Rancho Mesa’s Surety Relationship Executive Anne Wright and Pam Scholefield of Scholefield Law in San Diego, discuss what affects subcontractors and prime contractors when changes occur in their contract.
Anne Wright: Welcome to Studio One. This is Anne Wright, surety executive here with Rancho Mesa Insurance. And I have again as my guest Pam Schofield. We met a couple months ago and talked about prime contract provisions and how they affect or impact subcontractors and what to look for. Very well received. So now we thought we'd try our hand at talking about change orders. We are going to talk about a few things that affect the subcontractors and prime contractors.
When it comes to changes in the contract, what you need to know, what you should look for and how you can potentially negotiate those within those contracts. So a few contracts will run from start to finish without change orders for different reasons. It could be poor plans, designs, scheduling, et cetera.
So Pam, let's remind the audience just a little bit about your background and then we'll get started.
Pam Schofield: Okay, thanks, Anne. I appreciate you letting me come back.
I started my career many decades ago as an engineer for General Electric Power Distribution and Controls Division, and at that point in time, that's when I started working with contractors in the industry. And then I ended up going to law school, and naturally I started representing contractors and subcontractors in the industry I already knew.
I had a little different perspective, but was able to develop my practice based on the skills and contacts I had from when I worked, was in the trenches with them. So I enjoy this industry, this is a great industry, and that's why I'm still here.
Now I help subcontractors and contractors, obviously with a lot of contract issues. So I'm happy to be here to share any bits of knowledge that I can.
AW: Well, you're uniquely qualified to do that, so we certainly appreciate it.
When talking about change orders, there's kind of a start to finish process with that whole thing. Again, if you enter a contract thinking there's not gonna be changes, you've probably had some different experiences than the majority of contractors out there.
So in the world of disputes, which will likely occur again for these various reasons, can we talk a little bit about how you can avoid them and what you should look for that are the key points in documenting your file and working to make sure that your change orders are recognized and ultimately approved?
PS: Sure. So you're right. If you believe that you will not have changes in a job, you either are very, very new or have had an unusual experience as a contractor. And I'm glad you talked about the contract itself because that is the most important place to look. Every contract, every subcontract has a process that you have to follow as the contractor or the sub in order to present any changes that you want. And in a change order or reason for a contractor to seek extra time or extra money is anything, honestly.
Some contracts have a list of what would trigger the contractor's responsibility to tell its customer. So when I say its customer, when a contractor tells the owner or the sub tells the contractor, the important thing there is that they want to know as soon as possible if something happened to cause more money or more time to your work. And that's the whole point, what we call the notice provisions.
And so anything I tell people, whether it's listed in your contract or not, that would cause you more time or more money, that is when to give your customer notice that, "Hey, this is happening. You've asked for a change. I've run into something unexpectedly. There's another trade in my way. The job site is not ready for my work or the owner came and asked me to do this. So let me talk about that.
Contractors should not do changed work or extra work or different work or any way you want to describe it just by a verbal request by an owner or even their own contractor. If you're a sub, you don't do anything orally. When the project's going along fine, you might get in a situation where people get casual as they get through changes, and they're paying change or all that, when it's something that's more controversial, like a big money, a delay to the project, or there's a dispute as to whether or not whatever's happening is really extra work for the contractor or sub. That's when people dig into the contract and they say, did you or did you not, as the contractor asking for extra money, follow the process in the contract.
So what I tell my clients, and when I give my own seminars, is that before you start the work, you need to know what that process is. And the reason is, is because many contracts will say, hey, you've got two days, 48 hours from whatever that event is that's causing extra money or delaying you to let us know about it. And that's a very, very short deadline, especially in the heat of construction.
And as a subcontractor, you may have deadlines in there, but because we talked last time about how the subcontract incorporates the prime contract terms and conditions, you still need to know what the prime contract requires because you don't want to cause your general contractor to miss those deadlines.
So again anything that would cause extra money or extra time is a situation where you want to start that process.
AW: And is it typical that the contract will indicate whom you need to communicate with?
