the GC and its payment bond surety seeking payment for the $75,000 of additional work performed by the subcontractor. The general contractor and its payment bond surety moved for summary judgment, arguing that the subcontractor waived the right to payment for the $75,000 when it signed the Final Release.

The Decision

The court agreed, reasoning that by the terms of the Final Release the subcontractor waived “all claims for labor performed, materials furnished, equipment, and/or machinery supplied.”

Next, the court considered whether the general contractor waived the contract’s written change order requirement by verbally assuring the subcontractor that a written change order would be issued as soon as possible. In rejecting this argument, the court said the subcontractor and the general contractor executed two written change orders during the project as evidence that the general contractor did not waive the written change order requirement. The court reasoned that many parties agree to require written change orders to avoid reliance on “oral promises made by a mid-level employee” and to promote certainty.

The Impact

In Artistic Stone, the court strictly enforced two contract clauses to preclude the subcontractor from recovering approximately $75,000 of additional work. First, the court enforced the plain language of the Final Release. The lesson should be familiar to all contractors: You should alter the language in final or partial releases when you have a claim to preserve your ability to assert claims for extra compensation at the end of a project.

Second, the court determined that the subcontractor’s failure to obtain a written change order prior to performing such work defeated the subcontractor’s claim. Contractors should know the provisions of contracts before a dispute arises, to ensure compliance with written change order or other similar requirements. In the court’s own words, contractors are “encourage[ed] to read and follow the governing contract.”

Gerald I. Katz is an attorney specializing in construction law throughout the United States with Katz & Stone LLP, Suite 600, 8230 Leesburg Pike, Vienna, VA 22182; www.katzandstone.com.