GENERAL CONTRACTOR SUPPORTING A SUBCONTRACTOR’S CHANGE ORDER ONLY FOR OWNER TO REJECT THE CHANGE

The opinion in Westchester Fire Ins. Co, LLC v. Kesoki Painting, LLC, 260 So.3d 546 (Fla. 3d DCA 2018) leads to a worthy discussion because it involves a common scope of work occurrence on construction projects involving a general contractor and subcontractor.  The contractor submits a subcontractor’s change order request to the owner and the owner rejects the change order.   What happens next is a scope of work payment dispute between the general contractor and subcontractor.   Yep, a common occurrence.

In this case, a general contractor hired a subcontractor to perform waterproofing and painting.  A scope of work issue arose because the specifications did not address how the window gaskets should be cut and then sealed. The owner wanted the window gaskets cut at a 45-degree angle and the subcontractor claimed this resulted in increased extra work.    The general contractor agreed and submitted a change order to the owner to cover these costs.  The owner rejected the change order claiming it was part of the general contractor’s scope of work even though the cutting of window gaskets at a 45-degree angle was not detailed in the specifications.

After the subcontractor filed a suit against the general contractor’s payment bond surety, the project architect further rejected the change order because gasket cutting was part of the specification requirements.  (Duh! What else was the architect going to say?  It was not going to concede there was an omission that resulted in a change order to the owner, right?)

Importantly, the subcontract agreement stated that, “If a dispute arises between the Contractor and the Subcontractor regarding the Scope of Work, or in the interpretation of the Contract Documents, and the parties hereto do not resolve that dispute, the decision of the [Architect] shall be final.”   As it pertains to this provision, while the appellate court noted the enforceability of the provision, it found that it did not apply because there was not a scope of work dispute between the general contractor and its subcontractor.  The general contractor agreed that this resulted in a change order condition, i.e., that there was a change to the subcontractor’s scope of work, and submitted a change order to the owner for the scope of work change.  Ouch!  The payment bond surety was on the hook to pay for this change order.

A few things that I find noteworthy.

First, the opinion does not include a lot of discussion on language in the subcontract. This tells me that there may not have been great language in the subcontract dealing with the subcontractor’s scope of work.  It is not uncommon to hear that a specification does not include every single detail so if the subcontractor was always required to cut gaskets in performing its scope of waterproofing work then there may be an argument there is not a scope of work change.  Either way, detailing the scope of work in the subcontract is important to account for the inevitable scope of work dispute.

Second, I understand the logic from the general contractor’s perspective of having the architect decide scope of work disputes between a general contractor and subcontractor because the architect is going to naturally disfavor scope of work changes or changes of work associated with its plans and specifications.  This will benefit the general contractor as a rejection of a scope of work change will support the denial of a change order.  With that said, I am generally not in favor of the finality of such a decision from an architect, particularly when addressing the scope of work dispute may warrant a detailed analysis of the governing subcontract. Also, the court in this case seemed to dismiss such language because the general contractor supported the subcontractor’s change.

Third, just because a general contractor supports a subcontractor’s change order request does not mean that it and its surety should automatically be bound by the change and finance the change.  Again, there was little discussion as to language in the subcontract and it does not appear the surety tried to make an argument under the pay-when-paid clause. While such defense is generally not applicable to payment bond sureties, the (creative) argument could be different when dealing with a change order to preclude the effect of a surety and general contractor being on the hook for every change order submitted to the owner that the owner rejects.

And, fourth, this opinion does not address how the general contractor handled or pursued this with the owner.  That is important because if the general contractor agreed and supported the change, there should have been an effort to collect this amount from the owner.  This leads to another important consideration.  In this scenario, the subcontract could include language that any claim the subcontractor initiates stemming from a dispute involving the owner should be stayed pending the resolution of the dispute with the owner.  On the other hand, if the general contractor elects not to pursue the dispute with the owner but recognized the change, then it having to pay for the change makes sense based on the business decision it made.

What are your thoughts?

 

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

CONSTRUCTIVE CHANGE DIRECTIVES / DIRECTED CHANGES

shutterstock_716540956Prime contracts typically contain a constructive change directive clause.   A constructive change directive also goes by the acronym CCD (and for purposes of this article, such changes will be referred to as a CCD), however it can also be known as a Work Change Directive, Interim Directed Change, or Directed Change, depending on the type of contract beign utilized.   An owner can order a CCD, versus issuing the contractor a formalized change order, as a mechanism to direct the prime contractor to perform work if there is a dispute as to contract amount, time, or scope.  Just because an owner issues a CCD does not mean the owner is conceding that it owes the contractor a change order.  Rather, the owner is ordering the CCD as a mechanism to keep the project moving forward notwithstanding a disagreement with the contractor as to the price or time impact.  Standard form construction agreements such as the AIA, EJCDC, or ConsensusDocs, will have a standard provision dealing with change directives where the owner can order the contractor to proceed with work in the absence of a change order.  In the federal government context, most construction contracts will contain a changes clause that authorizes the government to formally direct changes; and, there is authority for contractors to equitably pursue a constructive change based on certain directives or instructions issued by the government.  Naturally, from the contractor’s perspective, this CCD provision is an important consideration as it could likely require the contractor to finance a change to the owner’s project, particularly if there is a scope dispute where the owner does not believe the contractor is entitled to any change order.  

 

An example in the federal government context can be found in the Armed Services Board of Contract Appeal’s decision in Appeal Of – Buck Town Contractors & Co., ASBCA No. 60939, 2018 WL 679564 (2018), dealing with the reconstruction of a hurricane protection levee.  The prime contract required the contractor to place a layer of geotextile material at the base of the levee.  The specifications required the material placed such that all seams and overlaps were installed perpendicular to the centerline of the levee.  The contractor’s subcontractor, however, placed the geotextile material such that overlaps ran parallel (not perpendicular) to the centerline of the levee.   The government objected to the method of the contractor’s placement of the geotextile material and directed the contractor to remedy the incorrect method (i.e., redo the incorrect work).   The contractor interpreted this instruction or directive as a constructive change directive and submitted a Request for Equitable Adjustment (REA) associated with the directive claiming that it installed the geotextile material based on the interpretation of other provisions in the specifications.  The government denied the REA and the contractor followed-up with a formal claim, which was also denied.

 

The Armed Services Board of Contract Appeals ultimately held that the prime contractor was not being directed to perform additional work, or work contrary to the contract.  The Board found that the contract required the contractor to place the geotextile material so that all seams and overlaps were perpendicular to the centerline of the levee, which necessarily prohibits the contractor from placing seams and overlaps parallel to the centerline.   As a result, the directive for the contractor to redo work was not a constructive change that authorized the contractor to additional compensation.

 

As mentioned above, the CCD provision is a valuable provision for owners in prime contracts to keep the project moving forward.  Contractors need to consider this clause in conjunction with instructions and directives received from the owner during the course of construction that authorizes the contractor to perform claimed additional work as such work can have both a cost and time impact.   If the requirements of the contract are changed and the contractor is directed to proceed with additional work, it is important that the contractor consider the directive in accordance with the provisions of its contract and preserve its rights and notify the owner accordingly. 

 

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

 

 

EXAMPLES OF (RISK SHIFTING & ACCEPTING) PROVISIONS IN A SUBCONTRACT

imagesIn reading articles posted in this blog, I hope it is impressed upon you to understand the risks you are accepting in your contract and what to do if you encounter a risk, as well as those risks you are flowing down or allocating to your subcontractors.   Construction is inherently risky so you want to know what to do when you encounter certain situations or occurrences, and in certain circumstances, you want to factor the costs associated with certain accepted risks in your contract amount. 

 

When it comes to subcontracts, there are provisions that contractors want to include in their subcontracts that subcontractors need to note:

 

  1. The schedule – the contractor will want to include provisions that any baseline schedule is not written in stone and that it has the discretion to resequence the progress of the work.  This is an understood event since the contractor is responsible for managing the work so subcontractors should account for this contingency.
  2. No damage for delay – the contractor will want to include a no-damage-for-delay provision that provides it is not responsible for any delay-related damages and that the subcontractor’s only recourse for a delay will be an extension of time.  The provision may also state that the contractor’s liability for any delay will be limited by the amount it receives by the owner associated with the delay.
  3. Change orders – There will be a change order issue at some point.  The subcontractor needs to understand the change order procedure so proper notice is given regarding the change order work before proceeding with that work.  And, if the subcontractor is directed to proceed with work (through a change order directive) or there is a dispute as to the amount or time associated with the change, the subcontractor needs to understand that it needs to track and itemize its costs associated with the change.
  4. Claims – If a subcontractor is delayed / impacted or there is an event triggering change order work, as mentioned above, the subcontractor needs to submit timely notice of the event or occurrence.  Otherwise, there may be an argument that this event or occurrence is waived.  The contractor will argue that the notice provision is important so that it can ensure it timely submits notice to the owner pursuant to the prime contract and a subcontractor’s failure to comply with the notice provision prejudiced the contractor.

 

Provided below is an example of contractual provisions that fit within the above four categories.  These provisions may be analogous to provisions in the subcontract you are working under or, if you are a general contractor, may be provisions you want to consider including in your subcontract.  Remember, the objective is to know those risks you are accepting, those risks to flow down or allocate to the subcontractor, and, importantly, what to do if you encounter a risk!!

 

Also, please share any examples of contractual provisions that you have come across that fit within these categories. The more examples the merrier when it comes to understanding the types of risks that are frequently dealt with and allocated between a contractor and subcontractor.

 

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Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.