PS: Often it does, not all the time. And that's very, very important because sometimes a contract will say that it has to be a vice president level or above. And as the subcontractor, you're like, well, that very rarely happens. We don't communicate at that level. It's usually the project manager or the project engineer that you talk these things through.
It's very important on a public project. So I'm really glad you brought that up because public projects often say, tell you who can authorize. And being a public entity, it's extremely important that you only do extra work when it's been authorized by the right person, because that deals with public money, obviously. And so you don't want to just go scurrying along and doing extra work, because somebody said, oh, sure, do this, or I'll sign off on it, because they may not have the actual authority to let you do that work.
So that is a very important part. Again, if it's not listed somewhere then probably a project manager but a lot of contracts these days do say who has the authority. And you need to know that out of the gate.
AW: Right, yes. Again, it's all about setting up your job file, having your checklist, making sure everybody involved with processing the work knows what those procedures are and this is important.
PS: It is very important, especially on the bigger ones.
AW: And to your point about, you know, the timelines in which you need to submit them, I have seen and or heard stories in my career about contractors, generals or subs that, you know, don't want to rock the boat, right? So they're just going to keep doing what they're doing. And like you said, sometimes it's very casual and they feel like it's a great relationship and they're moving along with the job and they'll just submit the change orders at the end of the job.
PS: Right.
AW: And especially if you're a public owner, you've got a contingency that only gives you so much money.
PS: Yeah.
AW: So you could run out of money if you wait until the end of the job, never the best practice.
PS: Right. And that's one of those, you know, no good deed goes unpunished because if you're going to wait until the end of the project, you likely will not get those paid. And that usually starts happening when the project people start talking about these changes or, things happening on the job site at project meetings. Or, they document it in a request for information and a response comes back and the contractor says, “Okay, well the engineer says that this is how to fix it. Okay, I'll go ahead and do it that way.” But if it costs extra money or time and they don't document it before they do the work or they don't get permission and writing, before they do the work, at the end of the project you're not going to. You're right because there might be a contingency for certain amounts. You may have to go to another level of authorization within the company that you're dealing with or the municipality without realizing it. And you definitely don't want to wait until the end of the project.
One of the other practical reasons, financial reasons, you don't want to wait until the end of the project as a subcontractor or as a contractor, is because you financed it. You had to pay your people. You had to pay the materials. Do you really want to drag a $150,000-$200,000 change order along to the end of the project for many, many months? I mean, you should try to get your money back as soon as you can.
And you do have to stay on top of it. And you're right. They want to be good team players. They want to be friends with the contractor, like the sub to the general.
AW: They don't want to risk not getting that next job.
PS: Exactly. They don't want to risk not getting that next job. And that is used as a carrot many, many times, like can you cut the change order in half or something. But the reality is, and as long as let's say you're a subcontractor and you're concerned because you've not done work with that general before and you finally got in the door, right? And you don't want to rock the boat. But the reality is, is that you can do the proper paperwork and document it in a very professional way. Even if you just think something's going to cost you more money. You need to start documenting it and giving that notice.
You'll call the person up to say, "Hey, this happened. I'm not sure how much it's going to do, but I'm going to be sending you an email.” or whatever the proper way is that you're communicating, “I'm just giving you heads up. I'm going to send you an email because I want to let you know this is happening. I don't know if it's going to cost me any money, but let's just document it." And if you do it that way, it tends to, again, strengthen that relationship because you're having more conversations in general.
And you're giving them a heads up. You're being very professional about it. So that's helpful. And a lot of times a subcontractor or contractor gets in the situation where a bunch of little things start happening. Like maybe an owner's rep or a construction manager has the tendency to waltz around the job site and chat with the people out there and you know the workers want to be friendlies but maybe they chat for 10 minutes maybe it happens two three times a week and there's five of your people every time it happens. That starts to add up you know, and then a month goes by you're like wow why is my labor, why are we not done with these tasks yet?
And so again giving warning that hey you know, “while we appreciate the interest of the owner's rep, I just want to let you know it is disruptive you know. How do you want us to handle this?” like if you're a subcontractor. And then start documenting it per what the contract says you have to document.
