3 Expensive Mistakes to Avoid When Scope of Work Changes

Changes happen all the time, but what’s the best way to make sure you get fairly paid for them?

Watch this webinar to:

• Dodge future payment disputes with these best practices
• Make your life easier when identifying, tracking and documenting
• Learn techniques to best communicate changes as they happen

Webinar Experts

Alex King

Construction Attorney
Beltzer Bangert & Gunnell LLP
View Alex’s Expert Profile

Buck Beltzer

Founding Partner & Construction Attorney
Beltzer Bangert & Gunnell LLP
View Buck’s Expert Profile

Seth Bloom

Senior Director of Attorney Services
Levelset
View Seth’s Expert Profile

Full Transcript

Seth:
My name is Seth Bloom. I’m senior director of attorney services at level-set here in new Orleans. I’m really excited to have a great webinar today. The title is expensive mistakes to avoid when the scope of work changes. I’m happy to have buck Beltzer. He’s a founding partner at BBG construction law firm as well as as associate Alex King. They’re both based in the Denver area and service the entire region and have national clients as well. So I’m sure we’re going to learn a lot today. Buck, do you want to start off? And Buck and I met at a ABA conference in Tucson back a few months ago before all this COVID stuff. So it’s good to see you again Buck.

Buck:
Likewise Seth and thanks for the opportunity. Alex will be doing all of the heavy lifting today. Hope that you as, as participants are can submit questions and we’d like to hear what you have to think or have to say about what we’re talking about. So anything we can do to more specifically address questions, just use the chat feature, which I’m sure Seth will explain to you at some point.

Seth:
Yeah. When questions come in, I’ll try to flag either Alex or Buck down and we’ll get that question answered. Hopefully we can get to all of them. If not, we can talk about what to do after that. But Alex, I’ll let you get going.

Alex:
Excellent. Hello, my name is Alex King. I’m based out of here in Denver before becoming a lawyer, I was actually an estimator for a construction firm here in Denver. And so that’s kind of helped me in my transition to the legal field. Today we’re going to be talking about change orders and you know, how you as a contractor can implement best practices to ensure that change orders are approved, that they’re tracked appropriately and that you’re compensated fully both in time and in wage or contract adjustments to make sure that all the costs are being collected. So to begin, and this is going to be a little bit of a theme that runs through this entire presentation, but keep in mind that you always need to go back to the contract and that is going to kind of set the tone for how the whole project’s going to run.

Alex:
And so if you can spend a little bit more time on the front end and the negotiation and the clarification period when you’re, before you actually execute the contract, it’ll pay dividends in the long run, save you money and save you headaches ultimately. So there are three major contract provisions which should be what should be on your radar when you’re negotiating. Sign the contract specific to the change order provision and scope changes. The first one is going to be a clearly defined scope of work and this is key in the sense that most disputes happen with regards to change orders on what is included in a scope of work and what is excluded. And so the more detailed you are with your scope of work definitions at the beginning in the contract negotiation period, the easiest, the easier it’s going to be for you to request for submit change orders for changes to that scope of work as it was previously decided.

Alex:
Now, almost as importantly as what’s included or defined in the scope of work is what’s excluded from the scope of work. And keep in mind your bids or your proposals that you used to get a seat at the negotiating table. Most of the time those will not become included in the contract. And so the exclusions that you put at the bottom of page eight of your proposal may not make it in. So you need to ensure that those exclusions do get in and that your scope of work is clearly defined. And importantly what is not included in your scope of work is clearly defined so that when something comes up on the project, you’ll be able to adequately determine whether or not it is a change or whether or not it is your responsibility from the scope. The next provision, which is key is going to be the actual change order provision.

Alex:
Every contract should have this, the change order provision is going to have basically the roadmap for you to follow to ensure that you get compensation for any changes to the scope and whether that be compensation changes to the contract amount or changes to the contract time. Both can be considered compensation and are critical to making sure that you receive everything that you were entitled to based on any changes to what you were previously agreed to perform. So the first kind of provisions within, within the change provision you need to be aware of is going to be the notice requirements. So if a change occurs, who are you supposed to tell? When are you supposed to tell them? What kind of documentation are they looking for? These should all be clearly defined in this provision. And so if you know, going in beforehand and you can make a little cheat sheet or a list of things to follow when a change occurs, you’ll know beforehand and it’ll be easier to perform when the change actually happens.

