Introduction
During any construction project, unanticipated impacts and revisions to project scope, schedule and cost are almost inevitable. For example, access delays and disruptions arise, unusually severe weather conditions are encountered, owner design preferences evolve, supply chains are disrupted, hidden building conditions or unanticipated subsurface conditions may be identified and the list goes on. Given the wide number and variety of individuals, companies and end users that are involved in and affected by any construction project, revisions to project scope, schedule and criteria can seem almost inevitable, which is why the construction industry has a term for it: change management.
As any experienced construction professional will attest, pitfalls associated with change and change management come in many different shapes and sizes, whether you are the owner, the architect/engineer, the general contractor or a subcontractor. Given the high expectations and significant investments involved in any construction project, when disputes arise there is likely to be two or more sides to the story – any of which may be reasonable or at least understandable. For instance, a necessary but unexpected design modification can delay the entire project schedule or substantially alter a contractor’s planned scope of work, which may result in rework, resequencing or changes in materials. In these scenarios, project stakeholders must address practical challenges (e.g., contractors are obliged to change their staffing and equipment plans; an owner is surprised by and objects to cost or schedule impacts to its project) and be prepared for potential contractual or legal disputes (e.g., the parties are unable to agree to an equitable cost adjustment or revised completion date; a contractor places a lien against the project property in an effort to secure payment).
While the construction partners impacted by a project change event have different roles and responsibilities, this article is written from the perspective of a contractor (general contractor, subcontractor or supplier) seeking to avoid pitfalls and disputes when navigating change management scenarios on behalf of itself and its clients. When experienced contractors adhere to the guidelines below, the expectation is that all project stakeholders will benefit.
So, how do contractors go about safely navigating the world of change management while still attempting to meet their client’s expectations? First, contractors must be alert to actual or potential changes to project cost and schedule and be prepared to communicate those events to their contracted partners (up and down the contracting chain). Second, contractors and their clients should have established a reasonable set of contracting terms to govern project changes and should be prepared to adhere to procedures set forth in the contract. Although this article does not contain an exhaustive list of change scenarios and challenges, it provides an outline of four critical steps to follow when a change management situation occurs during a project.
Identifying a Change Management Situation
As suggested in this article, and as experienced contractors will attest, change management situations arise from a never-ending variety of project events and circumstances. Changes in a project can be initiated by the owner, the architect/engineer, the general contractor (or its subcontractors), government agencies or even as the result of public opinions and actions.
Any potential impact to a project’s cost, scope or schedule – including any change to the project specifications, design or performance criteria – should be evaluated as a potential change event that must be brought to the attention of the project stakeholders and addressed in accordance with the parties’ contracts. Because project changes and impacts are typically unforeseen, it may be helpful to ask yourself this question: Did some fact or assumption for the project change, requiring new, different or additional work to be completed that was not originally contemplated? If the answer is yes, then it is likely you are encountering change management.
Four Steps You Should Consider for Change Management
Once a change management situation is identified and encountered, action must be taken swiftly and with clear direction. We recommend starting with the following four steps when encountering a change management situation: (1) check your contract, (2) notify your client, (3) analyze and follow-up with your client on actual or projected scope, cost and schedule impacts based on input from your trade partners and suppliers and (4) understand your options and obligations under applicable construction/mechanic’s lien laws. Addressing a change management situation with these four steps in mind can help you avoid or mitigate the practical or legal issues that may otherwise arise.
Step One: Check Your Contract
Modern construction contracts (prime contractor agreements, subcontracts, design-build contracts, etc.) will almost always include change order and claims language and procedures, including – critically – change and impact notice requirements. The first step when evaluating a potential change event is to refer to the governing contract (e.g., prime contract with the project owner, trade subcontract or supplier agreement), review the applicable change and notice provisions and consult with a knowledgeable attorney if you have any questions about the applicable contract processes and requirements. Be prepared to consult with legal counsel if the contract provisions are excessively convoluted, contradictory or appear to be missing entirely.
Change management provisions are a mainstay of construction contracts and exist precisely to address unforeseen project events, encourage collaboration between the contracted parties and discourage unauthorized actions that may result in later disagreements. Furthermore, the contract is likely to be the first point of reference in the event of a dispute between the contracted parties.
Step Two: Notify Your Client
Providing your contract partner (whether it be an owner or a higher-tier contractor) with timely and proper notice, in accordance with the specific requirements of your contract, is crucial to preserving a contractor’s rights in connection with any claim or change order event. Contract notice requirements can feel like “gotcha” provisions that provide owners or higher-tier contractors with a convenient excuse to reject a proposed change order. But these provisions are indeed important, as they are intended to ensure that all project parties have sufficient information to make decisions in the face of unexpected events, conditions, delays and impacts, and to drive resolution of change events at the project level (between the parties’ designated project representatives) rather than in the courts or arbitration. For example, and as owners will justifiably point out, if the owner is not aware of cost and schedule impacts to its projects (before the work is carried out), they are not in a position to take cost saving or avoiding measures, such as specifying alternate materials, reconsidering a design change or resequencing or accelerating their own operations or the work of their other contractors and consultants.
