Avoiding These Common Contract Administration Issues May Lessen the Likelihood of Claims
In my nearly 30 years of law practice, I tend to see the same mistakes repeated by general contractors and subcontractors during the administration of a project which either cause or contribute to disputes and claims. Three of the most common are (1) failing to give proper and timely notice, (2) proceeding with changed work without proper written authorization or required paperwork in place, and (3) failing to separately account for cost and time associated with extra work, backcharges or claims.
Failure to Give Proper and Timely Notice. Prompt notice of an issue gives the party receiving the notice the chance to act and perhaps to mitigate a potential loss. Note that notice often must be proper both as to form and time. As I have written about repeatedly, courts will enforce notice requirements in contracts. Typically, written notice is required upon discovery of a delaying event, a requested change which will cause additional cost and/or time, a differing site condition or a claim. The notice provision will usually provide for a certain number of calendar days to give the notice and conclude with wording that failure to comply will be deemed a waiver of the right to claim time or money. Contractors may not give the required notice for a variety of reasons: not paying attention to the contract requirements, not wanting to offend their client, or a belief that the issue will simply go away or be worked out down the road. To avoid problems and preserve rights, each contract must be read and understood by all personnel with responsibility for the project. A list of notice requirements should be developed and include all of the particulars as to form and timing. When in doubt whether notice is required in a given circumstance, send the notice.
Proceeding With Changed Work Without Proper Authorization or Paperwork. Virginia courts have ruled that contract requirements for change orders are binding and are meant to promote order and predictability in the construction process. A contractor takes on a serious risk if it proceeds to perform changed work upon an oral promise to pay when the contract requires written authorization or a formal change order before performance begins. Yet, due to the time crunch of keeping the job on schedule, contractors will often proceed as directed, often in violation of the specific change order provisions of the contract. Failure to follow the contract-required change order process can result in a justified rejection of payment by the contractor's client.
The contract may also spell out how changes in the work are to be priced. Sometimes estimates or proposals are required; other times, change directives are issued with agreement on price to be reached later. For changed work performed on a time and materials basis, the prudent contractor will present daily records of work performed for review and sign off. As with notice, it is imperative that responsible personnel review and follow the change order provisions of the contract.
Failing to Account Separately for the Cost and Time of Extra Work, Backcharges and Claims. Whenever a contractor encounters extra cost, whether as a result of delay, extra work, backcharges, differing site conditions or some other impact, the contractor should open a new cost account or accounts to allocate the additional costs of labor and materials. Similarly, a contractor should consider adding a new schedule activity for the extra work. Contractors often do not take these steps, instead allocating the time and costs to existing activities and accounts. When it comes time to seek recovery of the additional time or costs, the contractor has no way to easily ascertain the amounts attributable to the extra work. This makes proof damages in pursuit of a claim more difficult and more easily susceptible to attack. As with notice and change order processing, proper accounting for extras is a necessary step in the administration of a project and should be a regular responsibility for personnel charged with overseeing a project.
Spotts Fain publications are provided as an educational service and are not meant to be and should not be construed as legal advice. Readers with particular needs on specific issues should retain the services of competent counsel.