Alex:
So, you know, who do I, who do I contact on? If you’re a general contractor, who from the owner do I contract to let them know a change has occurred or is about to occur? On the same vein, who from the owners group, if you’re a general contractor, is authorized to make the change order? Is it the owner himself? Is it the owner’s agent? Is it the project manager? You need to know who has the authority to actually execute the changes as they occur. Because otherwise you might run in the case where a project manager tells you to go ahead and make the change and it turns out he never had the authority to do so. And you might have to fight over getting that change order actually approved on the backend. The other thing that should be clearly defined in the change provision is how it changes going to be priced.

Alex:
A lot of times owners like to include different pricing terms for change orders compared to how the entire contract is designed to be priced or costs are allocated. And that can have serious repercussions if your change order does not allow you to include your usual profit and overhead into any any pricing changes. It might just be actual costs for the change. And so if you know that going in, you can appropriately allocate risk and price the rest of your risks, the price, the rest of the project accordingly, knowing that if a change occurs, which it inevitably will the pricing for that change is going to be different from the pricing you did in your initial estimate. And proposal. The third provision that’s very important for the change. If a change occurs on a project is going to be the claims provision.

Alex:
And this is always, if you know heaven, heaven forbid that one of your scope changes is unapproved or you commence work before being properly authorized. And now you have to, you’re the change in the work that you already completed has been denied. Now you’re going to have to follow the contract claims provision to submit a claim to the owner or if you’re a general contractor. This also applies if you’re a subcontractor to the general contractor. But you’re gonna have to submit a claim explaining why you are entitled to the compensation you believe you are from the change. Now just like the other two provisions, if you do a little bit of upfront research and negotiation, you can create a very clear and outlined roadmap on the procedures and the steps you need to follow to ensure that that claim is both received by the owner.

Alex:
And if supported by the appropriate documentation, then it can be approved and you can receive the compensation that you feel you’re entitled to. So with those three provisions if you negotiate them on the front end and the more clear and defined and easy they are to follow, I guess if there’s a step by step process, the easier it’s going to be on the backend when the change occurs, you know, eight months into the project and everyone’s angry with each other already at least you’ll have a clear roadmap on how to proceed and boxes you can check to ensure that you get the compensation that you feel you deserve.

Seth:
I just wanted to pump up the room a little bit. Let’s ask those questions. You know, lawyers charge a lot of money to answer these questions so you have them free right now. So I’d love to see some of the participants post some questions.

Alex:
Alright, so the next step is going to be after you’ve got the contract negotiated, you have your clearly outlined provisions from the contract and you have your cheat sheet handy so that you know exactly what to do in the event of a change. Inevitably, a change is going to occur on every large project. It always happens, it’s just how you react and the internal processes you have in place to handle the change as they occur. Could be the difference between, you know, the money you save or the money you spend and having to track down the change and get the compensation you should otherwise be entitled to. So good press practice is to have an internal administrative process where you identify an employee within your company who should be in charge when a PR, when it change eventually happens. Who’s the person from your team who’s going to handle the entire administration of the change process. And that could be, you know, the project manager, the project engineer, the estimator who bid the project. I mean, it depends on each company and the size of your company and your workforce, but you should know beforehand who you want to handle the changes.

Seth:
All right, Alex, we’ve got a question here. If I can jump in for a second. La La asked, should we be using a separate document for a change order or is a written email where they agree to the change order sufficient and legally binding?

Alex:
Well, a lot of that will go back to your the contract you have. If you have a clear change provision in your original contract, it should outline how changes are allowed to be authorized. If the change order provision allows written authorization via email, then absolutely that should be enforceable. If the contract requires a separate amendment to be added to the contract, which must be signed by both parties and be substantially in this form which is attached to the back of the contract, then you need to follow that procedure and create your change order on the form provided. So that’s why a little bit of upfront work on making sure your claims provision is clear will help on the backend.

