Cardinal Change

The U.S. Court of Claims has defined “cardinal change” as a change or series of changes that are beyond the scope of the contract and are a breach of contract.¹ The Supreme Court has defined work within the general scope as work that “should be regarded as fairly and reasonably within the contemplation of the parties when the contract was entered into.”²

Faced with a potential cardinal change, a contractor has three options. First, the contractor may prepare a change order request for additional time and cost of performance. The change order may include a request to change a fixed-price contract to a reimbursable contract. Second, the contractor may perform the change and then seek breach of contract damages after completing the work. Or third, the contractor may refuse to perform the additional or changed work and claim breach of contract. If the contractor performs the change, it may suffer severe financial hardship until it proves and recovers breach of contract damages. If the contractor elects not to perform the work and a court or arbitration panel later determines that the change was not cardinal, then the contractor may have committed a breach of contract.

Because major changes or a series of changes are not typically anticipated by a contractor at the time of award, the contractor can suffer significant cost increases and profit reductions assimilating the change order work. Out-of-scope contract changes are by definition, not redressable by way of an equitable adjustment. The cardinal change doctrine remedies this situation by providing breach of contract damages. Also, the full amount of the contractor’s costs incurred and profits lost may not be recoverable by equitable adjustment because the amount of the adjustment often is limited by contract provisions setting percentages for overhead and profit. However, a cardinal change is so profound that the contractor may not be limited by the provisions of the contract in recovering costs and damages from the owner.

The cardinal change doctrine was developed to answer the claims of contractors in the special context of U.S. government contracts. Certain states allow recovery for cardinal change or abandonment of contract claims on private jobs. State courts resolve similar issues by applying quantum meruit, rescission, and termination analyses, depending on whether the contractor kept performing or stopped work. Many private construction contracts now contain provisions similar to those in U.S. government contracts. State and municipal courts are generally more conservative in their opinions of what is deemed to be a cardinal change. However, case law has not established clear lines that determine when changes become cardinal, and until these lines are defined, the use of cardinal change as a claims vehicle is very risky.

It is unlikely that a major engineering and construction contractor would argue that a cardinal change has occurred as a result of the normal types of change orders that occur during the final design and construction of process plant projects, thereby either entitling that contractor to terminate its work or justify a change to its basis of compensation. The major risk to the owner in this area would occur under a unit price contract if a significant increase in quantities occurred as compared to the quantities that the owner defined in its Invitation to Bid. In that case, the agreement should provide for changes in quantities and allow the contractor to request a renegotiation of its unit rates if the quantities vary by a given percentage from the estimated quantities provided by the owner. If the quantities vary significantly, the contractor may argue a cardinal change and request that the contract be converted to a cost-plus basis.

Factors Used to Determine If a Cardinal Change Has Occurred
Several factors stand out as helpful in determining whether a cardinal change has occurred. No one factor is applicable in all situations. The factors are all based on the need to determine the nature of the original bargain. Even when application of the factors indicates that a change may be cardinal, circumstances may show that the parties contemplated the modification when contracting and thereby precluded the cardinal change theory.

Comparison of the Changed Item to the Original Item
The basic standard is whether the modified project is essentially the same work as the parties bargained for when the contract was let, and if the project as ultimately constructed is the same in essence as the parties contracted. The test, therefore, is whether the change alters the nature of the project to be constructed.

Whether or not changes are beyond the scope of the contract is largely a factual question; that is, is the changed work a substantially different undertaking than that contemplated by the parties? This determination does not depend on the number of changes made but rather focuses on their magnitude and quality. The right to alter or change a project is limited to changes that do not unreasonably transform the character of the work or unduly increase its costs. The cardinal change doctrine is most often applied to situations where design defects are encountered that cause drastic consequences even though the completed project does not materially differ from that originally contemplated. But cardinal changes are not limited merely to changes that increase the quantity of work put in place. They may also result from changes in the means or methods of performing the work.

Number of Changes
Often contractors encountering a large number of changes on a project are advised inappropriately to seek damages for a cardinal change. The number of changes may not be, in and of itself, the test. A single change beyond the scope of the contract can be cardinal.  However, a multiplicity of changes can be cardinal where, because of the specificity of the contract, it is obvious that the parties did not contemplate a large volume of changes.

It is true that an accumulation of changes may fall outside the originally contemplated scope; yet, it is difficult to establish when that point is reached. Numerous changes to the details of the interior finishes of a ten-story office building may not constitute a cardinal change if the final project is still a ten-story office building. A cardinal change claim based on the accumulation of changes also may be barred by the contractor’s failure to provide written notice of its intent to file a cardinal change claim. This requirement provides the owner the opportunity to remedy the situation.

Timing of the Changes
Another factor is how long the owner takes to make the change after its need becomes known. Courts and arbitration panels have implied a condition requiring the owner to make such changes without measurable delay. Failure to make necessary changes in a timely manner may render the owner liable for damages. An additional factor concerns the effect that the change has on the time for performance of the contract. Generally, a separate contract provision provides the contractor with an extension of time and possibly money for delays not the fault of the contractor. While some courts make note of the delaying effect of a change in analyzing whether the change was cardinal, it is the effect on the work and not on the time for performance that may render the change cardinal.

Extent of Engineering or Research and Development Necessary
When changes require additional engineering or research and development, a court or arbitration panel will examine how much of this additional work was needed. If a great amount of engineering or research and development was necessary, the trier of fact is more likely to find cardinal change. This inquiry also includes evaluating the nature of the contract work. If the contractor should expect such additional work, extra research and development will not render the change cardinal.

Magnitude of the Contractor’s Losses
It can generally be argued that changes substantially increasing a contract’s value are not within the scope of the contract and constitute a breach. Courts and arbitration panels appear reluctant to use a strict actual cost versus contract price comparison, but under appropriate circumstances such a comparison may provide supporting evidence of cardinal change.

Circumstances Insufficient to Support a Cardinal Change Claim
Not all situations may support the application of a cardinal change claim in construction For example:

• Changed site conditions may not justify a cardinal change claim when the contractor should have discovered or anticipated those changed conditions.
• A prime contractor’s mismanagement that resulted in loss of productivity to a subcontractor’s work may not be considered a cardinal change.

Conclusion
It is extremely rare that a change order under a contract is deemed to be a cardinal change. Application of the cardinal change doctrine is uniquely dependent on the facts of the particular case. The ultimate test is whether the final project was essentially the same as that contemplated by the original contract or had so materially changed or evolved as to become something else. If it can be established that the changes to the contract rise to the level of a cardinal change, the contractor may be able to justify a refusal to perform the work as changed or be entitled to recover damages for breach of contract that may not be limited by the contractual provisions.

The determination of what constitutes a cardinal change depends upon a court or arbitration panel decision and the unique contract language at issue. There is great risk in stopping work and abandoning a project because of a claimed cardinal change. Most contractors will elect to perform the work at issue and subsequently seek recovery rather than risking the threat of its position not being upheld by a court or arbitration panel, with the resultant exposure to significant damage for which it would be liable for wrongfully abandoning its work.

¹     See General Contracting & Construction Co. v. United States, 84 Ct. Cl. 570 (1937).

²     See Freund v. United States, 260 U.S. 60, 63 (1922).

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