Demonstrating Entitlement For Contract Change Orders And Claims

1. INTRODUCTION

Based on research and nearly 40 years of experience in the engineering and construction industries, this author has found that one of the most common causes of disputes between owners and contractors is failure by the claimant, typically the contractor, to adequately demonstrate entitlement to additional costs and project time resulting from scope changes and other causes. The common vehicles used to identify and demonstrate these entitlements are change order requests and, if necessary, claims.

This article discusses the elements of a contract change that should be established to successfully demonstrate entitlement to a change order or claim. It is written not by a legal scholar but from the viewpoint of an experienced construction practitioner who has held several construction management roles on construction projects and has researched, analyzed, and testified a multitude of times on disputed construction management, delay, and cost-related topics.

The purpose of this article is to help contractors and owners better understand the hurdles that must be overcome to increase the likelihood of attaining a mutual agreement on contract changes that are experienced during any phase (engineering, procurement, or construction) of a project. To reach an agreement on the terms of a change order,¹ it is paramount that the contractor convincingly demonstrate to the owner with reason its entitlement to a requested change. These demonstrations of entitlement apply regardless of the contract delivery methodology implemented.

It is important for all parties to a contract to understand the contract provisions, as well as laws, regulations, and standards that govern the contract. It is also recommended that an attorney be consulted to review the change management process of a contract including the terms defining the claimant’s responsibilities necessary to demonstrate entitlement to requested change orders or claims.

2. CHANGE ORDERS, CHANGE ORDER REQUESTS, AND CLAIMS

In the context of an engineering and construction project, change is defined as an “alteration or variation to a scope of work and/or the schedule for completing the work.”² However, changes can include more than alterations or variations to work scope. Changes can also include revisions to contract terms, sequences of work, work conditions, and other administrative revisions. A change may be directed by the client or discovered to be necessary due to facts and circumstances that are identified during the project.

Typically, construction contracts contain provisions that address changes to contract terms. The contract terms most often affected during project execution are scope of work, budget, and timeline. Usually, one of these factors cannot be impacted without impacting one or both of the others.

The contract tool used to document a legal change to a contract is commonly known in the construction industry as a change order. According to AACE International, a change order is defined as:

A document requesting and/or authorizing a scope and/or baseline change or correction. 1) From the owner’s perspective, it is an agreement between the project team and higher authority approving a change in the project control baseline. 2) From a contractor’s perspective, it is an agreement between the owner and the contractor to compensate for a change in scope or other conditions of a contract. It must be approved by both the client and the contractor before it becomes a legal change to the contract.³

A change order signed by all parties to a contract change typically signifies that both parties agree to the terms of the change, including, but not limited to, scope, budget, and timeline (schedule) revisions. A caveat to this statement occurs when one or both parties sign the change order document but add wording noting an exception or reservation of certain rights. When this occurs, both parties should consult their legal counsel.

The process of attaining an acceptable change order typically begins when the contractor submits: 1) notice documentation to the owner indicating that it has identified a changed condition (scope or issue affecting project cost or schedule), whether directed by the owner or not, and thereafter, 2) a document containing the information necessary to demonstrate entitlement to the added costs and/or project timeline. The contractor’s need to provide notification to the owner is discussed later in this article. The latter documentation, often known as a change order request (COR), is defined as:

A proposal from a claimant concerning a requested change to the contract’s compensation amount or payment terms, time of completion, product or performance specification, or other terms within the contract.⁴

The COR is the most important element of the change order process, as it should demonstrate entitlement to the resulting costs and project delay related to the change. If the owner disputes any element that the contractor identifies in the COR, the contractor can either negotiate with the owner towards a mutually acceptable change order or submit its requested contract change as a claim. The elements necessary to demonstrate entitlement for a contract change remain the same if the COR escalates to a claim. A claim is generally defined as:

A demand or assertion of rights by one party against another for damages sustained under the terms of a legally binding contract. Damages might include money, time, or other compensation to make the claimant whole.⁵

Typically, once a disputed COR has been submitted as a claim, the resolution process rises to higher levels within both parties’ organizations and the parties may enter into the dispute resolution process established in the contract.

3. THE ELEMENTS NECESSARY TO DEMONSTRATE ENTITLEMENT

Prior to signing a contract, it is highly recommended that the owner and contractor meet and review the terms (with their counsel) to ensure there is mutual understanding of the terms, including the change management process. The intent of this meeting should be to eliminate any miscommunications or misunderstandings during project execution.

It is recommended that the elements that should be demonstrated in a contract COR, and the extent to which they should be described, be agreed upon before the contract is signed and work commences. Experience has shown that one cannot go into projects assuming a perfect world whereby the owner and contractor have equal understandings in this regard. Because the potential stakes associated with disputed changes can be significant, many disputes can be avoided with this common understanding established well before the project begins. To deal effectively with the changes that might arise on a project, the project participants should have established a common understanding of what elements must be included in a contract COR and the expected level of detail in defining each. A facilitated alignment session at the start of the project is a good way to bring such expectations into common agreement.⁶

The burden of demonstrating entitlement to a change usually falls on the party that is making the associated claim. A contractor and owner should typically consider the following seven elements when a claim for entitlement to a revised budget or schedule is submitted:

1. Causal event occurrence;
2. Adherence to contract change notice requirements;
3. Contractual entitlement to request a contract change or make a claim;
4. Causation;
5. Prudent effort to mitigate any impacts;
6. Assignment of responsibility; and
7. Quantification of impacts.

