The Validity of Oral Change Orders under Construction
Contracts
Bruce W. Smith, CPC
Auburn University
Auburn, Alabama
The
uniqueness of most construction projects encourages changes during the
construction process. Some of these changes call for immediate action by the
contractor in order to maintain the continuity and schedule of the project.
The process for changes outlined in the construction documents usually calls
for a written change order that has gone though an approval process. When the
process is too lengthy, or time is inadequate, the contractor may proceed with
only a verbal change order. Other situations may arise when the procedure is
not followed. The question arises as to the legal basis for the contractor to
receive payment from the owner on oral change orders. This paper discusses
circumstances that would determine the validity of oral change orders.
Key
Words: Oral change orders, verbal
change orders, change orders, construction law
Introduction
The
construction industry has an intrinsic characteristic, in that most projects
are unique. This uniqueness requires the development of different plans and
specifications for each project. Even the best-prepared and thoroughly
coordinated construction documents will change, for various reasons, once the
construction begins. The discussion of verbal change orders starts with a
review of the source and nature of change orders. Once there is an
understanding of the source and nature of the change order, one needs to look
at the contractual language that addresses change orders. AIA A201-1997,
General Conditions for Construction, issued by the American Institute of
Architects, will be the focus of discussion, but other contracts and documents
will be referenced. The question then arises as to the circumstances under
which a general contractor would choose not to follow the procedure, and
proceed with only a verbal approval. Finally, does the general contractor have
any legal basis for collecting on a verbal change order?
What are the sources for change
orders?
There are
several primary sources for changes in a construction project. First, changes
can result from changes in scope, quantity, or quality instructed by the
owner. Such changes are not unusual, for several years could elapse between
the decision to pursue a project through the completion of the project. During
that period of time, many factors can influence the owner’s decision on what
they want, need, and can afford as a final product. The owner could require
additional parking, a different office configuration, different information
technology capabilities, or different quality finishes than previously chosen
(O’Brien 1998, Inman 2002).
A
second source of changes can come from concealed or unknown conditions.
Concealed or unknown conditions are defined in AIA A201 as “(1) subsurface or
otherwise concealed physical conditions which differ materially from those
indicated in the construction documents or (2) unknown physical conditions of
an unusual nature, which differ materially from those ordinarily to exist and
generally recognized as inherent in construction activities of the character
provided for in the construction Documents…” (AIA A201). Such conditions can
range from unsuitable soil, rocks, underground water, or hidden conditions in
an existing structure. Any condition that could not be reasonably known to the
contractor, subcontractor, engineer, or architect, which differ materially
from those known ordinarily, could become a source of changes. (O’Brien 1998,
AIA A201, Inman 2002) Alterations would require additional time and/or money
to make modifications to the plans and to complete the work. Such
modifications would be made through a change order.
Mistakes, errors, and omissions in the construction documents are another
source of changes. These are what are considered constructive changes. Such
changes alter the scope or quantity of a project, and could result in changed
costs and increased time (O’Brien 1998, Inman 2002, AIA A201). Examples of
such a constructive change directive could be a footing that is the wrong
size, inadequate space above a ceiling for the specified HVAC ducts and
equipment, or a flashing detail that does not work in the required
application.
Another
major source of change is due to substitution of products from the
specifications. The specification itself may have discrepancies, which need
clarification. Other materials may become substituted if they are deemed as
comparable to, or better than, the specified material. The substitutions may
result from price, availability, or compatibility with other material. The
owner may request a different type of roofing than outlined in the plans and
specifications. In changing the roofing, the contractor has made a change in
the contract, and that change may or may not impact the cost or duration of
the project (Inman 2002, White 2002).
