Change orders happen on nearly every construction project. While they’re often necessary, they can be confusing, and and feel just like extra unnecessary work. But performing work – without written approval – that wasn’t in your original scope of work can severely affect a construction company’s right to payment. In a court case out of Kansas, an electrical subcontractor learned the hard way that performing work with unapproved change orders can cost you.
Importance of change order procedures
Change orders are among the leading causes of financial losses for a construction company. That’s why it’s so important to understand and follow the change order procedures that are outlined in the contract. It’s not only crucial to wait until the change order request is approved by the owner, but that the approval is in writing as well.
Subcontractor completes work without approved change orders
A 2019 case coming out of the Kansas Court of Appeals, Decker Electric, Inc. v. Pratt Regional Medical Center, is just another example stressing how important it is to use the proper notice and change order processes.
Pratt Regional Medical Center (PRMC) hired Hutton Construction as the general contractor to renovate and expand the hospital. This was under a cost-plus contract with a guaranteed maximum price, which also had a contingency fund to cover approved change orders.
In turn, Hutton hired Decker Electric, Inc. (Decker) as a subcontractor to perform the electrical work on the project.
- Property owner: Pratt Regional Medical Center (PRMC)
- General contractor: Hutton Construction
- Subcontractor: Decker Electric, Inc.
Change orders run wild
Problems arose early on in the project. There were late and incomplete mechanical drawings submitted, requiring multiple change orders. The initial change orders followed the proper procedures. The owner would request the GC to perform extra work, and the work was then delegated to the subcontractor. Based on discussion with the sub (e.g. Decker), the GC would submit the change order to the owner, which they would either approve or deny.
As the project progressed, the change orders kept coming. Eventually, the cost of the change orders depleted the contingency fund, even though change order work still needed to be done. PRMC stated that the guaranteed maximum price had already been reached. So to keep working, Hutton and Decker negotiated an agreement for Hutton to pay the retainage money withheld from the subcontract. And any money Hutton was able to recoup from PRMC for the electrical work would be paid forward. In return, Decker agreed to waive any claims against Hutton.
Sub files unjust enrichment claim
When the project finished, Decker abided by the agreement and didn’t file a claim against Hutton. Instead, they sued the property owner, PRMC, under an unjust enrichment action.
The doctrine of unjust enrichment is when one party receives some sort of benefit at the expense of another without the other receiving proper compensation. To prove a claim for unjust enrichment, there are three main things that the claimant must prove:
- A benefit was conferred on a party;
- Appreciation or knowledge of the benefit by the party; &
- Acceptance or retention of the benefit under such circumstances would be inequitable without payment to the other party.
Clearly, PRMC received the benefit of additional electrical work being done on their property. There’s also no doubt that they were aware of this. And lastly, it would seem that allowing PRMC to not pay Decker would be “inequitable.” Yet Decker’s unjust enrichment claim failed. So what was the problem?
Court: Property owner wasn’t liable for payment
The court declared that even though PRMC had paid the full guaranteed maximum price, they could still be liable for an unjust enrichment claim. However, when such a claim is between a sub and an owner who didn’t have a contract together, liability is limited. The subcontractor will have to prove that, under the circumstances, the owner was reasonably notified that the sub expected to be paid directly by the owner. That simply wasn’t the case here.
In addition, the change order protocols were in place, and they were followed for most of the project. And, although Decker Electrical assumed that the only source of money would be PRMC, they had no reason to believe that payments were expected to come directly from them.
Takeaway: Always get owner approval
If under these same circumstances, Decker and PRMC had discussed these change orders and PRMC had agreed to pay, things would be different. There would be an oral contract between the parties and Decker would simply sue for breach of contract. Instead, Decker learned a hard lesson about following procedures and documenting everything.
Contractors are informally asked to perform additional work all the time on projects. But any time additional work is requested on a job, contractors should always wait for approval. And not just a verbal assent, but written approval. Just because a contractor has asked for work doesn’t necessarily mean that the owner consented, approved, or is going to pay for it. Take the time to follow the normal procedures in place at the time.
For another look at how change order procedures can affect a contractor’s right to payment, check out this Oregon case: Change Order Format Can Make or Break Mechanics Lien Rights