Change orders should be handled properly because they can result in payment disputes, can negatively impact a project’s schedule, and can potentially spark litigation. If you are dealing with change orders in your projects, it is important to properly follow the change order procedure if your construction contract specifies one. Failing to adhere to the process can result in you not getting paid and potentially, a costly lawsuit.

Every year, there are numerous disputes that arise in connection with change orders. As with most disagreements, many of those disputes could have been avoided if a little more diligence was performed by one of the sides. When it comes to change orders, it is usually the party that did not comply with a specified procedure, or the party with the weaker evidence, that ends up footing the bill.

Approval

Many, though not all, construction contracts require that the project owner and design professional of record approve changes to the work, whether those changes affect contract time, contract price, or materials incorporated into the work.  Some contracts are very specific about who must approve the change and when the approval must be received (e.g., owner must approve any changes prior to the contractor commencing the proposed changes). Other contracts create presumptions about whether changes are approved (e.g., if the owner does not object to the proposed change within 5 business days, the change order is approved and the contract time and price are adjusted accordingly).  Knowing who has to approve a change order, the timing of approval, and the specific language in your contract are important first steps in the change order process.

The perils of not appreciating or following the change order process is illustrated in Trimcos, LLC v. Compass Bank.  There, the First District Court of Appeals for Houston found that additional items such as permit fees not presented in a change order or budget, were not contractually or properly presented for payment. The construction contract delineated the requirements for additional costs and expenses to be paid, and the contract specifically required approval. Since no change order or other evidence of approval was submitted, the Court found that conditions precedent were not satisfied to warrant payment. As a result, payment was not required to be made and the contractor took a loss.

Writing

Almost all contracts require proposed changes to the contract time and cost be made in writing. Sometimes specific forms are required, though more frequently than not, the form is left to the discretion of the parties.  An email in certain instances might suffice.  A formal document entitled Change Order may be required for other projects.  Once again, the language of the contract is important in determining whether the form used for a proposed change order is sufficient.

If your change order process has a written requirement, it is imperative that the writing requirement be carefully followed. The Texas Supreme Court recently held in James Construction Group, LLC v. Westlake Chemical Corporation that if a contract requires a written component as a condition precedent, a writing is needed.  The Court emphasized that strict compliance, not substantial compliance, is required for written notice requirements.

Know Before You Do

It is important to understand the change process specific to every project before the work begins.  On complex projects, a flow chart of the process might be helpful to assure compliance.  Even on relatively simple jobs, however, understanding the assumptions built into the contract regarding changes will assist in reducing conflict.

The attorneys in our Austin and Dallas offices have significant experience negotiating and litigating issued concerning change orders and are available to answer any questions you may have. You may contact us at info@gstexlaw.com.

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