Steps contractors can take to improve collections on change orders
Business Development Specialist
There is no law stating that there has to be change orders. Unless it specifically allows the owner to make changes, all construction contracts are changeless contracts. If a contract states, “I will pay you $X to do Y scope of work, the contractor can't be forced to do any more or be entitled to do any less work than Y. Also, the owner can't be forced to pay more or be entitled to pay less than $X. If a general contractor does not make a similar agreement with a subcontractor, the subcontractor can't be forced to agree to a change either. Without a changes clause, there can only be a change if both sides agree. This gives the contractor leverage - the contractor could refuse to make the change unless he or she was paid what was demanded. However, most construction contracts do have change clauses. Contractors don't want to do work that they won't be promptly paid for. Here are some steps contractors can take to improve collections on change orders.
- Give notice that you consider something to be a change - Read your contract. It probably requires that you notify your customer or Prime Contractor if you think that something is a change — even a no-cost change. If you don't give this notice, you may never be able to collect a dime. Often, if the owner understands that something is extra and how much more money and time it will take, he will change his mind about the change entirely.
- Demand a written order to do the change - There is often pressure on the contractor to “just do it” with the assurance that “it will be worked out later.” Who wants to tell a customer that you need it in writing from his boss? Yet, that's what the contract probably says — and you can expect that most courts and arbitrators will enforce this clause. So, make them follow the contract if you want to get paid. If you are a DBE and a subcontractor make sure that your foreman, superintend at the field have some blank forms for change orders (see above samples), so if Prime Contractor says to do some extra work, just have the Prime Superintend sign authorizing extra work, which is not part of your scope of work. Based on my experience as contractor and talking with current DBE subcontractor this is a major issue right now not getting paid because they trusted the Prime Contract.
- Negotiate contract terms for prompt payment for changes - Contractors are not bankers, but they can end up financing a lot of extra work. It is now common for clauses to provide that only the disputed portion of a change can be held back. Also, the owner is usually required to front half the estimated cost of the extra work until it can be finalized even as to the disputed part. Such provisions help to level the playing field between owners and contractors.
- Negotiate contract terms to verify the customer has money to pay for the change - While most owners borrow enough to cover their contract cost, they may not have borrowed enough to cover extras. A contract term that allows a contractor to ask for confirmation from the lender that there are sufficient funds to cover the extra work is no longer unusual. These days, banks are more likely than ever to insist that they know about changes and approve them to protect their investments.
- Take time extensions into account - Contractors who do not think to ask for time extensions as part of changes could end up paying liquidated damages that they don't owe. Extra time also frequently generates additional field overhead, including temporary utilities, storage trailers, insurance, etc.
- Consult with all trades about the impact of a change - Just because the change is to reroute ductwork doesn't mean that an electrician, plumber, fire sprinkler or other subcontractor won't also be affected.
- Reserve lien rights for unresolved changes - Many lien waivers are drafted to give up lien rights for all work as of a certain date. If work has been done on changes, but not yet paid for, signing such a lien waiver could be giving up rights. Make sure that you tailor the lien waiver form to accurately reflect what should or shouldn't be covered.