Changes in the scope of work are an inescapable reality on virtually every construction project. Changes arise from a myriad of issues such as owners changing their minds, defects in plans and specifications, differing site conditions, etc. As a result, most construction contracts contain a changes clause permitting the owner the desired flexibility to make changes in the scope of work as it progresses. Most often these clauses permit the owner to unilaterally require the contractor to perform changes in the work that increase or decrease the contract price. Such clauses allow the owner to add or delete work from the project without stopping the progress of the work, pending processing of a change order to the contract or even resolution of a dispute in the courts. In the absence of such a provision, a contractor could sue for breach of contract if the owner made significant additions to or deletions from the work originally contemplated at the time the contract was made.
An important limitation on the changes clause is that the extra work order must apply to changes within the scope of the original contract. The United States Supreme Court has defined such work as that which "should be regarded as fairly and reasonably within the contemplation of the parties when the contract was entered into." (Fruend v. United States (1922) 260 US 60) Whether a particular change fits within the general scope is often a question of degree determined by the following basic criteria:
- the general nature of the original contract and the changed work;
- the comparative cost of the original contract and the changed work;
- the comparative time of performance;
- the origin of the change (i.e., a change occurring after contract execution or a change resulting from an error or omission in the project plans discovered later); and
- the number of changes required by the owner and/or the quantity of work affected by owner changes.
When an owner will not grant a change order for additional time and compensation, the contractor has essentially two options:
- continue performance under protest while reserving the right to claim additional compensation, delay damages and extensions of time; or
- cease performance contending that the refusal to grant a change order is a breach of contract excusing the contractor's further performance.
If the change in work is a "material" change to the plans and specifications, then the contractor can cease performance. On the other hand, if the change in work is minor or trivial, then the contractor must continue to perform. In any event, if the contract contains a clause requiring the contractor to continue to perform disputed work, the contractor must do so or face damages for breach of contract.
"The Court of Appeal finally ruled that contracts with public entities cannot be modified orally and that people dealing with public agencies are "presumed to know the law with respect to any agency's authority to contract." For public works projects, an issue arises as to whether contractors may be precluded from recovering for extra work performed without a fully agreed upon change order. This was addressed in the recent decision of P&D Consultants, Inc. v. City of Carlsbad (2010) 190 Cal. App.4th 1332. P&D Consultants entered into a written contract with the City of Carlsbad to provide civil engineering services for the redesign of the City's municipal golf course. The contract provided that no amendments, modifications or waivers of contract terms were allowed without a written agreement signed by both parties.
At the City's initiation, the parties entered into written Amendment Nos. 1 through 4 which increased the contract price for extra work. In each instance, P&D submitted a proposed change order with a fixed price to the City's project manager. Because the City typically took several weeks to execute an amendment, the City's project manager frequently authorized P&D to begin extra work before it received an executed amendment. The parties disagreed on the scope of work and price for Amendment No. 5. Ultimately, the City's project manager notified P&D that Amendment No. 5 authorized work on a time and materials basis for a not-to-exceed value of $99,810.
As was customary, at the City's project manager's direction, P&D began work several weeks before the City formally executed the amendment. At trial, P&D advanced the theory that the contractual written change order requirement was modified by the City's project manager's oral authorization of extra work and by the parties conduct in handling amendments. The City's project manager testified that P&D threatened that if the City did not pay for extra work beyond the scope of Amendment No. 5, P&D would discontinue work. The City's project manager contends that the work was not extra but included in Amendment No. 5.
Nevertheless, the project manager told P&D that if they believed that they were performing additional work outside the contract and the amendments, they should put it together with proper backup and the City would evaluate it. P&D also testified that the City's project manager had indicated that the City was running out of funds for the project but that P&D should continue working and the City would "take care of it." The City's project manager also told P&D that he was in the process of preparing a sixth amendment to the contract and that it had been prepared and was "in accounting". Ultimately, the City refused to pay for extra work not included in Amendment No. 5 and P&D sued for various theories including breach of contract.
At trial P&D argued that the contract's written change order requirement was modified by the project manager's oral authorization and by the parties conduct in handling the amendments. The Court of Appeal finally ruled that contracts with public entities cannot be modified orally and that people dealing with public agencies are "presumed to know the law with respect to any agency's authority to contract." The court found that P&D acted at its own peril when it ostensibly relied on the City's project manager's oral authorization or direction to begin or perform extra work without a written change order.
Keep in mind that this ruling is contained to public works contracts and would not impact arguments of modification by oral agreement or modification by conduct when private parties are involved. However, private works contracts include their own set of issues that can trap the unwary contractor. The bottom line is that contractors should read their contracts carefully and develop a thorough understanding of the applicable requirements before performing extra work on any construction project.
This AALRR publication is intended for informational purposes only and should not be relied upon in reaching a conclusion in a particular area of law. Applicability of the legal principles discussed may differ substantially in individual situations. Receipt of this or any other AALRR publication does not create an attorney-client relationship. The Firm is not responsible for inadvertent errors that may occur in the publishing process.
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