The
importance of the change order process is indicated by the dollars involved in
changes to a project. Changes in contracts typically range from 5 to 7 percent
on new, stand alone projects. Remodeling or renovation projects typically run
10 percent and higher in changes. On a $20 million new, stand alone project,
such as a school or an office building, changes would run from $1million to
$1.4 million. The breakdown of changes is based on a percent of the total
cost. (Inman 2002)
·2 percent unforeseen
conditions
·2 percent owner’s
request
·2 percent for
discrepancies in contract documents
·1 percent for
substitution requests
The Change Order Process
Since
the dollar value of the changes is significant, and that most projects require
changes, the various contracts used in construction stipulate a process for
addressing changes. The process for changes in most construction contracts is
outlined in the general conditions. The contracting parties realize that
having a defined process for change orders is necessary for the smooth
progression of a construction project (Fisk 2000, Mincks 1997).
AIA
A201 defines a change order as “…a written instrument prepared by the
architect and signed by the Owner, Contractor, and Architect, stating their
agreement on the following: (1) change in the work, (2) the amount of the
adjustment, if any, in the Contract Sum, and (3) the extent of the adjustment,
if any, in the Contract Time” (AIA A201). AIA A201 states that a change order
must be signed by the owner and the architect. A201 goes to say, “The owner
shall designate in writing a representative who shall have express authority
to bind the Owner with respect to all matters requiring the Owner’s approval
or authorization… the architect does not have such authority. The term ‘owner’
means the Owner and the Owner’s authorized representative” (AIA A201).
A
change that is initiated by the owner or architects would start with a
modification proposal to the general contractor. The general contractor
reviews the change and contacts the necessary subcontractors and suppliers for
prices on the proposed work. Upon receiving the prices, the general contractor
will finalize the estimate, and submit the proposed change order price to the
owner. The owner evaluates the contractor’s change order price and responds to
the general contractor with a yes, no, or further negotiation. If the proposed
change order is approved, a signed change order is given to the general
contractor. At that time, the general contractor can proceed with, and get
paid for, the work (AIA A201, Hinze 2001).
The
process is similar when a general contractor encounters concealed or unknown
conditions. The general contractor will inform the architect (within 21 days
of the observance (AIA A201)). The architect will promptly investigate such
conditions, and if the conditions differ materially, the architect will
recommend a change in the cost and/or time. Upon agreement between the owner
and the contractor, a change order, signed by the owner, will be issued.
Requests for changes in materials will be initiated by the appropriate
contractor. Such changes will be priced by the contractor, and the final
change orders signed by the owner. In all cases, AIA A201 requires an approved
change order signed by the owner and the contractor. This is an agreement
which defines the scope of work associated with the change, the dollar value
of the change, and any time element associated with the change.
Finally,
there are constructive change orders, where the architect makes a change in
the plans, clarifies plans, or corrects a mistake in the plans or
specifications. If the contractor and the owner do not agree on the terms of
the change order, the architect issues a Construction Change Directive, signed
by the architect and the owner. The contractor is required, by the contract,
to perform the work on the change without a signed change order, and the value
of the change in time and money will be determined by the architect. The
Constructive Change Directive, although not a signed change order, is also not
an oral change order, and will not be discussed further in this document.
Why Oral Change Orders?
The
explicit language of AIA A201 regarding change orders brings up the question
of why a contractor would not follow the procedure. There are many reasons
general contractors fail to follow the process for change orders. Some of the
reasons include lack of knowledge of the procedure, lack of knowledge of the
consequences, the process has not been enforced in the past, time constraints
of the project, or situations preclude waiting until the process is complete.
Circumstances of the project often call for action by the general contractor
that precludes the formal change order process to maintain the schedule of the
project. Although AIA A201 states that adjustments can be made on time based
on certain criteria, the document also states, “The Contractor shall proceed
expeditiously with adequate forces and shall achieve Substantial Completion
within the Contract Time” (AIA A201). In reality, many projects have
completion dates that are fixed, such as schools, residential buildings, and
hotels. Contractors realize that delays during construction will not change
the agreed upon completion dates. The reason the contractor does not follow
the change order procedure is important as it may establish the validity of
the oral change order.
Validity of Oral Change Orders
A
review of some cases where the central issue was verbal change orders gives
some insight into the validity of verbal change orders. Every case is unique,
and the relevance to future cases is based on a multitude of variables. The
goal of the discussion is to find some commonality or guidelines on which to
evaluate the legitimacy of future claims.
