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Can the owner demand a credit in excess of the line item established in the contract?

IndianaChange OrdersConstruction AccountingConstruction Contract

A contract with an owner includes several line items which were approved by a pre-job schedule of values. One line item is for a small aspect, and the value for that line was established in the contact to be $2980. The owner, without our knowledge, hired someone else to perform the work associated with that line item. I planned to strike the line from the final pay app, and just not bill them for it, but the architect sent a deductive change order in the amount of $3278, a 10% increase over the line item value. He said the contract stipulated that 10% markup is applied on change directives. Can they demand we credit them 110% of a line item value that is clearly established in the contract?

2 replies

May 14, 2020
Generally, deductive change orders shouldn't be calculated like ordinary change orders. It wouldn't make much logical sense, really - an owner shouldn't be entitled to unilaterally cancel work then receive a discount on the remaining as a result. That's not particularly fair or equitable. So, if there's an upcharge for additions to the scope of work, that shouldn't necessarily mean reductions in the scope of work will be calculated in the same way. Still, the terms of the contract will control - and it's possible that deductive changes would require the same 10% applied if the contract calls for that. The best way to get clarity on your contract would be to consult with a local Indiana construction attorney so they can review the contract terms and discuss the matter with you. Still, let's take a look at some common themes.

Deductive changes and the contract

One thing worth looking at would be the exact terms of the change order provision allowing the 10% charge. Typically that will be worded as a one-way street in the contract by referencing "extras" or "additions" to the scope of work. Or, there may be other language in the change order provision which clearly indicates it relates to additions to the scope of work. In fact, it's possible that deductive change orders aren't even allowed under the contract depending on the way the change order provisions are written. What's more, change orders must usually be clearly communicated. And, the contract may well require specific notice be given in advance of the change order. That means it's also possible that the change was improperly done and that the reduction in price is improper if the required notice wasn't given. Note also that major changes to the contract may well be considered a partial termination rather than a deductive change. If that's the case and if partial termination/termination for convenience isn't allowed in the contract, then the customer could be in breach of the contract by taking the work from you. And, just like with change orders, even if the termination is allowed, that will often require timely written notice. If notice was required but not given, that could also be a breach of the contract.
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May 14, 2020
Thank you for your time and attention to my question. It has given me reason to follow up.
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