Change Orders -- The Bane of All Construction Projects

More disputes arise because of actual or perceived changes in a construction project than for any other reason

More disputes arise and more adversarial positions are staked out because of actual or perceived changes in a construction project than for any other reason. Aggressive contractors will threaten slow-downs and work stoppages if they don't get paid. Overbearing owners will insist that unknown conditions, extra features, and an expanded project are covered by the original bid price.

A seemingly minor in-the-field alteration of a lateral support may, weeks or months later, change the route of a surface drain to a more expensive and even dangerous location. Many shop drawings, materials specifications, detailed plans and installation requirements are not known when the work is bid. New instructions arise instantly in the field through the superintendent or architect or owner's representative. One side may have no recourse except to make the change or get thrown off the job and lose the ensuing legal fight, or the contractor will have a valid claim for extras and the owner will bear the consequences. Informal change requests may be backed up by the full force of law; in other circumstances the impact of changes will be ignored by the courts, and claims for extra payment will not be enforced.

Most construction contracts specify the steps required before additional work or deduction in work is authorized. Construction contracts typically provide that a change in dollars or time must be described and submitted in writing, must be submitted so many days in advance of the work (or so many days after the owner's request), signed by designated people, and reviewed and approved within so many days of submittal.

But most contracts fail to anticipate other issues. Care must be taken that any affected third party also signs off on a change order (a construction lender, a surety or bonding company, a landlord for improvements to property under a long term lease). A change in scope of work between subcontractors should be signed off by the prime contractor. See Superior Gunite v. Ralph Mitzel, Inc. (2004) 117 Cal.App.4th 301.

If the change implicates health or safety concerns or building code requirements, permits may need to be applied for and obtained before work on the change begins. See California Pools, Inc. v. Pazargad (1982) 131 Cal.App.3d 601. An extreme example of the interplay of building laws and contract rights is Heple v. Kluge (1952) 114 Cal.App.2d 473. The contractor bid a job on plans that did not comply with building requirements. The courts ruled the contractor could completely ignore those building plans and instead be paid much more than the contract price.

Change orders on public agency jobs present special problems. There, change requests and contracts must scrupulously adhere to regulatory requirements that vary among states, cities, and other public agencies. See Los Angeles Dredging Co. v. Long Beach (1930) 210 Cal. 348, 353. Contracts wholly beyond the powers of a municipality are void even if fully performed. In First Street Plaza Partners v. City of Los Angeles (1998) 65 Cal.App.4th 650, the court upheld a summary judgment because "the signature of the mayor was lacking." Id. at 667.

The manner of approving changes in public agency projects varies among the different types of public agencies. California state agency contracts are governed by the Public Contract Code, particularly sections 10250 et seq. for modifications. Changes in construction contracts of local agencies, such as counties, are governed by Public Contract Code §§ 20136 et seq. Other public agencies such as cities, irrigation districts, water districts, unincorporated associations, and the United States each have their own unique requirements for any binding change orders and contracts.

Even a completed fully performed and paid for contract can result in a viable lawsuit to make the contractor pay back the entire amount received if the public agency contract was entered into in a manner not authorized by law. Miller v. McKinnon (1942) 20 Cal. 2d 83.

Changes from unforeseen conditions present special problems. See T. Kelly & Sons, Inc. v. Los Angeles (1935) 6 Cal.App.2d 539. The court held that the city was not responsible for the extra expense caused by an unforeseen below water rock shelf.

By far the most common change request comes on the fly when the parts don't fit, the drawings are unclear, the unexpected surfaces, workers or parts don't show up on time. Such problems can be solved seamlessly if everyone cooperates and no one is adversely impacted in time, labor costs, and/or materials required. However, such informal changes are loaded with ambiguities that spawn controversy and great expense to resolve if disputed, because "[w]hether a writing has been modified by an executed oral agreement is a question of fact." Keeble v. Brown (1954) 123 Cal.App.2d 126, 132. "Question of fact" under law means there is no easy answer and the dispute can't be resolved without an expensive and time consuming trial to an arbitrator, judge or jury. The results are both unpredictable and can cause large swings in the economic consequences. Nuttman v. Chais (1950) 101 Cal.App.2d 476 is an example of large cost overruns being enforced on purely oral modification.

To sum up, the best protection for all sides is careful and detailed contract procedures that in advance require exacting descriptions of the change, its money and time impact, written approval of all those who are affected, and precise turn around or approval times. Without stating and following such procedures, owners, contractors, lenders, bonding companies and others may be thrown into unpredictable legal proceedings. In that very expensive arena, witness memory, unclear documents, legal doctrines designed to reach "fair" results, and judges or juries will determine an outcome that strikes someone as lawful and reasonable -- but potentially devastating for the losing side. For public agency works, additional compensation or extra time for changes in the work will be rarely be obtained without following the law and contract provisions to the letter and in advance.

George Berger is a Partner at Allen Matkins in San Diego. He has over 30 years of experience as a litigator and can be reached at [email protected] or (619) 233-1155.