Seth:
Great. And we have another question here from Christina what is the best way to include unforeseen change orders in a payment bond contract? It looks like it’s a second part. There’s a second part to the question, does a subcontractor need both the payment bond and performance bond on file and why?

Alex:
So I might toss this over to buck for the second part, but with regards to the first part, it’s going to be difficult and likely impossible to include an unknown or an unforeseeable change order amount in a contract with your surety for a bond. Typically those bonds are going to be based on the contract amount. And if the contract amount is going to change substantially, especially by change order, if you have a change order that adds a million dollars your contract with the surety company itself for securing that bond may require you to seek approval from the bond company before such change order is allowed or the bond company may require you to on any change order above a certain amount or certain percentage, come back to the bond company, explain the amount and then do a true up in the sense that you have to pay the difference for what the bond amount was originally charged to what it should have been charged based on the change that was implemented. So you kind of need to take a look at what your contract is with the surety to understand what their requirements are going to be for any changes that occur on the project. Buck, with regards to the second part, are you familiar with whether the subcontractor needs to keep both the payment and performance bond on file?

Buck:
I’m not sure what, what on file means. You know, if you, if you have a subcontractor, if you’re a general contractor and you have required your subcontractor to obtain payment and performance bonds, then you would want a copy of those because if the subcontractor defaulted, you would need to follow the instructions in the bond in order to preserve your rights as to the surety. So on file, you mean in your own file? As a general contractor? I would say the answer is yes.

Seth:
Okay. And we have one more question then I’ll let you get back to your slides beause I don’t want to be too disruptive. But Chris asks, do you have any suggestions with regard to dealing with construction change directives per AIA201 when the contractor and the owner cannot agree on the pricing of the change.

Buck:
Yeah, I can, I can handle that Alex if you want. So a construction change directive is the mechanism in the standard AIA contract for implementing a change, which is typically an add to the scope or a different design. And it is the mechanism that the parties use when they cannot agree on the price for that change order. One thing that’s critical when you are operating under a construction change directive or any sort of a interim process before the change order is approved is to make sure you track costs so that you have some basis for payment later after the work is completed. You can do that by separate cost code. You can do it by TNM tickets. There’s a number of different ways that you can accomplish that, but you need to segregate the costs at some, by some method so that you can you can, you can show the owner or the person who’s authorizing the construction change directive, that your costs for the change are different from your cost for the base scope work.

Seth:
Okay. That’s it for now. So if you want to go back to the slides, that’d be great.

Alex:
Absolutely. So with regards to the internal processes you should have in place in anticipation of the change inevitably happening you should also, whoever you choose to have administer the change should also have a plan to document the change. And both just kind of touched on that a little bit a minute ago, but just kind of know the steps that you’re going to take to keep track of the additional costs that are being incurred and the impacts that those costs or the impacts to the remaining work are going to have to downstream subcontractors and possibly the contractor’s critical path. So just have your plan set ahead, which could be as easy as, you know, we’re going to do daily logs on this project. We’re gonna do weekly logs. The foreman is just so that we have that practice ready so that when a change does occur, we can look back to the logs and say, Oh, this, this change occurred on this day.

Alex:
This is when we first either knew about it or we were beginning to know about it. This was when the owner asked us to redesign this whole area. These are the impacts that we have suffered every day because of it. And the more you can document it and, and plan and have a plan in place to document and be ready to not be trying to do this after the fact, the better it will look when you eventually, if needed, have to present that information to either an arbitrator jury or a judge. Okay. So the next step with the person who’s administering the change procedure for you is going to be, they have to have a good grasp on the contract and those three provisions we talked about earlier, take the cheat sheet, follow the steps, check the boxes. That’s the best way to make sure that you don’t have any, you don’t give the owner or the general contractor any ammunition to deny your change order based on your failure to follow the contract. It’s also important if, if possible Buck mentioned earlier, sometimes with a constructive change directive there’s you, you have to proceed with the work and most contracts will require you to proceed with the change work. Regardless of whether you agree with whether it should be considered a change or a change directive or whether it’s outside your scope. But if, if possible, do not start work until the change is approved and approved in the manner dictated by the contract.