Compliance with contract notice requirements (particularly convoluted notice requirements with multiple steps and follow-up requirements) may increase the administrative burden and complexity faced by the contractor’s project staff. Those staff may also feel reluctant to present change order/claim notices (which may be perceived as endless) to a valued client, for a project that is otherwise proceeding well. Project staff must be coached to overcome these challenges and hesitations and to understand that formal change notices requirements are a part of the construction industry, reflect the owner’s expectation that they be apprised of impacts to their projects and are a requirement of the parties’ contracts (which are often drafted by the client).
It is imperative that contractors understand and strictly adhere to the contract notice requirements set forth in their agreements, including any associated deadlines. Common examples include:
- The requirement for a contractor to provide written notice within [X] days of any event(s) giving rise to a cost or schedule impact.
- The obligation to notify the owner of a differing site condition immediately and before the conditions are disturbed.
Such notice requirements or potential “time bars,” which may be littered throughout the contract and are not always consistent, are often written as a condition precedent to the contractor’s entitlement to any equitable relief under the contract. Likewise – depending on the factual circumstances and the applicable state law – courts may strictly enforce such notice requirements regardless of whether the contractor incurred legitimate cost or time impacts in the execution of the work (due to no fault of its own) and regardless of whether the other party had actual or constructive knowledge of the event in question.
Failing to comply with notice and claim provisions can prejudice the parties’ ability to timely discuss project change events, resulting in a potential waiver of a change order or claim, or simply resulting in a contractor losing leverage in change order negotiations. In adhering to its notice requirements, contractors should also be attentive to related communication requirements, including to which party representative a notice must be submitted and in what format (i.e., email may not suffice).
Step Three: Analyze and Follow Up on Cost, Timing and Scope of Impact of the Change
Beyond simply notifying an owner or client of a change event, contractors must collaborate with their project partners (including trade subcontractors and suppliers) to continue analyzing how the change will alter the project in terms of cost, schedule and scope, and to communicate the same to their clients in writing.
By way of example, let’s say during a project an unexpected site condition is encountered. This new site condition not only requires a design modification, but also certain environmental remediation efforts or compliance measures. This, of course, would require additional work by engineers and architects, and may require bringing in a third-party environmental expert to assist in the environmental aspects. As described above, this change would need to be immediately discussed with the client (in this example, the owner). But this change would evolve over time. Throughout the problem-solving process, the solution itself may shift. Same for the ultimate additional cost spurred by this change.
Thus, it wouldn’t be enough to simply notify the client at the nascent stage of this change management situation. You would need to continually update the client on estimates of additional cost and time for the project. But that is not all. The continual analysis and follow up with the client would need to consider the contract. Is the force majeure provision triggered? Does the contract require the client’s written approval for each and every shift in the solution to this unexpected change? Or does it allow the contractor some discretion? Does the contract include contingency or allowance funds that may be used to fund the change, and does the client need to approve the use of such funds? The point is, Step Three is a continuation of both Steps One and Two. You must continue to refer to the project contract and continue to analyze change impacts in collaboration with your project partners, all the while continuing to communicate and document those events with the client.
Step Four: Understand Your Rights and Obligations Under Applicable Construction/Mechanic’s Lien Laws
The final step in responding to a change management situation is to understand applicable state lien laws, while assessing the procedural and timing requirements for establishing a lien against the property (where lien rights are applicable and available). This requires a state-specific legal analysis and understanding of the applicable construction and lien laws, as each state has unique construction/mechanic’s lien laws and procedures that apply differently to each tier of prime contractors, subcontractors and suppliers. Beyond merely stipulating what projects/properties are subject to a lien (i.e., public projects/properties are typically excluded but subject to payment bond requirements benefitting subcontractors), and stipulating deadlines for the filing or perfection of a lien, those laws may also include notice of commencement or preliminary lien notice requirements that are triggered by a contractor or supplier’s commencement of construction activities or delivery of project materials.
As such, Step Four is not a ‘final’ step, but rather one that must be considered at the commencement of a project – particularly when a contractor is venturing to work in a new or unfamiliar state. Failure to understand the applicable construction/mechanic’s lien laws may deprive a contractor of a powerful remedy (perfection and enforcement of a lien against the property) that would otherwise be available in the event of a dispute concerning changed or unpaid work. Because the laws of each state vary, you should contact a knowledgeable attorney to understand the applicable laws and identify how to protect your statutory lien rights.
Conclusion
In construction, change management is typically stressful, fast paced and complex. Thus, contractors and their staff should implement clear plans to identify and manage change events. While there is no perfect, exhaustive list, there are four general steps you can take to help you avoid the numerous pitfalls in change management situations. First, consult your contract. Second, notify your client of the change event as soon as possible and in accordance with any contractual notice deadlines. Third, continually analyze the impact on the project and continue to update your client, in writing. Fourth, be knowledgeable about any statutory construction/mechanic’s lien rights applicable to your project (and contractor tier) and understand how to preserve those rights.
If you or your company is dealing with a change management situation and need assistance navigating any of these steps, please reach out to a qualified attorney who is knowledgeable about your state-specific laws and the construction industry.
