Executive summary. Ensure that before you sign a change order, all of the necessary components of your negotiation are included. Here’s what to look for in a change order before you sign it. And don’t forget – you don’t have to sign it.
What is a change order? It’s a modification to your contract. So, it is the contract. Also, it’s an order, not a request. It can be non-negotiable in that it must be performed by your company regardless of whether or not you agree with it. When the contractor and the owner cannot mutually agree upon the terms of the document, and it is issued to the contractor, this is called a unilateral change order.
What needs to be included in the change order? Change orders are about impacts to the work, so it follows that the two primary inclusions in a change order are time and cost impacts. The basic list of document components follows:
- Project name, number, and location
- Change order number
- Date of change order
- Original dates – notice to proceed, milestones, substantial completion, and original final completion
- Current dates – milestones, substantial completion, and final completion (current dates as of this particular change order)
- These dates are critical as they often determine when liquidated damages may start.
- Additionally, ensure that the math was done correctly in the date calculation. Calendar days and working days are completely different and should be verified.
- Scope of work –include what was originally stated in the request for proposal (if applicable) and, in detail, any other negotiated aspects of the work. There should be no assumptions or omissions. So often project managers or upper management (within both parties) change for various reasons. This document you’re signing will outlive any of these personnel changes. You should assume that someone outside of this negotiation will be relying on the narrative to manage and pay for the work so make sure it’s complete! Lastly, remember that if it was important enough to say during the negotiation, it should be important enough to write now.
- Reconciliation – the original contract value, the changes-to-date, and the value of this change order should all be included and sum to a current contract value.
- Cost of the work – all direct and indirect cost of the work should be included. This is usually limited to costs expended at the jobsite (labor, material, equipment, and subcontractor). It should include line items for management at the project level if your contract allows it.
- Cost resulting from time effects – this is usually called extended performance. When a contract’s duration lengthens, there are additional costs associated with on-site personnel as well as your corporate office. These costs are usually ones which owners wish to ignore, but your contract may allow it. If you cannot include them (because the owner prohibited these terms) in the change you have two options:
- Unilateral change order – a unilateral change order is issued to you, but not signed by you. The way a contractor handles it is by receiving the change order and then properly documenting the protest of the document via a letter and/or transmittal explaining why the document was not executed.
- Issue a parallel, but separate letter – this option is weak; however, some contractors do it with success. It can be a letter of protest or a letter of clarification. In this case the contractor signs the document and then concurrently issues a letter clarifying the terms of the change order. Often times contractors feel pressured by the owner due to schedule demands or become desperate for cash and make the mistake of executing the agreement. As stated above, this parallel letter is a poor option and, frankly, one that may hold no water when when you ask a court to enforce it. Ultimately the contract is all that matters, and the change order is the contract.
My story. I once had a $3 million project with 22 unilateral change orders. The owner refused to acknowledge the effects of time on my project cost. Each of the change orders were returned by me with no signature. They were all eventually paid. That was a terrible job for me which ended up in formal mediation. Also know that the terms of your change order can include the exclusion of extended performance. But you better be explicit when you state the exclusion – it’s a slippery slope! Work safe!