Alex:
Continuing along the same path, the, it’s important to mitigate. Most most contracts will require you to mitigate the impacts of any damages or at least contemplate how you can mitigate the impacts felt by the change in the scope of the change of the scope. So you need to take a look. Whoever’s administrating the contract or the change procedure needs to look at the critical path schedule, determine whether the, the change is going to have any impacts to that critical path. And if so, what are the actions or steps the contractor can take to minimize those impacts? And if you’re able to not only identify those impacts, but also document the steps you’ve taken. So in a way that you can present in the future if needed, that will go a long way in satisfying your contractual obligation to mitigate damages and mitigate the impacts of any potential change.

Alex:
Finally, the person who’s administrating the contract from your team should also price the change accurately. And it’s, I know once a change happens, you’re going to want to immediately go, Oh, well we priced the whole project this way. It’s, you know, cost plus plus our fee or it’s you know, a lump sum. So we’re just gonna do our calculations based on that. But you have to go back to that change order provision and determine how the owner requires you to price changes. Follow the contract and then keep in mind both the direct and indirect costs that are going to be flowing from this change. And there are some that are obvious labor materials, idle equipment. If you know, you have to wait for new materials to get onsite or wait for a redesign overhead. And then there are other overhead and profit and there are also impacts direct costs that are a little bit harder to quantify, require a little bit more time and thought.

Alex:
And that’s things such as loss of production and loss of efficiency. And so there are ways to measure loss of production and loss of efficiency. The best way to do so is what’s called the measured mile. And the measured mile also works best if you have, if the measured mile is applicable to your contract. So an example is if you’re installing guardrail, you’re able to, you know, you’re, you’re working on this project for 30 days. For the first 20 days, you’re able to install 2000 feet of guardrail a day. A change happens halfway through. Maybe they owner decides that based on we have a new design and we’re actually gonna have to go over the mountain instead of around the mountain and now you’re only able to install a thousand feet per day. Well, you need to be able to document how you have lost that, the loss of production, the over a thousand feet per day, that you’re no longer being able to get.

Alex:
You need to be able to quantify it and also present that to the owner to justify the increase in cost. So if you can go back to the beginning of the project, when you were making, when you were installing 2000 feet a day, no problem. You can insert, you can demonstrate this was the costs, these are our production rates. And after your change, these are our new costs. These, this is our decrease in deficiency efficiency and this is what it’s going to cost us. I will go a long way ensuring you get compensated fully for that. For that change. There are other ways to do it. If the measured mile, if you don’t, maybe it’s at the beginning of a project and you no longer and you’re not able to have the previous work. You can use industry standards and studies. Again, these are all open to attack from owners or general contractors who may think that, you know, maybe that study or that standard isn’t applicable or you were never going to make that rate. Should cost estimates, which are basically how you bid the project and the proposal you put forth. Similar to the industry standards and studies. These are open to attack, but they’re better than nothing. You need something to demonstrate that your efficiency or your production has been impacted by the change and you deserve compensation either time or money. The other, Oh, go ahead.

Seth:
No, Alex, I just, I had kind of a question. It’s, it’s for me personally, but I mean our change orders in general. Is this one of the biggest things you deal with in construction projects? And then like the second part is, you know, what are the stages to avoid litigation once a change order has occurred? So it’s kind of a, a two part question. Is there, I mean if it gets beyond lawyer letters and he can’t agree, it’s just something you try to mediate or is this something that usually goes right to litigation?

Alex:
In, in my experience, I’d say this rarely do change orders go straight to litigation. Usually the parties, the project managers or the project level employees try and work out but change amongst himself and a lot of it will determine, it will be determined on whether the scope the definition of the scope of work is clearly defined. I mean that’s where we see a lot of disputes over change orders is the, the owner thinks of the change or the work to be performed as within the contractor scope and the contractor thinks it’s not. And so if the contractor is doing work, it thinks is outside of its scope, it’s going to issue a change order for it. The owner’s going to say, no, you should have thought about that or that’s incidental to your work or it’s expressly included in your scope of work so you’re responsible for it and I’m not paying you anymore money for what we’ve already previously agreed upon.

