I’m from the government and I promise you …

Owners often give contractors oral directives in the field to proceed with work that may go beyond existing scope and justify an increase in contract price. Equally often, the contract requires that all change orders must be in writing and signed. However, preparation of formal change orders may take weeks to wend through the owner’s bureaucracy. In the meantime, the work needs to get started immediately to avoid delaying the project.
The contractor is between a rock and a hard place. If the contractor proceeds with the extra work and the owner changes its mind, the contractor must overcome the barrier of the contract requirement of written and signed change orders. If the contractor doesn’t proceed without a signed change order and delays occur, the contractor’s costs will increase, and delay claims are notoriously difficult and expensive to litigate. Worse, on a public works project, the contractor may face exposure to liquidated damages for the resulting delay.

On private projects, if the contractor proceeds with the extra work and the owner changes its mind, the contractual barrier of written and signed change orders, while substantial, is not insurmountable. The contractor at least can argue that the owner’s course of conduct during the project of orally authorizing extra work modified the contract requirement of a written and signed change order.  But on a public works project, the recent case of P&D Consultants, Inc. v. City of Carlsbad confirms that the contractor won’t have this argument and will be out of luck.  

P&D Consultants, Inc. v. City of Carlsbad

In P&D Consultants, Inc. v. City of Carlsbad, a city entered into a contract with an engineering firm to provide consulting services to satisfy conditions imposed by the California Coastal Commission for the redesign of a municipal golf course.  The contract price was based on time and materials with a not to exceed limit. The contract required that all modifications, including change orders, be in writing and signed by the parties.  

The Coastal Commission’s requirements continued to change after the consultant started work. This led to increases in the contract price, formalized by signed change orders. The city usually took several weeks to process change orders, and the city’s project manager frequently authorized the consultant to perform the extra work before the written change order was prepared and signed.
 When the Coastal Commission’s requirements were finalized, the city’s project manager asked the consultant to prepare a final scope of work and costs. The consultant prepared a proposed change order for about $210,000, which included both costs for extra work already performed without a change order but with the oral authorization of the city’s project manager, and also costs for further work to meet the Coastal Commission’s final requirements. The city’s project manager balked, stating that the city was at its budget limit and the change order amount would have to be reduced below $100,000. According to the consultant, it threatened to stop work and leave the Coastal Commission’s requirements uncompleted, and the city’s project manager replied to keep working and he would take care of the issue. However, ultimately a change order was approved for only $99,810.
 The consultant sued the city for extra work not compensated in the final change order. The consultant won at trial but lost on appeal. The appellate court held that, unlike private contracts, public contracts that require written change orders cannot be modified orally or through the parties’ conduct. The governing legal principle is that that those dealing with a public agency are presumed to know the powers, and limits on those powers, of the agents with whom they deal.  The project manager did not have the actual authority to orally bind the city to a change order.

What if the owner’s rep puts it in writing?

You may be thinking that the problem in P&D Consultants is that an oral promise isn’t worth the paper it’s written on. What the consultant should have done is had the owner’s representative sign a letter confirming the extra work.
 Good thinking, but wrong. This actually happened in a school modernization case of mine which only last week settled after start of trial. (That case is why I’ve been quiet on the newsletter front lately). The school’s project representative signed such a letter. The court ruled the letter could not be enforced as a change order because, by law, contract modifications (such as change orders) could only be authorized by the school district’s board.In my case, there were two issues not involved in P&D Consultants. The first issue was whether a relatively informal letter met the requisites of a contract modification.  The second issue was that, by California statute, a legislative act, board approval, was required in addition to a written, signed, contract modification.
 So it’s not enough to have a writing. The writing needs to be signed by someone having authority to do so. If the public entity’s project manager does not have authority to approve a contract modification – and often he or she may not – the project manager’s written promise is worth no more than his or her oral promise.
 What do I do?

You may be confident, based on the public entity’s track record on the current project or past projects, that it will approve the change order. That’s a business decision, as long as you understand the risk.
 If the risk is not acceptable, then it is critical that you document to the public entity that you are unable to proceed with the extra work until you receive a signed change order, and describe delays which may occur during the interim. This is important not only for any subsequent delay claim, but also to defend yourself against any claim for liquidated damages arising from the same delay. 
We really would appreciate your feedback. Praise, kudos and compliments are always nice to hear. But constructive suggestions for improvement are particularly appreciated. There’s always room for improvement, and your suggestions can make this newsletter better, and more useful to you. Thanks. Jeff

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