Monthly Archives: July 2015

Lessons Learned: Give Me an Aspirin — Change Work is a Headache

 A Primer on the difficulties a Contractor Faces When Dealing With Change Work

(published in the Magazine for the University of Florida’s School of Building Construction)

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A. The Traditional Setting

1. The Relationship

In this setting, there is no contract between the general contractor and architect but rather only contracts between the owner/general contractor and owner/architect. This creates a triangular relationship that often leads to tension.  This is because the construction process seldom unfolds as anticipated. Things change – especially in construction – and this is the subject of our article.

2. The Standard Contract

The American Institute of Architects (“AIA”), among many other things, sells construction contract forms which all the various trades utilize. Because of their popularity, we use AIA forms as our examples in this article.

3. The Work Begins

With a complete design, and with bidding finalized, contractors are chosen and the work begins.  Thereafter, the need for numerous changes almost certainly arises. Why? The reasons are endless.  Examples include design conflict, change of owner preference, out of sequence construction, and problematic physical condition(s).  After generating questions to the designers, the various trades then submit proposed changes to the construction administrator.

4. Change Work

Change work is typically done by way of a written modification to the contract; most often as a change order. The AIA’s general conditions define “Modifications” as (1) a written amendment to the contract signed by both parties, (2) a change order, (3) a construction change directive or (4) a written order for a minor change in the work issued by the Architect.  Per the AIA, a change order shall be based upon agreement between the developer, contractor, and architect.  The AIA requires the architect to prepare the change order and the developer to sign it, indicating an agreement as to (1) change in the work, (2) the amount of the adjustment, if any, in the contract sum and (3) the extent of the adjustment, if any, in the contract time.  An unsigned change order may mean the general contractor does not get paid.

5. Schedule

Perhaps most important to any developer is the project’s schedule and change in the work tends to affect that schedule. This is why construction contracts typically provide for liquidated damages, which are damages to which parties contractually stipulate as a reasonable estimation of actual damages to be recovered by one party if the other party breaches.

B. The Conundrum in Contracting

1. Changes Tend to Disagree with the Schedule

Given the importance of the schedule and the potential for damages, should a contractor stop the work to get the change order signed? In other words, does the contractor proceed with the work, or should it wait for the signed change order?

2. Risk Management

While there are no simple answers to these questions, there are protections the contractor can put in place to better manage this dilemma, which include:

  1. Minimizing disputed change work based upon ambiguities, errors, omissions, or discrepancies in the bid documents.  These disputes often arise because of design conflict, as in a mechanical plan conflicting with a structural plan because, say, a drainage pipe cannot run through a structural beam. Owners often take the position that contractors should properly study the design during the bid phase and therefore refuse to pay for change work and attendant project delays based upon a design conflict.  Modification to the contract documents during the bid phase can serve to eliminate, if not minimize, these design conflicts.
  2. Address this dilemma at a pre-construction conference and build protections into the contract.  Meeting minutes should be kept and signed by all the parties present to confirm accuracy.
  3. Prepare detailed change order proposals to reduce the time associated with questions from the construction administrator regarding the change order.  Price and schedule analyses should be enclosed in the proposed change orders.
  4. Document the file.  While the contractor may be confident, even certain, that the change order will be signed, it can never be too sure.  When in doubt, document the file.  When not in doubt, document the file.

So the contractor has sent its letter memorializing why the change order is necessary and detailing its efforts to get it signed without delaying the work.  But what should be done in the meantime?  If the contractor proceeds, it may not get paid for that work.  If it doesn’t proceed, it may be in breach of its contract and face a lawsuit for construction delays.  The practical approach is to (1) submit the detailed proposed change order, (2) enclose within the submission the documents showing the changes (e.g., the architect’s revisions), and (3) and specify that the project will be delayed, through no fault of the contractor, until the change order is signed.

  1. Beware of field orders.   The architect issues these orders to clarify specifications, deal with technical execution problems, or resolve site access difficulties.  The architect has the authority to order minor changes in the work not involving adjustment in the contract sum or extension of the contract time and not inconsistent with the parties’ intent.  Such changes shall be done in writing and shall bind the owner and contractor.  If the field order increases costs or time, it should lead to a change order.
  2. If there is disagreement or delay on the change order, demand a construction change directive (“CCD”).  The AIA defines a CCD as a written order prepared by the Architect and signed by the developer and architect, directing a change in the work prior to agreement on adjustment, if any, on the contract sum or contract time or both.  CCDs are used in the absence of a total agreement on a change order.  The architect resolves disagreements about CCDs, per the AIA.  The AIA, in fact, provides that, pending final determination of the CCD’s cost, the contractor may request payment for CCD work, subject to the architect’s interim determination. Because the AIA requires the architect to prepare the CCD, a contractor may attempt to modify that language to state that the contractor shall prepare the CCD.
  3. Agree to a third-party decision-maker, other than the architect, to make onsite determinations.  Dispute over change order work typically arises because the owner and/or architect believe (1) the proposed change work was part of the contractors’ initial scope, (2) the cost of the proposed change is unreasonable, (3) the additional time necessary to complete the change work is unreasonable, or (4) a change is deemed minor and the contractor disagrees. Someone, other than the architect, may arguably be more objective with respect to these disputes.
  4. Require that someone with authority to sign off on change orders remain at the site.
  5. Utilize two-part change orders to separate the portion of the estimate about which the parties disagree and the portion about which the parties agree.
  6. Enter into a guaranteed maximum price (with open books) contract and share in the savings so as to incentivize everyone to finish the project expeditiously.

Consult a construction lawyer.  The manner in which a contractor may protect itself will vary with virtually every project.  A qualified construction lawyer should be able to assist with a thoughtful and deliberate approach to a contract that preliminarily addresses most of the contractor’s change work concerns.

