AIA Construction Problems- Sample Situation- Change Orders

Contractor and Owner dispute over change orders.

Why does this happen?

1. Contractor bidding on preliminary drawings that have not been permitted and stamped by the city

2. Owner seeing the job in process making changes that he feels will better represent his needs.

3. City Inspectors make job site visits and evaluations that were not anticipated in the city approved drawings.

Solutions:

1. In the agreement between the Owner and Contractor clearly stipulate the price and the process for change orders.

2. Example:

   1. If the bid is pre-permitted drawings, include in the contract language that the bid will updated based on items no previously disclosed in the contract

   2. If the change order is required by the Owner, have a clear understanding of the overhead and contractors profit that will be added, the number of days for the Owner and Contractor to agree on the change order, and the process if agreement is not made. In addition, the contract should be clear as to how the contract goes forward if no agreement is made. Also, some changes are large enough that the lender should be involved.

   3. If the change order is required by the city inspector, have a clear advance agreement that the change order is automatically approved with a clear statement concerning the contractor’s profit and overhead.

   4. Once the change order is agreed, then incorporate it in the pay application. This keeps the total of project in line and provides the lender information as to how the loan proceeds are being used. It may also raise the requirements between the lender and owner concerning additional deposits by the owner.

   5. Things to avoid:

      1. Do not sign two agreements- one going to the bank and one between the Owner and Contractor. This among other things could be a fraud on the bank.

      2. Avoid the Contractor having to pay for furniture of the Owner to get the bid or hiring the Owner as consultant. These area possible kickback.

      3. Avoid using email or text to approve change orders. Document properly and timely to allows for the paperwork (Pay Applications) to represent the ongoing cost of the project and progression payments.