The
first type of change order discussed previously involved changes initiated by
the owner in scope, quantity, or quality of a project. Falcon v. King
provides an example of an owner initiated oral change order. King Enterprises
contracted to build several airplane hangers for Falcon Jet. During the course
of construction, an employee of Falcon issued verbal change orders for
additional work, which were later followed by written, executed change orders.
The work for two change orders was completed before the change order was
executed. King was paid for the additional work. There were three more verbal
change orders issued by the same employee of Falcon, for which the work was
completed, but the owner refused to pay. The contract explicitly stated that,
“… an equitable adjustment shall be made to the amount payable to the
Contractor under this contract, provided, however, that no such additions or
omissions or modifications shall be made in the work or material except on
written order of the Owner” (Falcon v. King 1982).
The
court held, in this case, that Falcon, the owner, through the prior conduct of
employees, “waived its right to insist that changes be in writing and signed
by the authorized agent” (Falcon v. King 1982). There are several
aspects of the case that led to the acceptance of the verbal change order.
First, the contractor believed that the persons ordering the work were
authorized representatives of the owner. The same Falcon employee that ordered
the three disputed change orders also ordered the two change orders that were
approved. For the first two changes, the signed change order followed, even
though the work had already been done, and the contractor was paid for the
work. King had an expectation that, based on past behavior, future changes
would be handled in the same manner. Falcon had deviated from the contract
language, and had waived its right to enforce the contract language in the
future (Falcon v. King 1982, DSC v. Sagot 1987, White 2002).
It
should be noted that King did maintain documentation on the person authorizing
the work and the exact nature, scope, and cost of the work. The need for
documentation is essential in all aspects of construction, but can become more
critical when oral change orders are disputed (Falcon v. King 1982,
O’Brien 1998).
The
“waiver” argument is illustrated in Doral Country Club, Inc. v. Curcie
Brothers, Inc. Doral contracted Curcie to build a nine-hole golf course,
and the contract required written and signed change orders. The contract
included a schedule for hourly rates for types of equipment and costs of
materials. Doral decided to add nine holes to the contract, which increased
materials and the hours of equipment rental. Doral continued to pay Curcie
based on rental hours and materials as specified in the original contract.
Doral made several payments, but later refused some of the rental charges,
saying Curcie had not followed the procedure outlined in the contract for
changes. The court held that the continued payments, Doral’s knowledge of the
extra work, and the procedure for calculating compensation, amount to proof
that Doral had waived the provision requiring a written request for additional
compensation (Doral v. Curcie 1965). Any provision of a contract can be
waived, including provisions requiring approved change orders (McGreevy 2004,
White 2002, Busani v. Nussbaum 1997, Markway v. Kirchenbauer
1989).
Differing conditions is the next source of change. These are “…subsurface or
otherwise concealed physical conditions which differ materially from those
indicated in the Contract Documents…” (AIA A201). AIA A201 goes on to specify
that work in the area needs to halt, how a claim for the conditions needs to
be processed, the time line for the contractor to initiate the change, and
that the written order for the change be signed by the owner and contractor.
Delaying an activity on the critical path, defined by the project schedule,
will delay the completion of the project, even though other activities are
continuing on the project. A delayed activity not on the critical path could
move the activities to the critical path by delaying the completion date of
the activity. Smaller projects often do not offer the opportunity to change
the schedule without impacting the completion date. Decisions need to be made
more quickly. The contractor still needs approval from the owner on any
changes in the work, but the work may need to proceed before there is ample
time to process the paperwork (Jervis 1988). The change is then proceeding on
an oral change order. The assumption on the part of the contractor is that the
oral change order will be followed by a properly executed written change
order.
