10.4 TYPES OF CHANGES
10.401 In General. As the change clauses recited above suggest, generally there are two basic types of changes that occur on a construction project. The first is a directed change where the owner wants to make a change in the work, acknowledges that the change will cause an increase (or decrease) in the contract price or time, and issues a directive to the contractor to perform the changed work. A constructive change, on the other hand, arises when the owner issues a directive, instruction, or interpretation that the contractor believes requires the performance of work different from, or in addition to, that required by the original contract. This type of change
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inherently involves a situation in which the owner does not recognize the alleged change, at least at the inception of the constructive change. Both of these types of changes are discussed below.
10.402 Directed Changes.
A. In General. The need for a change order may be recognized initially either by the contractor or the owner, depending on the circumstances of the particular situation. Once the need is recognized, the owner often seeks the contractor's recommendations, ideas, and prices before issuing a change order. The owner and the contractor may also exchange information relating to the elements of the proposed change and arrive at some understanding of the scope and effect of the change. Input from the contractor on an owner-directed change is not required but is often helpful, and both sides usually benefit from such cooperation.
B. Unilateral and Bilateral Directed Changes. A directed change may be issued by an owner either on a unilateral or a bilateral basis.
1. Unilateral Change. In a unilateral change order, the owner unilaterally orders a change pursuant to the changes clause, but the price and/or time adjustment is not yet agreed upon between the parties. Article 7 of AIA Document A201 (2017) specifically addresses this kind of change and calls it a "Construction Change Directive." A construction change directive is defined as "a written order prepared by the Architect and signed by the Owner and Architect, directing a change in the Work prior to agreement on adjustment, if any, in the Contract Sum or Contract Time, or both." The clause specifically provides that a construction change directive is to be used "in the absence of total agreement on the terms of a Change Order." The clause also provides for how an adjustment to the contract sum or time is to be made in the absence of agreement.
2. Bilateral Change. The other type of directed change is a bilateral change, in which the owner and the contractor agree that there has been a change to the contract and also agree on the amount of the adjustment in the contract sum or contract time. Obviously, a bilateral change is preferred by the owner because it allows the owner to establish a fixed and liquidated cost for the change, rather than leaving it open-ended. However, the contractor does not always favor a bilateral change. While such change removes some of the contractor's uncertainty, the contractor runs the risk of underestimating the cost or time impact of the change. For that reason, the contractor may be reluctant to execute a change order without reserving the
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right to seek additional time and money at a later date, depending upon the indirect impact of the change. This is a particular concern in situations where many changes are occurring throughout the course of the project. When any one change is considered in isolation, the indirect impact on the project schedule or cost may be perceived as minimal, but when considered in conjunction with multiple changes (perhaps numbering in the hundreds), the cumulative impact may be very significant indeed. A useful reservation of rights clause that should be used in any situation where the contractor perceives a significant risk of additional, but as yet unquantifiable, impacts is as follows:
Contractor notes that the value of this Change Order is based solely on the usual cost elements such as labor, material, and normal markups and does not include any amount for changes in the sequence of work, delays, disruptions, rescheduling, extended overhead, acceleration and/or impact costs, and the right is expressly reserved to make claim for any and all of these and related items of cost prior to any final settlement of this contract.
Owners sometimes object to a contractor including such reservation of rights language in a bilateral change order because they do not want the change to remain open to future negotiation. They also may believe that the contractor should be able to fairly assess whether or not there is a further impact contemporaneously with the issuance of the change order. As a practical matter, if the contractor insists on the reservation of rights language but the owner is unwilling to accept such a reservation, the owner should issue a unilateral change order and the contractor will have to seek any additional compensation under the dispute resolution provision of the contract.
C. Written Order Requirement. In situations involving directed changes, it is essential that the contractor obtain a written order or directive from the owner. A typical changes clause requires that the owner issue a written change order before the contractor performs the extra work. A corollary to this requirement is that extra work is not compensable unless it was previously authorized by a written order of the owner. Accordingly, a contractor may find that compensation will not be allowed for extra work performed on the basis of a verbal directive from an owner's employee.
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An illustrative case is Main v. Department of Highways, 6 in which the contractor performed extra work, pursuant to a directive of the owner's representative, in the amount of $509,468.97 over and above the original contract price. The contractor did not obtain a written work order before performing the extra work. Upon completion of the project, the contractor submitted a claim for the extra work but the owner denied its claim. The Virginia Supreme Court affirmed the trial court's decision rejecting the contractor's claim for extra work. The court held that the contractor was not entitled to recover for the extra work because it failed to obtain an "extra work order" or notify the engineer in writing of its intention to make a claim before performing the work. 7 Absent a written order, contractors are often left in the difficult position of having to argue that the owner ratified the extra work or somehow waived its right to enforce the written order requirements of the contract. These arguments are typically unsuccessful in Virginia. 8
If a contractor receives a verbal directive to perform work that it considers to be a change to the contract, the contractor would be well advised to write the owner a letter reiterating the directive before performing the work, advising that it considers the directive to be extra work that would require additional compensation, and requesting confirmation in writing if the owner indeed desires the work to be performed. The contractor should not proceed with the work without the requested written confirmation. If the owner believes that the directive is not a change to the contract, he or she should respond to the contractor confirming the directive but stating the view
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that the directive does not constitute a change. The work can then proceed and the issue will have to be resolved pursuant to the dispute resolution procedures of the contract.
D. Owner's Obligation to Provide Clear Direction. The owner is obligated to provide clear direction to the contractor when a change to the plans or specifications has been identified. This happens most frequently when the contractor has made several attempts to meet the specifications but has failed and cannot work effectively until receipt of instructions from the owner or, in the case of a government project, the contracting officer. 9 When contract performance has been delayed because the owner's directions were not clear and specific, the contractor may be entitled to damages. In Haney v. United States, 10 the government was obligated to pay damages to a contractor partly because of internal disputes that contributed to delay in delivering approved drawings to the contractor, which in turn contributed to delay in completing the overall project. The court summarized the principle as follows:
Although the government had the right to make changes, even where the time is not as critical as in the present case, it would not have "the right to deliberate, in disregard of the interests of the other party to the contract, for as long as it pleases, upon changes so fundamental that the work can go forward...