AACE Recommended Practice 120R-21, “Demonstrating Entitlement for Contract Change Orders or Claims – As Applied in Engineering, Procurement, and Construction,” describes these elements.⁷

The Recommended Practice also describes and discusses below each element necessary to demonstrate entitlement to a change:

1. Causal Event Occurrence

It may seem hard to believe that there is a need to prove that a change event has occurred, but disputes have centered around this question. If an event, unanticipated by the contractor, adversely impacts its budget or schedule during project execution, the contractor must demonstrate that the event occurred. This demonstration must take place before any other facets of the change order request should proceed.

It might seem obvious that an owner-directed change is a clear cause for a change, but this is not always a mutually accepted truth. For example, many disputes occur because what the contractor considers to be a clear scope change directed by the owner that impacts its budget and/or schedule is considered by the owner to be an insignificant scope or design “clarification” that should not impact the contractor.

A simple and common example of a contractor’s need to demonstrate that an event occurred relates to impacts associated with adverse weather conditions. Based on the project site location, the contract might specify what type of weather the contractor should anticipate at any point during the project timeline including the frequency, intensity, and the weather data sources. Such a weather specification should cause the contractor to build contingencies into its budget and schedule to address anticipated weather events. However, during execution of the project, the contractor may experience an adverse weather event more severe than what the contract contemplated or local weather records indicate is typical. In this case, the contractor should document and submit to the owner a narrative concerning the weather event and its severity compared to what was anticipated prior to the start of any further entitlement discussions.

To demonstrate a weather-related impact, the contractor would typically have to support its claim using local weather records to demonstrate that the change was beyond what either party anticipated. If the contractor does not use weather records, the risk of a dispute over the severity and impact of the weather event is likely to increase significantly.

2. Adherence to Contractual Change Notice Requirements

Typically, construction contracts require that once a contractor has identified a potential changed condition, it has a specified number of days to provide notice to the owner that the changed condition may result in a change order request. Among the reasons for submitting timely notification are the following:⁸

• Provides the owner a chance to examine the actual conditions on-site or investigate the issues under examination at the time of their occurrence;


• Gives the owner a better chance to mitigate the potential adverse effects of the issues under examination (e.g., delay-causing events, adverse conditions, previously unknown site conditions, or changes to the scope);


• Provides the owner with an opportunity to explore more reasonable and/or less costly options, and possibly change its work plan by:


• Modifying the design to avoid or otherwise better manage pertinent risks;


• Requesting the contractor to provide a proposal or change order request to execute the changed work;


• Identifying changes such as change in the contractor’s means and methods or to exclude certain work elements from the contractor’s scope of work; and


• Provides the owner with an opportunity to adjust its budget and pursue additional funding opportunities as needed.

There may be continuing notice obligations to keep the client updated if the change event occurs over a significant length of time. For example, with respect to notices of delay, sometimes it takes months for a delay event to run its full course and the contractor to acquire the necessary data to support its claim. In this case, contracts may require that the contractor submit monthly or more frequent updates to the owner that inform on the status of the delay event.

3. Entitlement to Request a Change

This element relates to the contractor’s contractual right to request a change to the contract. Sometimes contracts specify what types of changes a contractor can or cannot request. For example, some contracts specify that the contractor cannot seek delay-related costs even if the owner agrees that it was responsible for a delay.

Using the adverse weather example again, construction contracts often indicate that the contractor should be familiar with the project site climate conditions at all times of the year with respect to potential impacts to the project schedule and other costs. This type of statement indicates that the contractor cannot request an adjustment resulting from a climatic event that it should have anticipated as a possible occurrence based on historical weather records.

The contractor should seek legal counsel regarding this element to ensure a full understanding of what changes can and cannot be requested.

4. Demonstration of Causation

In general, demonstrating causation means demonstrating there was a cause-and-effect relationship between a change event and the resulting impact. Successfully establishing a causal link should be straightforward if the contractor has maintained complete, accurate records that are appropriate to the project size and complexity.

However, several construction industry studies indicate that demonstrating a cause-and- effect relationship between an event and its impact to a contractor’s budget or schedule is the single most difficult element for a contractor to demonstrate. There are two primary reasons for this difficulty. The first is that contractors typically do not understand the importance of demonstrating causation and, therefore, do not spend enough effort on it or keep adequate, accurate records to support it; and second, determining whether a contractor has successfully demonstrated a causal relationship can be contentious because it can come from two subjective and opposing perspectives. If the parties are significantly misaligned on whether causation has been demonstrated, a judge or arbitrator may need to decide.

AACE International has identified the most common root causes that lead to change order requests on construction projects. They are as follows:⁹

• Design Modifications – These involve revisions to the contract drawings and specifications on a project, and they are usually initiated by the owner, the owner’s representative or the owner’s engineer. It should be noted that if the owner initiates a revision to any aspect of the design before it has been completed, the designer may be entitled to additional costs and/or a time extension. This point is especially important on a project that is delivered using the design/build methodology, also known as EPC, because in addition to the impacts that may affect the designer’s ability to complete on time and under budget, the design modifications may also affect procurement, construction costs and schedule depending on what point in time of the project the change occurred.


• Errors and Omissions – These address the items that are determined to be defective or missing in the contract set of drawings and specifications. Several studies reveal that on construction projects that use the traditional design-bid- build delivery process, design errors and omissions generally account for the primary cause of change orders.¹⁰


• Changes to Means and Methods – These occur when the owner or outside agencies impact the contractor’s planned means and/or methods for executing the work. . .

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Long International provides expert claims analysis, dispute resolution, and project management services to the Process Plant Engineering and Construction industry worldwide. Our primary focus is on petroleum refining, petrochemical, chemical, oil and gas production, mining/mineral processing, power, cogeneration, and other process plant and industrial projects. We also have extensive experience in hospital, commercial and industrial building, pipeline, wastewater, highway and transit, heavy civil, microchip manufacturing, and airport projects.

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