Don't Be Trapped By Change Orders
It is common for general contracts to include change order
clauses providing for stated percentage markup on change orders
to cover overhead and profit associated with the changed work.
The percentages are usually in the 10 to 15 percent range.
And while the mandated percentage might be adequate to cover
the extra overhead cost related to a moderate level of changes
that are expected on any project, it would not be adequate
to cover the overhead growth on a project when a large volume
of intrusive change orders cause the project to run substantially
over in time and cause additional administrative expenses.
In the case of a substantially impacted project, if the general
contractor has agreed to formal change orders with small markup
on all of the changes to the project, the fact that it has
signed off on the changes may prevent the assertion of an
impact claim for the real effect on its overhead cost of the
cumulated changes it encountered.
Whether or not the acceptance of change orders with standard
markup waives an impact claim is a complicated legal question
highly dependent on the facts of a particular case, and it
is not the purpose of this column to delineate all of the
situations that would prevent or allow the assertion of an
overall impact claim. Texas law does have some cases that
are helpful to the contractor in such situations, and some
that are not, and some contracts are clearer than others on
the acceptance of a change order barring further related claims.
The purpose of this column is to point out an obvious way
a contractor can avoid waiving its impact claim: Don't agree
to change orders that are silent on the subject. If you submit
change orders that might result, cumulatively, with others
to cause an impact on overall overhead costs, submit the change
order with a specific reservation.
For instance, you can attempt to add the following language
to the change order form: "A contractor reserves the
right to pursue a claim for the impact, if any, of this change
order on its overall cost of performance of this project,
and such cost is not included in the calculation of this change
order." If the owner is unwilling to permit change orders
with such a reservation, it is appropriate to insist that
the contract provisions for changed directives be utilized
to authorize and pay for the direct cost of the changed work
in the absence of a change order.
One of the common situations where contract markup does not
adequately compensate for the added overhead resulting from
change orders is the situation where change orders are issued
after substantial completion. In this situation, there is
often a day?for?day relationship between daily overhead rate
and the overhead impact associated with performance of the
changed work and the daily overhead rate can be added to the
proposed change order for each day expected to be expended
in performance of the changed work performance. Actually stating
the impact, when that is possible, is preferable to a reservation.
There can be situations where a complete redesign of a structure
through late value engineering can result in a deductive change
order (and thus no percentage markup for overhead and profit
at all) if only the direct cost of performance of the work
is considered, and not the disruptive impact of making wide
scale changes late in a project.
In spite of this, contractors often submit deductive change
orders without any reservation or calculation of impact cost.
There is a natural tendency to want to tie down the real contract
price for the direct cost of the work, but it is a mistake
to let that desire result in a waiver of important, valuable
rights to impact claims.
The small markup often allowed by standard change order clauses
are simply not worth the loss of the right to be fairly compensated
for the impact of changes to the work when the volume of changes
is beyond the level that can reasonably be expected. No one
can force a contractor to sign a change order with terms that
are not adequate for the total cost of changes in the work
(including impact), and no change order is preferable to losing
a valuable right to fair compensation.
I would apologize for wasting your time with this obvious
point, but it is a point that is more often overlooked than