Construction Contract Law: What You Need to Know About Differing Site Conditions and Change Orders
What’s more expensive than hiring a lawyer? Hiring a lawyer after a dispute arises. Unfortunately, this is the point at which the overwhelming majority of my clients come to me. What they don’t realize is that they could have saved themselves a lot of money on litigation and gotten paid if they had only familiarized themselves with the language in their construction contract.
A Construction Contract Makes Sure You’re on the Same Page
In our previous topic, we discussed how important it is to be as specific as possible in defining your scope. The first step in avoiding construction contract disputes is by understanding exactly what you are agreeing to.
It’s important that everybody is on the same page because at the end of the project, you don’t want to be dealing with a client that has a bunch of claims. You want to be dealing with a happy client and you want to be dealing with someone that comes back to you and wants to hire you again and someone that you foster a long-term relationship with.
Dealing With Unforeseen Circumstances in a Construction Contract
Unfortunately, no matter how well any project is thought out and arranged, it’s rarely the case that everything goes exactly according to plan. This is why you’re going to need agreements for how to deal with those unexpected situations and the changes that follow.
Of course, both parties have a lot at stake and this is where change clauses can become a really fertile ground for dispute — not just legally but emotionally, as well.
It’s important that those change orders get paid, from the contractor’s perspective, because it could be the difference between a profitable or unprofitable job.
On the other hand, there’s nothing a project owner hates more than having a contractor come to him and say, “I couldn’t have anticipated encountering these conditions and so it’s going to cost you 25% more to complete your project.”
So how do you avoid disputes? This is where clauses for differing site conditions and change orders come into play.
Changed Condition Clauses
Differing site conditions is what happens when you’re working on a project and you encounter conditions in the field that:
- Differ from the drawings that you were provided
- Differ from what was represented to you
- You could not have reasonably anticipated
The concept of a change order is related in that the work that is necessary to complete the project is now different from the work that was anticipated when you presented your proposal.
In all projects, there exists the potential for changed conditions, even though how it manifests varies from project to project.
If you’re talking about a modest residential home renovation, a changed condition could be this: You’re taking down a wall and you did not reasonably anticipate the existence of load-bearing beams, which requires you to engage the services of an engineer, on top of performing all sorts of additional work to to compensate for the loss of that load-bearing partition.
On on the larger end of the spectrum, I often see it with my clients performing heavy highway work. They’re going to dig some deep trench into the ground and they encounter rock and instead of just ordinary soil, and they’re forced to do blasting and a considerable amount more excavation than they anticipated.
Both of those concepts are examples of change conditions. And the first place we’re going to look is to see if the contract covers what will happen if changing conditions are encountered.
If you have a contract or you’re looking to draft a contract and it doesn’t have the changed conditions clause, it probably should have it. Are you going to get paid for these changed conditions? What conditions are going to be paid for? Generally speaking, in a construction contract, the owner agrees to pay a contractor for changed conditions.
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Differing Site Conditions
To use the example of the residential project, an architect prepares drawings. The drawings don’t indicate that the wall that needs to be removed is a load-bearing partition, and the contractor goes out and discovers that it is a load-bearing partition. That would be the type of a scenario where the owner would have to compensate a contractor for that work.
The other type of changed conditions is a little bit more subjective in that the conditions that are unusual, unknown, or unanticipated. Now, what could that be?
I’ll give you one sort of esoteric example, but one that actually is real. I had a project that I was working on in Philadelphia which, like many cities on the east coast is an older city, and they were building a townhome community.
They started excavating and they started to find human remains. What had happened was, this land had gone back to the founding of the city. And at one point there was a church over a hundred years ago that was located on this property. The custom at the time was that many of the parishioners were buried right next to the church. And then the church was abandoned and it was moved. Those parishioners that were wealthy enough to have gravestones, those bodies were interred to another location. But those parishioners that were buried in unmarked graves were left and they were encountered by the excavation contractor.
So what do you do? You have to respect those remains and do your best to follow the procedures that are necessary, to remove them in a careful manner, and place them at respectfully in a proper cemetery burial ground. That would be something that was unusual or unknown or unanticipated.
