Most large and complex commercial projects today are marked by numerous changes in the original scope of work, as issues are discovered during the course of construction, or as owners change their minds mid-stream. What starts out as a defined scope of work for a defined price on a defined schedule ends up getting altered on all three fronts. The owner wants the flexibility to change course, yet not be ambushed by a price for the change that busts the budget or by unacceptable delays in project completion.
Under Article 7 of the AIA’s popular form contract AIA A201 General Conditions, these owner protections are provided for. If owner and general contractor agree on the price and time effects of a change in scope, they simply execute a written Change Order which modifies their agreement, and everybody is happy. If they don’t agree, however, the contractor must still implement the owner’s desired change in scope―provided that he receives a Construction Change Directive, defined as “a written order prepared by the Architect and signed by the Owner and Architect, directing a change in the Work prior to agreement on adjustment, if any, in the Contract Sum or Contract Time, or both.” In effect, by issuing a CCD the owner says “do what I tell you to do, and we’ll deal with pricing and/or schedule changes later.”
Despite mechanisms built into the contract for pricing the change later (agreed-upon unit prices; time and materials plus a mark-up for overhead and profit; etc.), a CCD presents some risk for the contractor. If the CCD requires a significant reduction in scope, the contractor who was counting on the full scope of work must now scramble to fill a sudden hole in his schedule in order to make up for lost revenue. If the CCD requires a significant expansion in scope, the contractor may have other projects on his schedule that will now suffer. But the biggest risk is one of profitability of the new work. Precisely because the price is not agreed upon up front, the control that the contractor enjoyed at the bid stage and at the contracting stage is gone; his compensation for a portion of the work will now be determined by a third party (generally the project Architect) who will scrutinize his measurements – measurements that must now be carefully logged and documented by the contractor (for free!) as to units/yards/linear feet, as to man hours, as to materials used. The documentation headache that he hoped to avoid by entering into a fixed-price rather than a cost-plus arrangement has just started pounding. And if the Architect isn’t satisfied and asks for more detail, payment that should have been received this month is delayed until next month – a potential cash flow problem for the contractor.
Notwithstanding issuance of a CCD, if the change desired by the owner is a “cardinal change” the contractor can decline. Cardinal changes are those that either drastically increase scope (say, tripling the amount of work) or call for a different type of work (say, changing the framing from wood to steel). Some recognition of this principle is built into the A201 General Conditions, which limit Construction Change Directives to work “within the general scope of the Contract.” The distinction is between tweaking a project, and asking for what amounts to an entirely different project. As one court has put it, "There is no exact formula for determining the point at which a single change or a series of changes must be considered to go beyond the scope of the contract and necessarily in breach of it. Each case must be analyzed on its own facts and in light of its own circumstances, giving just consideration to the magnitude and quality of the changes ordered and their cumulative effect upon the project as a whole." Wunderlich Contracting Co. v. United States, 351 F.2d 956, 966 (Ct. Cl. 1965). And without a bright line test for when a change is cardinal, the contractor is at risk in declining a CCD and walking away from a project. Allied Materials & Equip. Co., Inc. v. United States, 215 Ct.Cl. 406, 569 F.2d 562, 564 (1978) ("Undoubtedly, the cautious contractor might often proceed under the revised contract because of doubt whether he could invoke the cardinal change doctrine.").
Under Article 7 of the AIA’s popular form contract AIA A201 General Conditions, these owner protections are provided for. If owner and general contractor agree on the price and time effects of a change in scope, they simply execute a written Change Order which modifies their agreement, and everybody is happy. If they don’t agree, however, the contractor must still implement the owner’s desired change in scope―provided that he receives a Construction Change Directive, defined as “a written order prepared by the Architect and signed by the Owner and Architect, directing a change in the Work prior to agreement on adjustment, if any, in the Contract Sum or Contract Time, or both.” In effect, by issuing a CCD the owner says “do what I tell you to do, and we’ll deal with pricing and/or schedule changes later.”
Despite mechanisms built into the contract for pricing the change later (agreed-upon unit prices; time and materials plus a mark-up for overhead and profit; etc.), a CCD presents some risk for the contractor. If the CCD requires a significant reduction in scope, the contractor who was counting on the full scope of work must now scramble to fill a sudden hole in his schedule in order to make up for lost revenue. If the CCD requires a significant expansion in scope, the contractor may have other projects on his schedule that will now suffer. But the biggest risk is one of profitability of the new work. Precisely because the price is not agreed upon up front, the control that the contractor enjoyed at the bid stage and at the contracting stage is gone; his compensation for a portion of the work will now be determined by a third party (generally the project Architect) who will scrutinize his measurements – measurements that must now be carefully logged and documented by the contractor (for free!) as to units/yards/linear feet, as to man hours, as to materials used. The documentation headache that he hoped to avoid by entering into a fixed-price rather than a cost-plus arrangement has just started pounding. And if the Architect isn’t satisfied and asks for more detail, payment that should have been received this month is delayed until next month – a potential cash flow problem for the contractor.
Notwithstanding issuance of a CCD, if the change desired by the owner is a “cardinal change” the contractor can decline. Cardinal changes are those that either drastically increase scope (say, tripling the amount of work) or call for a different type of work (say, changing the framing from wood to steel). Some recognition of this principle is built into the A201 General Conditions, which limit Construction Change Directives to work “within the general scope of the Contract.” The distinction is between tweaking a project, and asking for what amounts to an entirely different project. As one court has put it, "There is no exact formula for determining the point at which a single change or a series of changes must be considered to go beyond the scope of the contract and necessarily in breach of it. Each case must be analyzed on its own facts and in light of its own circumstances, giving just consideration to the magnitude and quality of the changes ordered and their cumulative effect upon the project as a whole." Wunderlich Contracting Co. v. United States, 351 F.2d 956, 966 (Ct. Cl. 1965). And without a bright line test for when a change is cardinal, the contractor is at risk in declining a CCD and walking away from a project. Allied Materials & Equip. Co., Inc. v. United States, 215 Ct.Cl. 406, 569 F.2d 562, 564 (1978) ("Undoubtedly, the cautious contractor might often proceed under the revised contract because of doubt whether he could invoke the cardinal change doctrine.").
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