Deductive change orders are a strange breed of normal construction change orders. Change orders that add to your scope of work are a relatively simple process. A change or addition is ordered, a change order is issued, and the contractor is compensated for the additional labor and materials associated with performing that work. But, what happens if the change order reduces or eliminates your work?
What are Deductive Change Orders?
A deductive change order is when the customer reduces the scope of work that was originally agreed upon in the contract. These can be small reductions or can result in the deletion of a substantial portion of work. There are two main issues to address when analyzing a deductive change order. First, you must establish whether the deletion of the work was a deductive change order or if it was actually a partial termination for convenience. The second and more difficult part is to determine how to price the unperformed work. How much should be taken off the original price for the work since the work was reduced?
Can the Customer Single-Handedly Reduce The Scope of Work?
This can be tricky. On one hand – a contract is a contract! Both sides agreed to the work that will be performed, and neither side should be allowed to toss the agreement aside or rewrite it without the consent of the other side (known as a “cardinal” change).
At the same time, construction contracts regularly allow for change orders and for partial terminations. When change orders or partial terminations are allowed, then the customer may be entitled to change the scope of work without agreement from the other party. However, changing the scope of work too much can actually result in a breach of the contract.
Cardinal Changes can Result in a Breach of Contract:
Is the Contract Partially Terminated? Or Was There Simply a Deductive Change Order?
Construction contracts regularly allow for a “partial termination for convenience”. This allows the customer to terminate a portion of the work. Construction contracts also regularly allow for change orders – and potentially change orders that reduce the scope of work. Determining whether a reduction in the scope of work is due to a partial termination or a deductive change order can be tricky – and sometimes, it won’t matter all that much.
Understanding Deductive Change Orders vs. Partial Termination for Convenience
There are two characteristics that will help identify whether a deductive change order or a partial termination is more appropriate when work is being reduced.
Termination for Convenience can get Complicated
Minor vs. Major Changes
Minor changes can be made via deductive change order, but major reductions in the scope of work should be made via partial termination. A customer can make minor changes to the scope of the contract, but they can’t unilaterally delete major portions of the work simply via change orders. That could effectively throw the contract for work out the window, and change orders that actually change the nature of the contract don’t hold up well in court. For that reason, major reductions to the scope of work should be handled through a partial termination for convenience rather than via deductive change order. If a deductive change order attempts to seriously reduce the scope of work, the recipient of the change order might need to push back.
If other work will be substituted for the deleted portion, that’s typically done through change orders (deductive or otherwise). This is a two-step process: One change order that reduces the scope of work, and a second order substitutes other work in place of the originally planned work. However, if there is no substitute for the deleted work, the reduction could constitute a partial termination for convenience.
Why Does it Matter?
For one, it’s important to be sure whether the reduction in the scope of work is even allowed under the contract. Some contracts will allow for deductive change orders, some will allow for partial termination, and some might allow for both – but making sure the customer is abiding by the contract should be high priority.
What’s more, whether the reduction in work is classified as a deductive change order or a partial termination will dictate the procedure for reducing work – such as timing, how the reduction is made, and even how the price for the reduction will be calculated.
Ultimately, if the construction contract allows for deductive change orders and partial termination for convenience, then determining which category a reduction falls under might not matter all that much. But again – it could still affect how to decide what to cut from the price of the contract.
How do you put a price on the work that’s not actually performed?
If the scope of work is reduced, the contract price will be reduced accordingly. Sometimes this is easy, other times it’s a point of contention.
When the deleted work is its own separate line item, it’s easy to determine how to adjust the price – just delete that line item! However, the deleted work isn’t always easily severable from the rest of the work. Contractors and subs generally prefer to lump everything together when calculating their price. If that’s the case, it can be hard to determine what exactly should be cut out of the contract price. Generally, the number will fall somewhere on the spectrum between the contractor’s cost for performing the work and the cost of the work + overhead and profit.
Unsurprisingly, this situation gives birth to many construction payment disputes.
Unit Price Contracts Make Price Adjustments Easy:
Special Note on Reducing Work Then Having Someone Else Do It
Because some parties abuse deductive change orders and partial terminations, states have begun to step in. Specifically, a recurring issue has been a customer reducing their contractor or sub’s scope of work, then having the work performed by someone else (presumably at a better price). When this happens, often, original contractor or sub will be entitled to recover the profits the contractor would have made on the reduced work.