Clearly on the architect’s drawings or the civil engineer’s drawings, there wasn’t any indication that you can anticipate bones in the grounds. You could argue that you could have anticipated certain geological formations or the fact that there may have been an existing foundation from a prior building there.
But really, nobody could reasonably anticipate uncovering human remains, and why that would be the basis for a change order is that the project has to stop, and the authorities have to come in, and it needs to be investigated. So it’s taking longer and there’s additional costs with getting the specialized folks out to the site to take care of those remains.
Now, there are many contracts that don’t have changed condition clauses. When I’m representing an owner and I’m asked to draft the contract, I try to shift as much risk as possible down to the contractor. I don’t want my owner having to pay for a bunch of change orders at the end of the project when they’ve paid an architect to prepare drawings.
If you’re on the other end of the spectrum type of contract that includes a site investigation or a disclaimer, then you need to know that you’re buying what you don’t know, and you might not be entitled to additional costs or additional time if you encounter conditions in the field that different than what you could have reasonably foreseen or anticipated.
Site Investigation, Disclaimer Clauses, and Risk Premium
So when we talk about site investigation and talk about disclaimer causes, what are we looking for? Well, a common type of site investigation clause will say that the contractor has investigated this site, they’ve had full access to the site, and they’ve made themselves familiar with the site, so that they’re not going to come back and say, “Well, I didn’t know that there was a load-bearing wall was there.”
If you represent the owner, you’re going to say, “Listen, I gave you a chance to investigate this fully. If you had any questions, or you needed to take measurements or calculations when you weren’t sure about certain things, then you had your opportunity prior to entering into this contract and you’ve in fact affirmed in the contract that you’ve investigated the site, and you were satisfied with its conditions.”
There could also be a disclaimer saying, “Hey, we’re not making any representations as to the completeness of the architect’s plans. If you’re concerned about that, do your own investigation. We can’t promise that the architect has picked everything up, and don’t come to us with change orders if you encounter something that’s different from what you anticipated to be there when you took down a wall.”
Those are the types of clauses that I always put into my contracts. When representing an owner, I’m trying to limit the risk that the contractor come back and say, “Hey, I didn’t know that load-bearing wall was there.”
I can go back to the contractor and say, “What are you talking about? You signed a contract and said you investigated the site. You also signed a contract that said the architect’s drawings were complete and perfect. You also signed a contract that says you’re not going to seek a change order for that, so go pound sand.”
You need to be aware of that because if you’re a contractor that’s receiving a contract like that, you’re assuming a higher amount of risk there. And when you do assume that additional risk, you’re going to want to make sure you price the project accordingly. You can’t price it the same way that you price other jobs saying, well, if I encounter something, I’m just going to get a change order like I do on all the jobs. No, you’re not. So just like anything else, just like any other commercial transaction, you have to price in that risk premium.
So be aware of that. Anything that says that you are investigating the site or that you’re taking the site as is, is a sort of disclaimer that the drawings aren’t full and complete. If you’re the contractor or the person that’s receiving that contract from an owner or a higher tier contractor, that’s definitely a red flag for you. You’re going to want to talk to somebody about what that means and what you might do to mitigate the severity of those clauses. Because, like I said, it’s a significant amount of risk that you’re assuming by your contract when you sign a contract with those disclaimers.
So now that you have an understanding of when you might or might not be able to recover additional costs and additional time for change orders, we move on to the change order clause.
When we’re looking at change order causes, we’re asking who, what, when, and how of change order claims. That means you want to find out:
- Who is authorized to direct changes?
- What are your deadlines to submit change order claims?
- How must those claims be submitted?
The change order process is going to become more sophisticated based upon the size and complexity of your project.
On a smaller project, like a home renovation, you may just need something in there that says, “If I’m going to request additional cost, how do I go about doing that?”
As to who is authorized to direct a change, that question is sort of rhetorical because you’re probably dealing primarily with the owner of the project, so it’s pretty clear who’s authorized to direct changes.
As you move up the sophistication on the project, however, there’s often different people that are authorized, or appear to be authorized, to direct changes in the work.
There are foremen, superintendents, and project managers, all of which have some level of authority that’s been granted to them by their employer. In this case, it’s important to determine in the contract who it is, exactly, within the client organization that is authorized to direct and approve changes.
Next, if you do have a change order and you believe you’re entitled to additional compensation or additional time to complete your work: When do you have to notify your client of the claim? We’ll say it can be as short as 48 hours.
The AIA has just changed to 14 days, but some claims are still permitted within 21 days. But like I said, it can be as short as 48 hours from when you encounter a condition that is different than the drawings or different than when you could have reasonably anticipated, and that condition is going to cause you to incur additional costs and additional time, and you intend to seek compensation for that from your client.
You need to be aware that certain contracts give you a deadline to advise your client of that. Don’t wait until the end of the project to submit a bunch of change orders and say, “Oh yeah, three months ago I encountered the load-bearing wall. Here’s the change order for that.”
At least present a notice that you intend to seek compensation, because you might not have all your numbers ready yet within those 48 hours. If I’m representing the owner, I am putting very strong language in my contract that says if you miss the deadline, you waive the claim, and of course go to enforce that. Those of you that participated in the first seminar know that the court’s going to look at that written contract that’s going to use the plain terms and meanings of the contract as to what the parties intended.
If it does say waiver, the court’s going to say, “Hey, you’re out of luck. You waive the claim. Forget about who said what, when, and where on the project, or what you were promised. That’s not coming in. You have a written contract.”
So be aware: How long do you have to submit at least a notice that you intend to seek additional compensation? You may have additional time to actually submit your supporting documentation and how much it’s gonna cost.
Your owner may say, you know what, maybe we don’t want to do it, or maybe we don’t want to pay that cost. In that case, it’s important for you not to do any work, not to go out of pocket for any work, until your client is aware of it and agrees to pay for it.
Again, it’s as much as a relationship tool as it is a sound business practice as well.
The final thing we need talk about regarding change orders is how you must support your claim. What do you need to do, to document your entitlement to the amount of money that you’re seeking.
Again, the more complex and larger the project, the more complex the level of data that you’re going to be required to present to your client in order to get paid. On government projects, for example, we’re talking about potential changed conditions that could be in the hundreds of thousands, maybe even millions of dollars. The minutiae that that go into substantiating those claims could fill a four-inch binder for one claim.
It is remarkable. For a smaller project, you may just have to back it up through timesheets and the material that you purchase from your supply house to perform that work. But again, it’s important to how it’s going to be documented and how are you going to submit that.
It’s always been my experience, regardless of what your contract says, that the more documentation you can provide in support of your claim, the more likely you’re voluntarily going to be paid. In the unfortunate situation where you have to go to court or arbitration, they’re going to look much more favorably on your claim the more it’s documented.
Documenting Your Claims
You know, one of the things that I’ve noticed with Fohlio is it does provide some opportunity for you to capture these costs.
One of the things that I always chuckle at is when a contractor is presenting a claim, and they hand me a bunch of receipts from Home Depot or Lowe’s. To me, that doesn’t do you any good.
However, you can use tools that are available to you and Fohlio is a great way to start. You can document your costs, track that data in real time, keeping track of the communication with your client, keeping track of who told you to proceed, who authorized the change, when they authorized the change, and how they did it. Software like that is going to go a long way and you’re going to be well ahead of even your client in documenting and being able to substantiate change orders and ultimately getting paid for a work that you should be paid for, and oftentimes are entitled to.
I see that all the time where clients are entitled to changes. It’s clear that this work was not within the scope of the work, and it falls within the definition of change in the contract. But when it comes to documenting the change order, their records are a mess.
You may end up getting nothing or only a percentage of what you’re entitled to.
What’s worse is when your client agrees to the change and agrees to pay you for it, but you can’t substantiate your costs. That’s a shame because there isn’t a dispute and there’s not a reason to get a lawyer involved.
I think it also makes you look sloppy as well, especially if you’re looking to develop a long-term relationship with clients.
Featured image by Da_Dian.
With Noam Hazan. Click here to watch.