The Effect of Early Signed Change Orders Where Multiple Changes Cause Unexpected Delay and Disruption: What was Released?

In a project where there are multiple changes, the cumulative delay or disruption effect might not be apparent at the time a particular, discrete change is issued and a change order signed. If the claims of delay and disruption arising from cumulative impact of multiple changes are unknown at the time of signing of the change order, will those claims be barred by the signed change order?

By John S. Mrowiec

A contractor signs a written modification (change order) which reads:

“The Contractor hereby releases any and all liability under the contract for further equitable adjustments attributable to the modification.”

Does that language absolutely bar the contractor from future claims that might have any relationship to the change giving rise to the modification?

The question is surprisingly difficult to answer where multiple later changes arise.

In the recent decision of Bell BCI Co. v. United States, 2009 U.S. App. LEXIS 13625 (Fed. Cir. 2009), the trial court, an appellate court majority and an appellate court dissent show how close a call that question can be.

Changes on a construction project can cause differing types of impacts on the contractor and subcontractors, leading to disputed claims. Examples include “delay claims” and “disruption claims” or “cumulative impact claims.”

John S. Mrowiec is a partner with Chicago-based Conway & Mrowiec, a construction and public contracts law and litigation practice. He may be reached at (312) 658-1100. For information, go to the firm’s Web site at www.cmcontractors.com.

As one court explained, “[a]lthough the two claim types often arise together in the same project, a ‘delay’ claim captures the time and cost of not being able to work, while a ‘disruption’ claim captures the cost of working less efficiently than planned.” Bell BCI Co. v. United States, 72 Fed. Cl. 164, 168 (2006) (emphasis in original).

In a project where there are multiple or major changes, the cumulative delay or disruption effect might not be apparent at the time a particular, discrete change is issued and a change order signed. If the claims of delay or disruption resulting from cumulative impact of the combination of multiple changes are unknown at the time of signing of the change order, Bell BCI decided whether those claims will be barred by the signed change order.

The Bell BCI case involved construction of a laboratory and office building for the United States National Institute of Health. The building contained culture rooms, isotope labs, cold rooms, warm rooms, darkrooms and other individual requirements of the scientist occupants. Although not the low bidder, Bell BCI Co. was awarded the fixed-price contract as general contractor.

Initially, the contract was for a five-story structure to be completed within 27 months. After the project had proceeded on schedule for eight months, the owner decided to add an additional floor. The parties signed a modification increasing the contract price by nearly $2.3 million, extending the schedule, providing 14 interim milestones for partial occupancy and agreeing to $266/day in liquidated damages.

The signed modification included the language quoted in the first paragraph of this article and also provided that the price increase was “full and equitable adjustment for the remaining direct and indirect costs of the Floor 4 fit-out (EWO 240-R1) and full and equitable adjustment for all delays resulting from any and all government changes transmitted to the Contractor on or before August 31, 2000.”

The owner’s representative promised there would be few, if any, more changes. Yet, the owner issued 279 extra work orders. The contractor signed the first 47 modifications after the modification adding the new floor. These modifications all contained identical release language to that quoted for those changes. Thereafter, Contractor included express reservation of rights language.

Contractor missed 13 of the 14 milestones. After completing construction, Contractor submitted a request for equitable adjustment for over $2 million in labor inefficiency costs, $1.6 million for a 284-day delay, 10% profit on the two prior claim components, unpaid retainage of $563,125, $1.6 million in 58 unresolved extra work orders and submitted a subcontractor’s claim. Owner asserted claims for liquidated damages, credits, costs for retests and estimated costs for “outstanding major deficiencies.”

Contractor filed suit in the Court of Federal Claims. After a six-day trial, the trial court ruled for Contractor.

The trial court found, in light of the numerous changes, the contractor suffered a cumulative impact and that “evidence of excusable delay from changed work was so overwhelming that a reasonable person could not reach a contrary result.” The owner appealed.

On appeal, the appellate court did not question the trial court’s findings of cumulative impact and delays. Instead, the appellate court focused on whether the 48 modifications Contractor signed, beginning with the modification for the added floor, barred Contractor’s claims.

Reasoning that the modifications were “plain” and “unambiguous”, the appellate court reversed the trial court and remanded for a new determination. The appellate court said Contractor could recover only to the extent, if any, that the damages for delay and disruption were not “attributable” to the changes addressed by the 48 signed modifications.

There was a strong dissent. The dissent noted the praise owner had lavished on the completed building. The dissent stressed that the trial court had received “extensive testimony about how this contract was implemented” and “the burgeoning degrees of disruption caused by the government’s continuing changes, accompanied by inflexible deadlines and government pressures for occupancy of the building while under construction.” Most important to the dissent was that the appellate court majority did not dispute the trial court findings of disruption and delays, the only testimony was that the impacts were unknown at the signing of the modifications and “[m]any of the events relevant to the cumulative impact claim did not even arise until after the parties signed the [additional floor] modification.”

The appellate court majority did not hold that Contractor could not sustain its claim, only that Contractor could not recover for any impacts “attributable to” changes for which Contractor had signed modifications without a reservation of rights. The dissent, though, realized an underlying problem with that result which was an outcome neither party requested. Because “cumulative impact requires recourse to the contributions that accumulated”, that is, a series of changes, the appellate court majority did not explain how one can find possible compensation for the effect only of the later changes in the series. Bell BCI, 2009 U.S. App. LEXIS 13625, *26 (Newman, C.J., dissenting).

Owner argued that Contractor could have begun reserving its rights in earlier modifications. But there might be problems in attempting to do so. As the Bell BCI dissent realized, cumulative impacts arise from a combination of events apparent only after-the-fact. Thus, it is difficult to determine when reserving rights will be “early enough.” In addition, recognizing that owners discourage reservations, when does the Contractor decide to pick the fight to insist on a reservation?

As Bell BCI shows, extensive changes present challenging questions for which the legal system might not have predictable, much less satisfactory, answers.