Deletion Change Orders

Nothing I’ve seen causes contractors more legal headaches than change orders. If you’ve dipped into the pages of this blog over the last ten years, you’ve seen how changes in the work can spoil nearly any job. A New York case decided last month illustrates the point. Here’s what happened.

Lanmark Group, a New York prime contractor, won the bid to do nearly $15 million in improvements to the Vince Lombardi School in Brooklyn. Lanmark awarded the masonry part of the job to Graciano Corp. at a subcontract price of $5,320,000.

It didn’t go well.

Once work started, Lanmark and Graciano fell into bickering – mostly about delays. Graciano blamed Lanmark and demanded $500,000 more for extra shifts and supervision needed to stay on schedule. Lanmark didn’t agree. With the masonry about 30% done, Lanmark gave up on Graciano, issuing a change order that deleted most of the remaining work. Lanmark hired another masonry sub to finish what Graciano hadn’t. Graciano sued, claiming wrongful deletion from the contract. By way of defense, Lanmark cited clear language in the agreement with Graciano:

"[A]t any time, in any quantity or amount, without notice to the sureties and without invalidating or abandoning the contract, [Lanmark] may add or delete, modify or alter the Work to be performed under this Agreement.”

And that’s what Lanmark did, cutting Graciano out of most of the remaining masonry work.

You Decide

What should the court do? A change order deleting 30% (or any percentage) of the job was Lanmark’s right under their agreement. And courts are loath to re-write contracts. When the words are clear, contracts get enforced as written. But consider this: If a prime contractor can throw any sub off the site by issuing a deletion change order, what’s the value of any subcontract?

I like the way the court decided Graciano Corp. v Lanmark Group. Deletion change orders are perfectly legitimate. But there are limits. In this case, Lanmark’s change order eliminated too much of the work. In the words of the court, Lanmark altered “the essential identity and main purpose of the subcontract.” Graciano’s bid was for a “complete masonry installation.” After deletion, Graciano was left with only crumbs. The court ruled that Graciano could proceed to prove their loss.

Notice that the Graciano case involved a deletion change order. Back in March of 2013, I wrote a blog post about change orders for additional work. In that case, a contractor working at a Colorado ski resort got stuck in a cost + 10% contract. The owner issued change orders for more and more work, many extra weeks, all to be billed at cost + 10%. The contractor wanted out of the deal. He was locked into working for wages at a time when good work was plentiful at better markups. The court in that Colorado case turned the contractor free, citing the “cardinal change” rule. Changes to a contract have to be within the general scope of the agreement and have to be relatively small. Large changes (or too many small changes) are considered a cardinal change and have to be the subject of a new contract.

I believe the cardinal change rule works well for both deductive and additive changes.

Now Watch This

A few minutes studying the contract could have saved Graciano a major headache. I hope you wouldn’t sign any contract that allowed the other side to make changes at will without negotiation. That’s elementary. And it’s just the beginning. There’s plenty more to know about staying out of trouble with change orders. It’s all at your fingertips with Construction Contract Writer. The trial version is free.

More Trouble for Tomi Akins

You may have heard the name Titilayo Akinyoyenu. "Tomi Akins,” as he’s known, is a Washington DC pharmacist facing federal charges of selling meds online to some 38,000 people without legitimate prescriptions. According to the US attorney, Tomi’s online sales netted $8.3 million. But the federal charges aren’t Tomi’s only problem. He got more bad news last week – in a dispute with his construction contractor. Here’s the story.

Back in 2011 Tomi signed a contract with Keswick Homes to build a $1,500,000 home on a one-acre lot in the Avenel neighborhood in Montgomery County, Maryland. The contract price was later increased by several written change orders. Before Tomi moved in, Keswick presented a bill for an additional $477,000 for site work -- engineering, soil testing, imported soil, a storm water-management system and 400 feet of 8’ to 16’ high retaining wall. Tomi refused to pay, claiming he never signed a change order for that work. Section § 10-505(3) of Maryland’s Custom Home Protection Act requires that new home contracts:

Expressly state that any and all changes that are to be made to the contract shall be recorded as "change orders" that specify the change in the work ordered and the effect of the change on the price of the house;

Keswick’s contract did that. But an addendum to the contract treated site work as an allowance. Keswick was to “manage, coordinate, and process payments to contractors upon completion of their work” and “submit accounting of all paid invoices at final draw with allowance to be adjusted to final cost at final change order.” In essence, the change order for site work was for an amount to be determined on completion. Did that comply with Maryland law?

The trial court ruled that it did. The jury awarded Keswick the full $477,000. Tomi appealed, contending a change order for work to be determined at price not stated was a violation of Maryland’s Custom Home Protection Act.

Last week the appellate court (2017 Md. App. LEXIS 233) agreed with Tomi. The change order for site work was void. But the appellate court didn't stop there. Under Maryland law, a void change order does not make the contract unenforceable absent proof that the owners were actually injured by the violation. In this case, Tomi didn’t prove an injury. “Consequently, the owners were not entitled to a judgment in their favor on the builder's claims. Instead, the court was entitled to submit the builder's claims to the jury, which found against the owners.”

So Keswick will collect the $477,000. The appellate court also reversed the trial court’s denial of attorney fees. Keswick is entitled to claim reimbursement for their $266,520 in attorney fees. As we said, it was a bad week for Tomi Akins.

So Can I Ignore Maryland Law on Change Orders?

Not recommended. Keswick won the case – but at a high price. Getting a signed change order is always easier than explaining why you didn’t get a signed order. 

But, you ask, “How can I quote a price on site work when I don’t know what’s needed?” That’s easy. And it works in all states that require a contract price in dollars and cents. Quote a Guaranteed Maximum Price (GMP) for the change order and then agree to split any savings with the owner. That’s essentially the same as a cost-plus contract but complies fully with state law. If you need help drafting a GPM contract, have a look at Construction Contract Writer. The trial version is free.

 

Get Paid for Surprises on the Job

When was the last time you had a pleasant surprise on a construction project – something that cost less than estimated or was easier than expected? It’s probably been a while. Most surprises are bad news – extra work and higher cost.

If you know a way to eliminate surprises, congratulations. You’ve got a rare gift. The rest of us have to deal with the unexpected. And that’s what I’m going to explain.

First, understand that construction companies are not insurance companies. Nothing in the law requires contractors to absorb the loss when there’s a surprise on the job. An example will make this clear.

Yesterday I took a question from a solar contractor. He bid a roof-top PV solar system for a church and got the job. So far, so good. Then came the surprise. On closer inspection, the existing roof was fragile mission tile -- pans and caps, not sturdy s-shaped Spanish tile. The salesman didn’t notice that when selling the job. After closer inspection, the contractor called the owner and explained the problem. Installing solar panels was going to break a lot of those fragile tile. The roof would probably leak. Better to re-roof the affected area with sturdy Spanish tile before installing the collector panels. The extra cost for re-roofing would be something north of $10,000.

Oops! The owner wouldn’t budge. He insisted that the contract was valid and enforceable as written. He was going to sue if work wasn’t done at the contract price.

What would you do? Re-roof and eat the $10,000? Install over mission tile and hope for the best? Walk away and let the lawyers slug it out?

I’m going to leave the answer to your best judgment. But I’m going to explain how to avoid losses and acrimony like this when there’s a surprise.

Differing Site Conditions

Just about every contract for public works construction includes a “differing site conditions” clause. If site conditions (such as the roof surface or substrate) aren’t as expected, the contractor gets a change order and an equitable adjustment in the contract price. A differing site conditions clause is considered a benefit to both the owner and the contractor. Contractors can bid based on what’s most likely, not the worst case. Government agencies get more competitive bids.

What’s good for public works projects is perfect for renovation, repair and improvement jobs. Expect surprises. Explain in your bid exactly what you expect on the job – in this case, installation over Spanish tile supported by a suitable substrate. Then be sure your contract has a differing site conditions clause. That settles it. No dispute. No lawyers needed. A satisfied customer.

A contract for renovation, repair or improvement work that doesn’t include a differing site conditions clause is an accident waiting to happen. Don’t get caught when there's a surprise. Construction Contract Writer has a good selection of differing site conditions clauses. Select the contract language that offers the best protection on your jobs. The trial version is free.

Change Orders: Get Paid for Extra Work

Has there ever been a construction project that didn’t require at least one change?

A contractor can go an entire career without seeing a job like that. And for good reason. Construction is too permanent and too expensive to resist making a change when the need is obvious. Take this as carved in granite: Changes are endemic to construction. That’s not going to change. Accept it. Welcome it! Changes should be a profit center for construction contractors. I’ll offer seven rules designed to make that happen.

Rule One: Every change requires an order.
This should be obvious. Don’t agree to any change without a written change order. Some states require it. Many construction contracts void oral agreements to make a change. Get it in writing.

Rule Two: Changes get done at your price.
On government and big commercial jobs, contracts often require that changes be done on a cost-plus basis –- usually cost plus a few percent. If you draft the contract, don’t let that happen. Make it clear in the agreement: Changes are your option, at your price and on your time schedule.

Rule Three: Surprises aren’t your problem.
When you discover something unexpected -- a defect in the plans, something about the site, an emergency, a mistake by the owner, etc. -- it’s not your responsibility. Contractors aren’t insurance companies. A surprise that requires extra work is a contract change and requires a change order. A good contract will identify types of surprises that constitute extra work. When a surprise happens, just point to the contract clause that covers the situation. Case closed. You win.

Rule Four: Changes required by law are extra work.
Contractors have to follow the building code. But any change in the job required to conform the work to existing or future laws, ordinances or regulations is extra work. Your contract should make that clear.

Rule Five: A dispute over extra work does not delay payment for other work.
Payments are due as scheduled for work not in dispute. That removes the incentive to haggle over extra work and simply makes sense.

Rule Six: Collect in full for extra work when that work is done.
Don’t wait until project close-out to collect for extra work. When extra work is 100% done, you’re entitled to 100% payment for that work. Put that in the contract.

Rule Seven: Attach a sample change order form to your contracts.
California already requires this in home improvement contracts. California Business and Professions Code § 7159(c)(5). Having a change order form handy simplifies and organizes making changes. It also puts the owner on notice: You’re going to charge extra for extra work. That helps head off problems.

If you’re using Construction Contract Writer, you’ll find all seven of these options offered in every contract-drafting interview. If you’re not using CCW, have a look at the free trial download.