Change orders are integral parts of construction projects because they represent modifications or amendments to the original scope, terms, or conditions of the contract. They often result from design changes, unforeseen site conditions, project scheduling shifts, and client requests. The legal and contractual aspects of change orders are critical to the negotiation process, as they set the parameters and define the remedies for each party involved. On top of all of the other alterations that change orders can bring, you need to project your business and ensure that you're legally protected. This article will explore the contractual provisions of change orders, discuss dispute resolution mechanisms, and recommend best practices for negotiating and addressing change orders.
While the specifics of contractual provisions for change orders may vary from contract to contract, certain key elements should typically be included. Some of these essential elements are:
Definition: The contract should provide a clear definition of a change order, specifying the types of changes that would require a change order and the process by which the changes will be implemented. It should detail how requests for change orders will be submitted and indicate whether they need to be in writing to be effective.
Authority: Determine and specify the individuals or entities that have authority to request and approve change orders. This should include a process for delegating or assigning authority if needed.
Pricing: The contract should provide specific guidelines, clear formulas, or any substantial benchmarks for determining the pricing changes associated with the change order. This can include the cost of labor, materials, and any consequential expenses arising from the change order.
Schedule: Contracts must address the impact on the project schedule through an estimated completion date or the number of days the project is extended. The implications of a change order on other parts of the project or timelines should also be considered.
Documentation: Maintain an organized record of all change order requests, approvals, and implementation steps throughout the project. This documentation will come in handy during any future disputes, audits, or project evaluations.
Several mechanisms can be employed for resolving disputes related to change orders:
Negotiation: Parties may first attempt to reach a resolution by negotiating directly. This method emphasizes open communication and a practical solution that meets the needs and expectations of all parties.
Mediation: A neutral third-party mediator is brought in to assist the parties in reaching a mutually satisfactory resolution. The mediator does not make decisions but guides the dialogue, ensuring that each party’s concerns are heard and addressed.
Arbitration: In the case of arbitration, a neutral third party called an arbitrator makes a binding determination after hearing both parties’ arguments and reviewing evidence. The contract should specify the parameters and processes of the arbitration, including whether it will be binding or non-binding.
Litigation: As a last resort, the parties may resort to litigation in a court of law to resolve the dispute. This is usually the most expensive and time-consuming option and should be avoided whenever possible.
To minimize potential problems and ensure change orders are appropriately managed, several best practices can be employed:
Communication: Maintain open and consistent channels of communication throughout the project to enable easy identification of potential changes. Effective communication among team members, stakeholders, and the client is crucial in managing scope changes.
Flexibility: Be prepared to adapt to changes in the project, as flexibility is vital in the construction industry. However, balance the need for flexibility with the maintenance of contractual integrity.
Monitoring and Tracking: Regularly monitor and track project progress, comparing it with the original scope and timelines. Keep an eye on potential areas where change orders could be necessary.
Documentation: Maintain thorough records of all communications, decisions, and change order agreements. This documentation will be invaluable during potential disputes, as well as providing a historical reference for future projects. ConGenius can help you keep a record of these alterations and change orders, as well as include some legal and contractual language to cover your business.
Risk Management: Develop and implement a robust risk management strategy to identify potential risks related to scope changes and other contract modifications. Take preemptive measures to minimize the impact of these risks on the project.
In summary, understanding and addressing the legal and contractual aspects of change orders is vital for successfully negotiating and managing changes in construction projects. With the right contract provisions, dispute resolution mechanisms, and negotiation best practices, all parties can navigate change orders effectively and maintain strong relationships throughout the project life cycle.