Anyone working on a construction project should familiarize themselves with every aspect of their contract; most notably, the change order procedures. On May 29, 2020 the Vermont Supreme Court upheld a decision to dismiss a subcontractor’s claim after they failed to follow the change order procedures. The subcontractor mistakenly thought a change order was unnecessary for the type of extra work. This assumption ended up costing the subcontractor over $100K.
Importance of change order procedures
Change is inevitable: This is particularly true when it comes to construction. There are a number of variables to consider, and unforeseen circumstances that could affect the work and schedule. This is why most construction contracts include a change order procedure.
Changes in work typically require some sort of notice and approval before performing the additional work. That way, the owner and GC can determine whether or how they want to proceed. Contractors should be vigilant to ensure that these procedures are followed closely. Failing to comply with the change order procedures can result in substantial financial loss, as it did for a drilling subcontractor in Vermont.
Vermont sub performs extra work without change order
The case in question is Construction Drilling, Inc. v. Engineers Construction, Inc.
Project Snapshot:
- Owner/public entity: Town of Hartford (Hartford)
- General contractor: Engineers Construction, Inc. (ECI)
- Subcontractor: Construction Drilling, Inc. (CDI)
The Town of Hartford hired ECI as the general contractor for the reconstruction of a railroad-bridge. CDI was hired as a subcontractor to perform drilling services for structural support of the bridge.
Multiple documents incorporated into the subcontract
The subcontract between the parties was a lump sum contract, which incorporated the terms of the general contract and CDI’s proposal. The proposal included a provision allowing for a price increase if they were “drilling in obstructions.” This was defined as having to spend more than 4 hours to complete drilling the hole. The price would be adjusted by $920 per hour, plus the costs of the drill bits.
The proposal did not outline how these price adjustments would be requested and approved. However, the subcontract did include a change order procedure. The same procedure was included in ECI’s general contract, which read as follows:
“…request for a Change Order may be submitted by the Subcontractor when changes in the work are encountered or expected. The request shall include documentation of the change, add or deduct costs, and possible changes to the schedule. Not work shall proceed on a Change Order until approved in writing by ECI.”
Stuck equipment costs over $100K in additional charges
As work began, the drill became stuck. CDI spent weeks trying to release the drill. However, they never notified ECI. Once the drill was finally freed, CDI sent an invoice for $120K for the extra work performed. ECI refused to pay, so CDI filed a lawsuit against them for breach of contract.
At trial the court agreed that the efforts to free the drill did constitute “drilling in obstructions” within the definition of the subcontract. But they weren’t convinced that the failure to pay was a breach of contract.
The attempts to free the drill constituted a change in the work, which required a request through the change order procedures in the contract. The change order needed to be submitted and approved before the subcontractor could bill for the additional work. The court dismissed the case, and CDI appealed.
VT Supreme Court: Sub should have requested change order approval
On appeal, CDI argued that the additional work performed was covered under the “drilling in obstructions” provision of the proposal allowing to bill for the additional costs. CDI contended that the change order provision in the subcontract didn’t apply. The Supreme Court refused to accept this argument.
The court mainly focused on the fundamental unfairness of allowing the claim to proceed without CDI providing notice through the change order request. The general contract included the same change order provision. ECI would have needed to provide the owner with notice before incurring those costs.
Furthermore, ECI didn’t have an opportunity to mitigate the issue because they were never informed. Allowing CDI to charge for this extra work without approval essentially allow them to dictate the overall cost and schedule of the project. The appeals court affirmed the lower court’s decision, and the case was dismissed.
Failing to follow change order procedures can be costly
Construction projects can be complex. When accepting a project, contractors should pay close attention to their contracts to ensure they comply with all the requirements. But that’s only the beginning. A project can include a number of different contracts and subcontracts, at a number of different tiers. Many contracts include “pass-through” or “flow-down” provisions that incorporate the terms of other contracts and documents.
This can tend to get messy, as there may be some incongruity between the terms and provisions. Before beginning any work, particularly additional or “change work,” prudent contractors will not only review their own contracts, but any other relevant contracts or documents that may be incorporated. And if unsure, just ask. Simply communicating could’ve prevented this payment dispute.