LAW: The Contractor's Side

The 'ripple effect' of change orders

Article December 28, 2000
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Changes, differing site conditions and delays are events that frequently
occur on complex highway- and bridge- construction projects. Federal, state
and local government owners typically ask contractors for proposals to perform
the changed work or remedy the differing site conditions if there is sufficient
time to do so. When time does not permit the contractor's preparation and
the owner's analysis of the proposal, the owner may direct the contractor
to perform the changed work or remedy the differing site conditions on a
force-account basis.


In either case, the contractor may unknowingly lose money because it has
not been compensated for the impact-on the unchanged work-of the change
or remedying the differing site condition. Contractors need to ask themselves
what resources (equipment and crews) will be required to perform the new
work and what work those resources would have performed otherwise.


Recently, I read an interesting case that dealt with impact costs and the
so-called "ripple effect." In State vs. Guy F. Atkinson Co. (187
Cal. App.3d 25, 231 Cal. Rptr. 382; 1986), