This article originally appeared in the April 22, 2022 edition of the Daily Journal of Commerce Oregon.
Most construction contracts contain a provision requiring a written change order as a condition precedent to payment for changed work. However, even in the absence of a written change order, a contractor may be entitled to payment, as an equitable adjustment to the contract price, for changed work under the legal theory of constructive change.
A claim for constructive change typically arises when the owner denies a change order request because it believes that the work in question is within the scope of the contract and directs the contractor, expressly or impliedly, to perform the work under those terms. In this case, the contractor believes the work is outside the scope of the contract, notifies the owner of a claim, and performs the disputed work under a reservation of its rights to seek compensation.
A contractor must prove two elements to prevail on a claim of constructive change: 1, the disputed work was beyond the scope of the contract (i.e., the change element); and 2, the owner ordered the change and/or is culpable for the change (i.e., order/fault element).
To prove the change element, a contractor must show that its actual performance went beyond the scope of the contract. This element is seemingly straightforward, but on a complicated project with numerous changes the identities of contract work and changed work can become fuzzy. Therefore, as with any other claim, a contractor should, to the best of its ability, segregate and document its costs associated with the changed work as it performs the work, as opposed to attempting to do so after the project is complete.
To prove the order/fault element, the contractor must show the owner’s action or inaction amounted to an order to perform the changed work. The least ambiguous owner order is, obviously, the owner’s denial of a change order followed by a direct, express order to perform the work under the original contract price. More ambiguous is when the owner merely recommends that the contractor perform the changed work. Whether a recommendation or other less direct communication constitutes an order is determined by considering whether the communication was such that the contractor reasonably felt compelled to perform the work.
Mere suggestions or discussion of methods may not reasonably lead a contractor to believe it is being compelled to perform the work. Further, if the order is made by an owner’s representative (e.g., by field directive) as opposed to the owner itself, the contractor may be required to prove that the representative had the authority to order the work or that the owner ratified the representative’s order.
Constructive changes typically arise out of disputes regarding what work is required under the contract, defective plans and specifications, acceleration of work, and the owner not fulfilling its obligation to cooperate with the contractor and not impede or delay the contractor’s work. A classic example of a dispute regarding the scope of work under a contract is the situation in which the contractor bid the work intending to utilize a certain method and the owner insists that the contractor use a more expensive method. Interpretation of the specification can also lead to constructive change, as the owner may interpret ambiguities in specifications to require a different, more expensive method of performance, while the contractor interprets them to require a less expensive method.
Regarding defective specifications, when an owner provides a contractor with plans and specifications, those plans and specifications contain an implied warranty that they are accurate, adequate and complete and that if the contractor follows them, a satisfactory performance will result. Typically, a contractor’s claim relating to defective specifications is for increased cost of performance due to the defect. In the case of defective specifications, there is not an “order” to perform the changed work as such, but instead the defect is considered the fault of the owner, thereby satisfying the order/fault element.
Another common claim for constructive change is for acceleration – performing the work in a shorter period than anticipated prior to performance. Acceleration and its related claims of disruption and delay are discussed more fully in my September 2021 article for the DJC. Finally, regarding the owner’s duty to cooperate and not impede the work, a contractor must show that an owner’s breach of that duty, which arises from the general contractual duty of good faith and fair dealing, was the result of unreasonable acts or omissions.
Examples of unreasonable owner conduct are unreasonably withholding clarification on specifications, unreasonably withholding notice to proceed, unreasonable changes to testing or inspection methods, and/or improper rejection of work.
The key first step for any contractor that is ordered, directly or indirectly, to perform changed work is to provide notice to the owner. Notice allows the owner to make any adjustment to the work it may deem necessary to mitigate increased costs and control the work. Failure to provide notice therefore arguably deprives the owner of those opportunities and could serve as the basis for denial of the claim.
Notice should be provided in strict compliance with the contract notice provision, especially if the contract is governed by Washington state law, which requires strict compliance. Oregon law is not as harsh as Washington law in that regard and actual notice may in certain situations be sufficient. However, the safest route is to strictly comply with the contract notice provision.
After providing notice, a contractor should diligently track its costs associated with the changed work and consider any other potential claims it could have because of the change, such as claims for acceleration, disruption, and/or delay. While some courts allow for recovery of the “cumulative impact” of multiple changes to work, this type of claim is generally less preferable than bringing discrete contract and constructive change claims.
While a written change order is always the preferred outcome when a contractor encounters the need for changed work, in the absence of a change order it may nevertheless obtain an equitable adjustment under the theory of constructive change, provided that it gives timely notice, tracks its costs carefully, and is able to prove the change and order/fault elements.
Brent Carpenter is a Jordan Ramis PC shareholder. His practice is focused on construction law. Contact him at 503-598-5524 or brent.carpenter@jordanramis.com.
Tags: Construction, Construction and Development
