Change orders can quickly become a source of contention on construction projects and are often the subject of major disputes. As a result, it is important for stakeholders to carefully draft and negotiate the change order and related provisions pre-contract.
The key portions in a change order clause beyond the obvious (i.e. changes have to be in writing) include the following:
- Condition Precedent to Payment. In order to protect the enforceability of the change order provision, the change order procedure is best described as a condition precedent to payment.
- Addressing Cost and Time. A frequent mistake is the failure to address the time component of a change in the context of a change order clause. Namely, the contract change order clause should address how and when the schedule will be modified.
- Calculation of a Change Order Amount. Large construction contracts may include a pre-negotiated amount for certain anticipated changes. Additionally, it may be preferable for both parties to include pre-negotiated time and material rates for scopes that have less certainty.
- Unilateral Changes. If an owner wants to have the ability to issue a change order for the work to proceed without coming to terms on the pricing of the change order, then a unilateral right to issue change orders should be included. These changes orders are often referred to as a change directive. Naturally, a method or procedure for determining the pricing on the backend should be included as well.
- Waiver of Claims. Most parties in an upstream position want to have a single negotiation over the effect of a change—including the cumulative effect of changes. If the change order provision does not address cumulative effect or indicate that claims addressed in a change order are released, consider whether the change order is the final, integrated agreement on the subject of the change.
- Deletion of Work. When drafting a change order provision on behalf of an owner, it is helpful to have the ability to delete work without invoking the termination for convenience clause. This provides two potential avenues for full or partial termination or supplementation. Contractors should carefully negotiate such a provision.
- Notice Periods. Most well drafted change order provisions include a provision requiring notice within a certain period after the change arises. Contractors seek to expand or eliminate this period and owners seek to shorten it. The notice period should be for changes expressly issued by the owner as well as contractor changes that the owner may dispute. The notice provision should also be carefully drafted so the parties understand when the clock begins to run.
- Form of Change Order. Including a form of change order helps the project team to follow the change order clause. For example, including a line item in the form for the effect on the project schedule allows the team to track schedule impacts. The change order form should also indicate the total amount of the change order as well as the adjusted contract price after the change.
- Compensable Events. Change order or related clauses often also address whether certain events are compensable. For example, is a force majeure event relating to weather compensable? What about delays caused by the owner or contractor? The failure to address these types of events may result in unintended consequences.
Considering these elements on the front end of drafting and negotiating the change order provision can help to avoid disputes in construction projects.
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