Alex:
So if once that occurs, usually the project teams either the owner’s rep and the project manager or the two project managers, if it’s a GC and a sub, we’ll get together and try and work out, work through whether it really is a scope change, who’s at fault for it that kind of stuff. If they can’t reresolve it amicably just from letters and talking, then they’ll move it up to the claims process where you go through and you submit a formal claim to the, through the contract to the owner or the general contractor. The general contractor denies it and the parties still can’t agree. That’s when it really moves to either mediation, arbitration or litigation. And that’ll all be determined by the dispute resolution provisions of your contract. Some contracts require you to go to mediation first and then the parties can elect to do either litigation or arbitration. And it’s really up to them. Sometimes it’s dictated where you have to do one or the other or sometimes it’s silent and the parties can choose for themselves what they would like to do.

Seth:
Is there some kind of standardized way, I mean I know, you know, change orders happen in all projects. Is there some sort of standardized way to treat different types of change orders? Are there experts that come in that can kind of resolve these pretty quickly or some sort of a formula in the more routine change orders?

Alex:
Mmm. Buck do you have any thoughts on that? If there’s a formula, the only thing I think of is the, if you go to mediation, it can help in the sense that you have a neutral third party who’s able to look and see both sides and kind of describe each as risk or allocate risk, kind of accordingly to say, you know, your work really was included in the scope and it was scoped bust or you missed it. So you probably are on the hook for this and that’s through mediation, which is voluntary typically, but but do you have any, anything to add? Really?

Buck:
The AIA standard contracts have an initial decision maker process and, and I think that’s designed to have somebody who’s knowledgeable about the project issue a decision on whether the change is appropriate or not or the claim has entitlement or not. Sometimes in projects they use dispute review boards or they can appoint as a single neutral to basically serve the same purpose as the initial decision maker. But the point of it is that if you can agree in advance to have a neutral person or board and setting aside the fact that the initial decision maker is rarely neutral, but if you can have a neutral party review the dispute and issue an opinion that can sometimes inform the parties of the risk of moving forward either pursuing or defending and promote resolution of the dispute early.

Seth:
Okay. And Chris has asked another question here is active. Thank you Chris. It’s a little bit detailed, but I’ll, I’ll try to make it succinct. If a subcontractor’s employee contracts COVID 19 and the CDC guidance requires us to shut down the job for seven days and sanitize, what proof can the owner require us to provide as proof of the impact concerned that we would need a doctor’s statement of proof that we could potentially be a violation of privacy laws. How do we deal with this? We need to be able to prove the loss of time for a change order. I, I knew a COVID question would come up, what’s going on right now? So that’s a great question, Chris.

Buck:
Yeah. So think of it, take COVID out of it for a moment and think about an impact of some sort that shuts your job down. Mmm. Proving that your job was shut down is fairly easy to do. Proving the cause of your job being shut down. It is more difficult. And in this case, you know, you, you raised a good point about a privacy concern, but I would say you shouldn’t get that deep into it. As the contractor, you have an obligation for site and employee and worker safety and you can make decisions and you’re obligated to make decisions the promote safety and are in the best interest of your workforce. So if you’ve made such a decision then it, it really ought not to be questioned unless you’ve done so for a purpose that is, is not in good faith.

Buck:
Here with a COVID issue, it’s entirely reasonable that you would have to shut the job down and that absent the code, that issue, you wouldn’t voluntarily shut the job down. So I don’t know that it, I haven’t never heard of a doctor’s note being required in order to prove entitlement to a shutdown. Now, whether you’re going to be entitled to time or money, regardless of the reason that’s the question you need to look at your contract for. Mmm. But certainly proving impact for a shutdown of a week, it seems to be a fairly low bar. I mean, whatever activity is on the critical path at that point. If it’s a site activity has been delayed for a week.

Seth:
Do you want to field one more question? Do you want to finish with the slides Alex and we can do some questions from there.