AW: Again, critical.
PS: It is critical, right?
AW: So some change orders are going to be, again, those that are presented timely and appropriately, you know, a lot of change orders just kind of happen and they get paid and everybody's fine and happy, but a lot of times they're disputed.
So what's the best practice for when it's time to dispute a change order? When would they bring in legal counsel or what do they need to know?
PS: It definitely depends on the situation and the value. Some contracts actually have a separate change order process versus claims process. And that's where it gets a little tricky.
You may have a prime contract that just calls everything a claim. And so you go immediately to their claim process, even though you've not even submitted the first request for a change.
Other contracts have a very detailed process that you have a certain amount of time to do a request for a change order, a C-O-R, or a request for equitable adjustment, whatever it calls it. And so you really do need to look at that process. But I'm advocating and it's unusual, but if you have change orders that are worse than money, you don't have to wait to the end of the project like we're talking about. You would start following the process and then eventually, if it's not getting paid, you go, okay, what's the dispute resolution process? Do we go to mediation first? Do we have to get an arbitrator? And that's going to be up to the person so long as you've followed the steps to initiate that final way to solve that dispute.
If you're in a public arena, it's usually in the public arena, there's often time frames, like okay, if the engineer of record does not respond in 30 days, assume they rejected it. So now you have to do the next step, and that catches people off guard too, because they'll submit it and don't hear from it for months, but they don't follow it.
And so I'm an advocate of early resolution. Because if you don't, the parties start being, like they feel like they're not being treated fairly.
AW: Yeah, tense.
PS: It gets tense, yeah. And then, I mean, if it requires upper management to get involved, get them involved.
And again, you can warn the project manager you're dealing with saying, "You know, we're going to go to the next step. I don't want to, but it's been out there too long. We're financing this thing. I'm just giving you the heads up. You know, we're going to take the next step because we're following your contract and this is what I have to do.”
AW: Well, he who speaks last loses.
PS: That's true.
AW: Got to let him know what's going on.
PS: And when a contractor follows the contract step by step, it demonstrates that A, you know what the contract says and B, it really looks like you have your act put together. It's a more believable change request. So whoever you're giving the change request to or the change order request to, they're thinking to themselves, wow, this person has gained some credibility. And the more credibility you can gain when you're looking for money and extra money the better off you are.
AW: Right. It helps that owner or general contractor’s rep, too, process what the channel they've got to go through.
PS: True
AW: If you got everything documented and organized and you know.
PS: And sometimes that's the bottleneck. It's the person who you submitted yours to. Because when you're a sub, especially in a chain, let's say a design change comes down the road and they've made changes and it might affect several trades, so you feel that your part was pretty straightforward and you get frustrated, “why hasn't the general contractor submitted my change yet?”. Well they're putting all the trades together and putting in a big change order and so that's why it's important to follow that process.
AW: And communicate.
PS: Communicate, absolutely that's the number one thing so.
AW: Well to sort of recap and go back to the beginning, it's know your contract, right, set up the job file, have everything documented, and follow procedures.
PS: Exactly. Sounds easy, but it's not that easy during the heat of the moment.
AW: I'm glad I don't have to do it.
PS: Exactly.
AW: I have a lot of respect for our clients that deal with this every day.
PS: Oh, absolutely.
AW: Okay. Well, thanks again for joining us. And if anyone has any questions beyond this, I can be reached at awright@ranchomesa.com or call me at (619)486-6570. And Pam, your contact info?
PS: Yes, my email is pam@construction-laws.com. The easiest way to get ahold of me honestly these days is probably my cellphone. We do still have office phones, but my direct line is (619)818-6240.
AW: Well Thank you for sharing that.
PS: Well, thanks for having me. Have a good day.
AW: Until next time.
Alyssa Burley: This is Alyssa Burley with Rancho Mesa. Thanks for tuning in to our latest episode produced by Studio One. For more information, visit us at RanchoMesa.com and subscribe to our weekly newsletter.