C. Conclusion

Although problematic, there are measures that can be put in place, preferably early in the process, that can make the change work process more manageable.  That said, construction contracts will always be a minefield ripe for conflict.  So, document your file and try to avoid performing work on an unsigned change order.

 

Implied Warranty of Fitness and Merchantability: Maronda Homes v. Lakeview Reserve

See the full article on CSK’s Florida Construction Law Update

The Florida Supreme Court recently issued an opinion in the Maronda Homes case[1] and broadened the common law implied warranty of fitness and merchantability, also known as an implied warranty of habitability. Maronda Homes dealt with whether a developer’s common law implied warranty of fitness and merchantability extends to initial purchasers of residential property for defects in offsite improvements. The Supreme Court answered the question in the affirmative.

The Florida Supreme Court’s Decision in Maronda Homes

To fully understand Maronda Homes and its import, one must understand its underpinnings. The developer’s common law implied warranty of habitability has its origins in the doctrine of caveat emptor, i.e., buyer beware.

Caveat emptor, with few exceptions, stood for the proposition that a buyer must identify latent defects prior to purchasing real estate or live with the consequences after the purchase without any legal redress against the seller. In other words, under this ancient doctrine, a purchaser of residential real property bought at his or her own risk.

Florida’s Departure from the Caveat Emptor Doctrine

In 1972, in Gable v. Silver, 264 So.2d 418 (Fla. 1972), Florida’s Supreme Court for the first time departed from caveat emptor in a residential real estate transaction and extended the implied warranty of habitability to initial purchasers of new homes and condominiums. The warranty there covered a malfunctioning air conditioning system.

The rationale was that the time when the seller and buyer were on equal footing had passed – the seller was now typically far more sophisticated than the buyer and in a superior position to know of, or discover, latent defects. Accordingly, it was no longer sound policy to protect the seller. As a result, the common law implied warranty of habitability was created so as to overcome caveat emptor with respect to new residential property.

In 1983, in Conklin v. Hurley, 428 So.2d 654 (Fla. 1983), a case involving investors who purchased vacant lots, not dwellings, Florida’s Supreme Court held that this warranty extended only to construction of a new home and other improvements “immediately supporting the residence thereon, such as water wells and septic tanks.” However, the Court intimated that, unlike purchasers of new residential property who buy a home to live in, investors are not entitled to the same protections created in Gable.

In Port Seawall Harbor & Tennis Club Owners Assoc., Inc. v. First Fed. Savings & Loan Assoc. of Martin County, 463 So.2d 530 (Fla. 4th DCA 1985), the appellate court held that the warranty did not extend to a lender which had foreclosed on the property at issue, unless the defects pertained to defects in the property completed by the lender. The defects there included “certain roads and drainage areas.” Id. at 531.

Fifth DCA Opinion in Maronda Homes

More recently, the Fifth District Court of Appeals, in Maronda Homes held that the warranty applied to offsite improvements, e.g., roadways, retention ponds, underground pipes, and drainage systems because they are “essential” to the habitability of the homes. While on appeal to the Florida Supreme Court, however, the Florida legislature passed section 553.835 of the Florida Statutes which took effect in July 2012. The Florida Supreme Court then issued its opinion after the law took effect.

Florida Legislature Responds to Fifth DCA’s Maronda Homes

Section 553.835 was passed to directly address the Fifth District’s holding in Maronda Homes. The statute thus expressly states that, “as a matter of public policy” Maronda Homes “goes beyond the fundamental protections that are necessary for a purchaser of a new home and that form the basis for imposing” the warranty and “creates uncertainty in the state’s fragile real estate and construction industry.” (emphasis added). The statute, per its express terms, purports to apply retroactively.

The statute further provides that the warranty does not apply to “offsite improvements”. The statute defines “offsite improvements” as streets, utilities, roads, drainage, driveways, and other improvements or structures not on or under the lot, excluding improvements shared by and part of the overall structure of two or more separately owned but adjoined homes when the improvements affect the fitness and merchantability or habitability of one of the adjoining structures, e.g., cable, broadband, internet, phone.

During the legislative process, there was a strong lobby against the passing of section 553.835. The arguments against it included:

  • The law will result in greater loss for Florida homeowners, e.g., repairing shoddy construction and lead to more foreclosures;
  • The populace does not support it, e.g., the governor received thousands of emails against it and the opposition outnumbered supporters 4-1; and
  • The statute’s unconstitutional retroactive application impaired vested substantive rights.

Florida Supreme Court’s Opinion in Maronda Homes

The Supreme Court has now affirmed the Fifth District’s decision and held that section 553.835 of the Florida Statutes does not apply in Maronda Homes, as its retroactive provision amounts to an unconstitutional abrogation of Maronda Homes’ vested substantive rights. It is unclear, however, whether section 553.835 will be upheld prospectively.

Accordingly, the Maronda Homes’ holding is that the warranty applies to “services ‘essential to the habitability of the residence;’” specifically identifying “roads for ingress and egress, drainage systems to divert flooding, retention ponds to correct water flow damage, and underground pipes (whether they be storm water or sanitary sewer pipes) which are necessary for living accommodations.” “Items to be excluded from the definition of essential services are those that provide mere convenience or aesthetic beauty, such as landscaping, sprinkler systems, recreational facilities, or a security system.”


[1]: Maronda Homes, Inc. of Fla. v. Lakeview Reserve Homeowners Ass’n, Inc., 2013 WL 3466814 (Fla. 2013) (note: the final opinion has not been released for publication in the permanent law reports and until release, it is subject to revision or withdrawal).