Alex:
Sure, sure. Absolutely. So the final slide discusses presenting the scope change as a claim if the parties can’t come to agree. And we kind of touched on this a little bit earlier about the various ways that this might come about. What happens when the parties don’t agree or the change order is not approved. And there, there are some little tricks that’ll help with your presentation. One is making sure you, the right person is actually presenting it to its counterpart with either the owner or the general contractor. And this goes beyond just, you know, I’m a project manager, you’re a project manager, let’s get this worked out. A lot of construction, and this might be Denver specific, but I think it’s applicable nationwide is the relationships are built and work is done based on those relationships. So if you have somebody who has a good relationship with whoever you’re working with, it might be beneficial for them to present the claim. If, if they can get this claim presented and it’s compliant with the contract and it’s supported by the documentation and it’s well-organized the likelihood of that claim being accepted and the owner providing the compensation requested is going to be much higher if the, you know, if you just throw a folder full of loose leaf invoices and time and material sheets and say, here’s my documentation this is, this is our claim. This is why we, when you’re being unreasonable. I mean, that’s, that’s not an efficient way to present a claim. You want to be organized. You want to do a little bit of the work for the owner in the sense that you provide them with, you know, an organized notebook with this. This is the impacts of our claim. These are the pictures, these are our foreman’s descriptions of it in the field as it happened. These are the invoices that support it. These, this is the separate billing code that we enacted once the change occurred so that we could adequately track costs. This is our loss in efficiency.

Alex:
You can tell up until this point, we were getting this level of efficiency from that point on. We were not. And this is the impact, the cost that we have to pay directly because of that. And if you can do that work for the owner in a way that they follow it, not only will the owner be forced to, you know, you go through that, that claim and that organization a notebook. But then when eventually if it needs to go to arbitration or mediation, you give that same well-organized document to the mediator and say, listen, this is what we provided. This is why it’s compliant with the contract and it’s easy to follow and they still unreasonably denied it. And so anything you can do that will make you look better and make your documentation look better, especially as an owner who’s just saying, no, it’s outside the scope or no, that’s not what happened, is going to increase your likelihood of success and hopefully maximize the compensation that you receive.

Seth:
Okay. Well, I just we’re running out of time here, so I just wanted to tell everyone, post your questions, if there’s any more, we’ve got one question here from Ron. Is it ever a good tactic for a contractor to refuse to execute a change, stop work, going to change until there’s a resolution to the payment for that work along the same thought process? Is there a contractual, a contractual clause that should be avoided or a clause that should be added to protect the contractor during this situation?

Buck:
Do you want me to handle it?

Alex:
Sure. Yeah.

Buck:
Is it ever a good tactic sometimes. If you have an abusive owner or a a set of, of design documents that are so poor that you feel like you’re financing the project through change orders that are not foreseeable or the, the, the volume of which were not foreseeable, then you may you may want to take that step, but you really need to look at the contract to see what it requires you to do if the owner directs the change. Now there’s a distinction between a change being required because of a design change or something like that and a an owner directive for a change, a change being required and, and being the subject of a change order request the burden for that is on the contractor generally to show that there was a change, a change directive from the owner already resolves the question of entitlement for the change. The only thing left to do at that point is figure out how much it costs. So under the standard AIA form, you may not be able to stop work on a change if it is issued pursuant to a construction change directive. So it really, again, like Alex said at the very beginning, it really depends on what the contract says, but absent any direction on this particular item there is no obligation to perform change work just by common law.

Seth:
Well that concludes our webinar. I wanted to thank both Alex and Buck from BBG in Denver. Oh, we really appreciate you guys coming on and answering all these questions. If anyone else has any questions, feel free to contact Alex and buck directly. Or you can also post these questions on our expert center if you didn’t get to them today or we weren’t able to get to them. Again, my name is Seth bloom. I’m the senior director of attorney services at Levelset. We’ll be putting on a lot of these webinars. And again, Alex, Buck, I really appreciate you taking time out of your day to do this. I know you’re helping a lot of people out there. It’s a tough time. So you know, construction is an essential service. So these kinds of webinars are really important and helping a lot of people.

Alex:
Thanks guys. Thanks for letting us speak. I appreciate it.

Seth:
All right, everyone. Have a nice day and stay safe.