The
case of Worth Construction v. City of Yonkers illustrates the necessity
for prompt action by the contractor and recognition of the validity of the
change by the owner. The court stated “ The evidence before the Court
indicates that, as one would expect on a job such as this, it was impractical
to obtain approval of the Control Board to all change orders on a basis that
was timely enough not to delay construction. It is therefore reasonable, with
respect to minor change orders, for the plaintiff to proceed with the work on
the representation of the project manager and the architect that the work was
in fact necessary” (Worth Construction v. City of Yonkers 1991). The
contractor needs to maintain continuity in the progress of a project in order
to maintain the time schedule and contract costs. The same case denies other
claims based on the issue of no oral approval by the architect and lack of
confirming documentation (Worth Construction v. City of Yonkers 1991).
It is critical, as pointed out previously, that proper process and
documentation of meetings, conversations, dates, times and costs of work
accompany the changes in order to validate the claim. Courts have upheld
payment for changes communicated in letters, transmittal notices, revised
drawings, revised specifications, notations on shop drawings, job meeting
minutes, field records, and daily reports (Hinze 2001).
Lack of
knowledge of the procedure and lack of knowledge of the consequences have been
mentioned as reasons why contractors have not followed procedure. The case
Dehnert v. Arrow Sprinkler, Inc. illustrates such a situation.
Arrow
Sprinkler was the sprinkler contractor which contracted directly with the
school board. Arrow Sprinkler, at the bid opening, indicated to the owner that
it planned on substituting plastic sprinkler heads instead of the aluminum
sprinkler heads required by the specifications. Arrow was given the contract,
and one week later, during a meeting on layout, the architect gave verbal
approval for the use of the plastic sprinklers. When the project was 80%
complete, the architect ordered Arrow to replace the plastic sprinkler heads
with the aluminum type specified. Arrow refused and was terminated. The court
held that the preliminary and verbal approvals did not substitute for the
contract change procedure that required a signed change order from the owner (Dehnert
v. Arrow 1985).
In this
case, the verbal change order was not considered valid. Arrow made the owner
and architect aware of the change early in the process. Arrow apparently
believed that the architect was the authorized agent for the insured. This is
a case in which the contractor did not understand the process or the
consequences. Arrow had sufficient opportunity to submit a request for a
change, and would have been given written approval or denial early in the
project.
Understanding the contract and process is the key. Part of the process is the
approved change order by the owner or the owner’s authorized representative.
Arrow may have believed the architect was an authorized representative of the
owner. AIA A201 gives the architect some authority in the administration of
the contract, but specifically states that the authority does not
automatically extend to approval of change orders (AIA A201). Since the
architect cannot approve written change orders, the contractor should not
assume there is any authority to make oral changes.
The
fault is not always on the side of the contractor. In Coonrod and Waltz
Construction v. Motel Enterprises, the contract general conditions
required written approved change orders. There were literally hundreds of
changes, but the “…architect and owner’s representative, prepared no written
change orders throughout the entire construction.” Some of the changes were
paid for during the course of construction, while other changes were billed at
the end of the project and payment refused. The court held that the owner
waived the contract language requiring written change orders, but the payment
on the changes depended on the ability of the contractor to document the
changes (Coonrod and Waltz Construction v. Motel Enterprises 1975).
Finally, there is a situation where the court finds that the owner received
benefit from the change and was required to pay for the value of the changes.
In Juncker v. Pearson, the court addresses the deviation from the
contract language when it stated, “…requirements shall not preclude the
recovery of compensation for work performed based upon equitable theories,
such as to preclude unjust enrichment of the party” (Juncker v. Pearson
2004).
The
owner of the property made a contract with the contractor for remodeling of a
home. The contract called for written change orders of anything over $500. The
owner was experienced in similar contracts, knew the contract required written
change orders, but issued oral change orders to the extent of over $86,000.
The court ordered payment to the contractor based upon “equable theories”,
specifically “quantum meruit.” The equitable remedy in this case was that the
contractor had completed the work, and the owner had received the benefit from
the work, so the owner should pay the contractor (Juncker v. Pearson
2004).
Conclusion
The
preceding work shows that there are certain circumstances where oral change
orders may occur. The question now arises as to the payment of invoices based
on oral change orders. There are two possible outcomes. The owner acknowledges
that the invoices are valid and that the owner received benefit from the
additional cost, and pays the contractor. Second, the owner does not pay the
contractor, based on the contract language that requires all changes to be
written and approved. In this latter case, the contractor needs to seek other
means of recovering.
