Problematic Construction Contract Clauses

Claims and disputes frequently emerge long before workers and machines reach the jobsite. Often the conditions for claims and disputes are written right into the contract documents.

This happens when construction contracts are ambiguous or overly restrictive or unfairly allocate risks to one party. For this reason, contracts should be read with care and skepticism.

Many owners still view harsh contracts as the best defense against claims. However, the toughest contract is not necessarily the best one. Such contracts often create problems for the following reasons:

• Harsh contracts discourage responsible bidders.
• Ambiguous language or exculpatory clauses almost inevitably result in conflict.
• Unfair contracts attract bidders willing to take any chance and who expect to make up their losses via claims.

While the owner is usually in a position to draft the entire contract and to shift much of the risk to the contractor, the contract should be equitable to both parties. A contract that is essentially reasonable and evenhanded can prevent unnecessary disputes. Furthermore, by avoiding exculpatory language and by assuming certain risks, the owner will reduce the amount contractors normally include in their bids to cover contingencies, thereby lowering overall costs.

Contracts take all forms and varieties. They can be standard form contracts adopted by such organizations as the American Institute of Architects (AIA), the Associated General Contractors of America (AGC), the Engineers’ Joint Contract Documents Committee (EJCDC), and many others. Outside the United States, a common standard form of contract is the Federation Internationale des Ingenieurs Conseils (FIDIC) contract. Federal government agencies develop contracts based on the Federal Acquisition Regulations (FARs), while state and local government agencies often use their own standard form of contract, and private owners often develop their own customized contract terms and conditions. To complicate matters even more, owners and general contractors will often include special conditions that may modify and impose additional terms and conditions on the standard boilerplate. Each of the aforementioned contracts may contain similar terms and conditions; however, they can also be quite different.

This is the first blog post in a series that discusses clauses in construction contracts with the goal of providing awareness of contract terms that often cause difficulties and give rise to claims. Previous blog posts have addressed problematic contract clauses involving differing site conditions and no damages for delay. This post discusses changes clauses, and other posts will discuss the following clauses:

• Coordination
• Suspension of work
• Warranty and defects liability
• Variation in quantity
• Inspection
• Force majeure
• Flow down
• Compensation and payment
• Weather
• Escalation
• Oral modifications

Changes
Because construction projects are rarely completed without encountering at least a few unanticipated problems, contracts almost always include a “changes” clause. Changes clauses should require that changes be authorized by written change orders and should contain clear provisions spelling out how contract adjustments in time and cost will be determined. If a required completion date is critical to the owner, the changes clause may make it clear that no delays or time extensions will be granted and that only acceleration costs will be paid if delays or changes are caused by the owner.

Changes clauses, however, risk promoting claims when they reserve the owner’s right to require the contractor (or the contractor’s right to require the subcontractor) to proceed with work prior to an agreement on cost and time adjustments. In other cases, contracts may require agreement on price in writing before the work is performed. However, the contracts may not address what happens if the parties cannot agree on price. In these cases, it may be wise to add a statement that requires the contractor to proceed with the work in any event if directed by the owner, and particularly if the change is required and directed by the owner. To avoid a claim, it may be better to allow the work to proceed on a reimbursable basis.

An example of a changes clause contains the following language:

9.1    Owner Initiated Changes. Owner, without invalidating the Agreement and without notice to the surety, may at any time and from time to time, by a written order, make changes within the general scope of this Agreement, including any one or more of the following:

(a) Additions, deletions, or other revisions to the specifications and drawings;
(b) The method, manner, or sequence of performance of the Work;
(c) Owner furnished facilities, equipment, materials, services, or site; or
(d) Acceleration in the performance of the Work, if practicable.

In the event that the Contractor’s cost or time required to perform the Work is materially increased or decreased due to such change, an adjustment in Contract Price and the Scheduled Mechanical Completion Date shall be made as provided herein. Contractor acknowledges and agrees that time extensions will be granted only to the extent that the Contractor can demonstrate that such delay actually caused, or will cause, delay to the Scheduled Mechanical Completion Date. Delays that only consume the available float in the schedule will not be the basis of a time extension. Contractor shall identify all Change Order Work, whether such changes are approved or disputed changes, as new activities with appropriate logic ties to existing activities in the master project schedule and integrated detailed schedules. In addition, the Contractor will record the actual time of performance of all Change Order Work in the master project schedule and integrated detailed schedules, whether such changes are approved or disputed changes.

9.1.1    All such changes in the Work shall be authorized by Change Order and all Work involved in the change shall be performed in accordance with the terms and conditions of this Agreement. If the Contractor should proceed with a change in the Work without written authorization from the Owner’s Representative, it shall constitute a waiver by the Contractor of any claim for an increase in the Contract Price and/or the Scheduled Mechanical Completion Date on account thereof.

9.1.2    The amount of additional compensation to be paid to the Contractor for any change so ordered shall be made in accordance with whichever of the following options the Owner elects:

(a) A lump sum amount agreed upon between the parties and stipulated in the Change Order;
(b) A price based upon the unit prices in the Agreement; or
(c) A price determined by adding __% to the reasonable actual cost of the changed Work performed.

9.1.3    In the event the parties are unable to agree on an adjustment to the Contract Price applicable to a Change Order, but Owner nevertheless desires that Contractor proceed with the Work that is the subject of the Change Order, the Owner may, at its sole discretion and option, direct the Contractor, in writing, to proceed with the change in the Work. Contractor shall proceed in accordance with such direction and the dispute shall be resolved as set forth in Article 22 of this Agreement. Contractor shall establish in its job cost accounting system a special account to capture the actual costs for such Change Order Work. If Owner elects to base any compensation on Contractor’s reasonable actual costs as provided in Article 9.1.2(c) above, or in the event of a dispute in the Change Order, the Contractor’s actual account records will be disclosed to Owner to document such actual costs. Contractor’s failure to record its actual costs for any requested Change Order will constitute a waiver by the Contractor to any additional compensation or extension of time related to the requested Change Order.

