Directed Change: Notice, Authorization, and Reservation of Rights

This is the second of two blog posts exploring directed change on construction projects. The first post discussed changes clauses and common mistakes that lead to disputes. This post focuses on failure to provide notice, failure to secure a written change order, and change order acceptance absent reservation of rights.

Failure to Provide Notice
Contractual requirements for timely notification should extras be perceived are not employed for exculpatory or punitive purposes. If an owner is going to be held liable for a contractor’s additional costs, logic and equity would point to the owner’s right to control or mitigate those costs. A differing site condition, a directed or constructive change, etc., should not give rise to unbridled cost overruns.

The three defenses that contractors most commonly employ to circumvent failure to provide notice are:

• Lack of notice did not prejudice the owner’s position or options.
• The specifications were defective, resulting in a constructive change not subject to the notice requirements set forth in the changes clause.
• The owner “knew or reasonably should have known” that a claim would be forthcoming.
• The owner constructively knew about the change even though formal written notice was not provided.

In both the first and second of these potential defenses, the matter of an owner being prejudiced by lack of notice bears consideration. Constructive changes, even if caused by defective specifications, will often be subject to the prejudice argument prohibiting contractor cost recovery that may have been avoided or mitigated had the contractor given timely notice.

It is nonetheless a highly risky proposition for a contractor to fail to follow the contractual notice requirements and base its chance of recovery on these defenses. Absent a showing of waiver, parties to a contract may be deemed to be bound by the plain terms of the contract. When extra work is directed, the contractor should simply ask itself, “Why take the risk and proceed with the extra work without giving notice?”

Failure to Secure a Written Change Order
Many of the arguments applied to the timely notice issue apply equally to a contractor proceeding with extra work without obtaining signed authorization, namely a change order, for said work. Like the usual contractual clause for timely notice, a requirement for an executed change order is a typical precedent for payment. A contractor may be at considerable risk if it proceeds with extra work before receiving a signed change order.

A distinction can be drawn for those instances where the owner fails to grant a change order because of an unwillingness to recognize that the work is extra. In such an instance, the contractor will not be denied additional compensation assuming that timely notice was provided.

In private contracts, more care should be exercised in proceeding with work that is not authorized in writing. In a situation where the contractor may proceed with extra work on the verbal promise that a change order will be issued, the contractor may be able to suspend that work if a change order is not forthcoming. Such an action may be vital to avoid waiving the right to additional compensation.

Change Order Acceptance Absent Reservation of Rights
Perhaps the most vigorous dispute that arises from performance of change order work is that of acceptance and waiver. The typical scenario occurs when the owner requires the contractor to perform extra work, the owner and contractor negotiate and agree to the cost for that work, a change order is prepared and executed, and all problems are seemingly resolved. Multiple requests for change orders occur throughout the project, and numerous change orders are prepared and agreed on. At some point, after a large number of change order requests, the contractor realizes that the total actual cost of the change order work has exceeded the agreed-upon compensation, so the contractor submits a “cumulative impact claim” for additional time and money to cover the “ripple impacts” of the changes. The contractor argues that the total actual costs exceed the sum of the individual, previously agreed-on change orders. Most often, the owner disagrees.

In general, a contractor will be barred from asserting contract claims because a change order (absent any reservation) will be deemed to constitute full settlement and agreement. This may be particularly true if the change order contains language to the effect that acceptance of the change order constitutes full agreement as to its expressed conditions. It is acutely important that the contractor not inadvertently waive or release its right to receive compensation for all its perceived extra costs. A simple statement on the change order that the payment accepted is solely for direct costs and an express reservation of the contractor’s right to later assert ripple or impact costs will usually suffice.

A caveat to the use of such a reservation of rights warrants consideration. It is beneficial to use it only in those instances where there may be ripple or impact effects. Credibility may be lost when a contractor reserves its rights on clearly minuscule changes.

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