July 09, 2015
A change order is best defined as an agreed modification to an existing construction contract. As a result, the same contract formation issues that can arise in contracts generally can also occur with change orders. For instance, for a change order to be binding on the parties, there must be what is known as "mutual assent." This normally requires that there be an offer, an acceptance, and a meeting of the minds. Furthermore, terms of the change order must be sufficiently clear to permit a court or arbitrator to ascertain the parties' intent. Put another way, in order to be enforceable, a court or arbitrator must be convinced that the two parties to the change had agreed on enough of the important terms to make the modification enforceable against both parties.
The most straightforward example of an enforceable change order is where the two parties execute a written change order document which clearly identifies the specific changes to the underlying contract's scope, price, and time. In this instance, there are likely to be few contract formation issues. However, even where the parties have executed a written change order, there can nonetheless be disputes over whether the parties did indeed have a meeting of the minds on such essential terms as scope, price, and time impact. Where the parties' intent cannot be ascertained from the change order document itself, and the change order is ambiguous, many courts will look to what is known as "extrinsic evidence" to supply the court with additional information concerning what was truly intended by the parties. This might include a review of the oral and written communications between the parties on the subject leading up to the execution of the written change order, as well as testimony from each party concerning what was intended in the change.
One common area of dispute concerning the interpretation of written change orders arises with respect to the particular type of contractor costs included in the written change order. This situation occurs with some frequency on difficult projects where there are numerous changes to
the project's design, sequencing, and schedule. It is not uncommon in these circumstances for contractors to price and execute written change orders for the direct cost impact of changes to their work. This would include the contractor's additional labor and material costs to perform the
changed work without specifying whether the contractor's price also includes impact, delay, or acceleration costs also associated with the change. Resolution of this type of issue will often hinge upon the language of the change order itself, whether the contractor included a "reservation of rights" with the change order document and often is dependent upon the language in the changes clause to the underlying contract.
In Linda Newman Construction Company v. United States, 48 Fed. Cl. 231 (2000), a government contractor brought suit for an equitable adjustment for extended overhead costs resulting from changes to a construction contract for an addition to a veterans' administration
hospital. The dispute between the parties centered around interpretation of a reservation of rights clause inserted into change orders on the project. In the reservation of rights clause, the contractor reserved its right to submit a request for equitable adjustment for "all costs resulting
from the impact of this change on unchanged contract work." The contractor, relying on the reservation of rights, submitted a request for equitable adjustment seeking recovery of extended overhead costs, which resulted from delays caused by the existence of project changes. The
government defended on the basis that the contract contained a limitation on overhead of 10% on all change orders, which it considered to be dispositive of the contractor's claim for extended overhead delay damages. In determining the issue in the government's favor, the court looked to
extrinsic evidence of the parties' negotiations on the reservation of rights language. Specifically, the court noted that the government had rejected the contractor's attempt to insert a reservation of rights clause which would have guaranteed the contractor the right to seek delay overhead costs.
Accordingly, the court held that the contract limitation of 10% overhead on changes applied to extended overhead damages as well and barred the contractor's claim.
Contract formation issues involving change orders can also arise when a change order remains unsigned, or even where there is no official change order document but there is an oral agreement to proceed and actual performance by the contractor. In Wisch & Vaughan Construction Company v. Melrose Properties Corporation, 21 S.W. 3d 36 (Mo. Ct. App. 2000), a contractor sued a property owner for breach of contract arising out of construction of a motel. There was testimony from the president of the construction company that the owner had requested changes and additions to a number of components of the project and that three change orders had been submitted. Neither the second nor third change order was executed, but there was evidence that: (1) the parties orally agreed to the extra work reflected in the unsigned change orders; and (2) the contractor had proceeded with the work referenced in the change orders. The owner defended on the basis that the contractor had failed to obtain a written change order before beginning the extra work. In ruling in favor of the contractor, the court held that the owner's habitual acceptance of extra work performed pursuant to oral change orders resulted in a waiver of the requirement that there be a written order.