Based
on the cases reviewed and the contract language, the arguments for a
contractor’s ability to recover on oral contracts have shown that there are
circumstances where oral change orders are valid. The following can be viewed
as guidelines for establishing the validity of oral change orders. Every case
is unique, as well as the courts interpretation of the contract language,
precedent cases, and circumstances.
Guideline 1 – For a change initiated by the owner, or owner’s representative,
the contractor should have reason to believe that the person was authorized to
approve such changes. The contractor should know who is actually authorized to
approve change orders (Falcon v. King 1982, DSC v. Sagot 1987,
Dehnert v. Arrow 1985).
Guideline 2 – If there have been previous instances, in this contract, where
oral change orders became written and approved change orders, the contractor
would have grounds to believe that future oral change orders would follow the
same procedure (Falcon v. King 1982, DSC v. Sagot 1987).
Guideline 3 – The contractor may be justified in proceeding on a change, with
only oral approval from the architect or engineer, if waiting for written
authorization would delay a project or portion of a project (Worth v.
Yonkers 1991).
Guideline 4 – The contractor could receive payment on an oral change order if
the owner knowingly gave oral confirmation and knowingly received benefit from
the (Juncker v. Pearson 2004, Falcon v. King 1982, Worth v.
Yonkers 1991, Merrit v. U.S. 1972).
Text
books on construction management and change order management emphasize that it
is critical to make sure all change orders are written and approved. But there
are circumstances in which oral change orders are valid, and sometimes
necessary. The key to creating validity in oral change orders is
documentation. Documentation should include the scope of the work, the dollar
value of the work or a method for establishing the value of the work, the
impact of the change on the duration of the project, and most importantly,
some acknowledgement from the person authorized to approve the change. The
acknowledgement could be an email, a note, or a signature, which shows
knowledge and approval of the change.
Oral
change orders can be enforceable, but contractors should be aware of the
pitfalls of not having approved change orders. Oral change orders should be
followed as quickly as possible with approved written change orders. Knowledge
of the change order process and requirements will allow the contractors to
make the proper decisions. These decisions will keep a project running
smoothly and insure payment on all work completed.
References
AIA
Document A201-1997, General Conditions of the Contract for Construction, the
American Institute of Architects, Washington, DC.
Busani v. Nussbaum, 940 S.W.2d 350
(Tex.
App. 1997)
Coonrod and Waltz Construction Company, Inc. v. Motel Enterprises, Inc
217 Kan. 63, 535 P.2d 971 (1975)
DSC
Industries, Inc. v. Robert Sagot, Inc.,
Bankruptcy No 86-01839S Adv. No. 87-0727S. (United States Bankruptcy Court.
E.D. Pennsylvania, Nov. 3 1987)
Dehnert v. Arrow Sprinklers, Inc.,
705 P.2d 846 (Wyo. 1985)
Doral Country Club, Inc. v. Curcie Brothers, Inc.,
174 S.2d 749 (Fla. App. 1965)
Falcon Jet Corporation and American Falcon Service, Inc. v. King Enterprises
Inc., No. 81-1929. (United States
Court of Appeals, Eighth Circuit Submitted Jan 14, 1982. decided May 19, 1982)
Fisk,
Edward R. (2000), Construction Project Administration (Sixth edition),
Upper Saddle River, NJ, Prentice Hall
Hinze,
Jimmie (2001), Construction Contracts, second edition, McGraw Hill,
Boston
Inman, Marc A. P.E.
2002, COs: a fact of life; change orders make all the difference 9 (December
2002) Reeves Journal 82, no 12, retrieved March 25, 2003 from
http://newfirstsearch.oclc.org
Jervis, B. M. & Levin,
P. (1998), Construction Law: Principles and Practice, New York, McGraw
Hill, Inc.
Juncker v. Pearson,
Cal.App. 6 Dist 2004
Markway Construction
Co. v. Kirchenbauer, 769 S.W.2d 836
(Mo. App. E.D. 1989)