9.2    Other Changes. If Contractor receives any other directive, instruction, interpretation or determination from Owner which will cause a change in the Contractor’s cost or time to complete the Work, Contractor shall promptly (and in any event, within 5 days) notify Owner in writing, which notice shall describe the directive and the anticipated effect on the Contractor’s cost or time to complete the Work. Within 14 days after receipt of any such directive, Contractor shall submit to Owner in writing a more detailed statement of its claim that a change has been directed, including the estimated increase or decrease in Contractor’s cost to complete the Work as a result of such alleged change including all direct, indirect and impact costs on the unchanged Work, the estimated increase or decrease in the time required to achieve the Scheduled Mechanical Completion Date as a result of the alleged change, the estimated cost attributable to the increase in time and the estimated cost, if any, of recovering any time delay, and a description of what steps Contractor has taken and plans to take to minimize the effect that such alleged change will have on any increase in costs to complete the Work or any delay in the schedule. Contractor shall thereupon undertake to diligently pursue those steps and use its best efforts to mitigate any adverse effects caused by the alleged change.

9.2.1    In the event Contractor is entitled to an adjustment to the Contract Price as a result of any such directive, such adjustment shall be made in accordance with Article 9.1.2.

9.2.2    If written notice as required by paragraph 9.2 is not provided by Contractor within the aforementioned 5 days and 14 days, respectively, the alleged change for the purpose of this Agreement shall be deemed to have no effect upon the cost to complete the Work or upon the schedule and Contractor will be deemed to have waived the right to any increase in the Contract Price or adjustment to the Scheduled Mechanical Completion Date.

9.3    Changes in Quantities. Changes in estimated quantities are to be anticipated by the Contractor and will not provide a basis for a change in the unit prices or an extension to the Scheduled Mechanical Completion Date except as provided in Exhibit E hereto.

Exhibit __ provides the possibility of a time extension and changes in unit prices only if the actual quantities exceed 15 percent of the estimated quantities, as defined by the cumulative man hours of direct labor for each construction discipline, i.e., civil, structural, mechanical and piping, electrical, and instrumentation, derived from the unit rates to perform the work.

FIDIC contracts contain provisions for Variations and Adjustments.¹ Important provisions in these contracts include the following:

Right to Vary
Variations may be initiated either by an instruction or by a request for the contractor to submit a proposal.

The contractor must execute each variation, unless (a) the contractor cannot readily obtain the materials required for the variation, (b) safety is compromised, or (c) doing so would have an adverse impact on the achievement of guarantees.

Each variation may include: (a) changes to the quantities, (b) changes to the quality and other characteristics of any item of work, (c) changes to the levels, positions, and/or dimensions of any part of the works, (d) omission of any work, (e) any additional work, or (f) changes to the sequence or timing of the execution of the works.

Value Engineering
The contractor may propose variations that would (a) accelerate completion, (b) reduce cost, (c) improve efficiency or value to the employer of the completed works, or (d) otherwise be of benefit to the employer.

Daywork
For minor or incidental work, a variation may be instructed on a daywork basis.

Adjustments for Changes in Legislation
The contract price will be adjusted for increases or decreases in cost as a result of a change in the laws of the country or in the judicial or official governmental interpretation of such laws. Such variations could include a time extension and payment of increased costs.

Owners often include in their special conditions other provisions related to changes and time extensions, such as:

– A time extension is not required for changes that only consume float and do not affect the mechanical completion date.

– The contractor must identify all approved and disputed change order work as new activities with logic ties to existing activities in the master project schedule and integrated detailed schedules.

– The contractor must identify the actual time of performance of all approved and disputed change order work in the master project schedule and integrated detailed schedules.

– If the contractor proceeds without a written authorization from the engineer, the contractor waives its right to additional time and cost.

– Changes can be paid as either:

• Lump sum amount,
• Price based on contract unit prices or rates, or
• Reasonable actual cost plus a percentage.

– The engineer can direct the contractor to proceed without an agreement on price. In that event, the contractor must capture its actual costs or waive its right to additional costs.

– The contractor must notify the engineer within five days if it believes that it receives any other directive, instruction, interpretation, or determination from the owner that will cause a change in the contractor’s cost or time to complete the work. Within 14 days, the contractor must provide (a) its estimate of the cost of the change, including all direct, indirect, and impact costs on the unchanged work, (b) the increase or decrease in time, (c) delay costs, (d) costs for recovering the additional time caused by the change, and (e) mitigation measures taken by the contractor. If the contractor fails to provide this information in the required time, it waives its rights for additional time and costs.

– To the extent that the contractor alleges that it has incurred cumulative impact costs as a result of multiple scope changes or other impacting events, the contractor must provide notice to the engineer within 15 calendar days of the occurrence and provide its planned, actual change order and impact man-hours and costs associated with each to justify its claim. To the extent that the contractor is alleging loss of labor productivity as a result of cumulative impact, the contractor must provide a measured mile or recognized industry study productivity analysis to support its claim and consider any contractor-caused impacts in its analysis.

Changes in scope and delays and impacts that result from changes are a major source of problems on construction projects. We recommend that contractors carefully review the changes clause and any special conditions and provisions associated with changes, ensuring their project management and project controls personnel are aware of the requirements for notice, record keeping, and pricing.

¹    See, e.g., FIDIC Conditions of Contract for Plant And Design-Build Contract, Clause 13, First Edition, 1999; also see FIDIC Conditions of Contract for Construction MDB Harmonised Edition for Building and Engineering Works Designed by the Employer, May 2005.

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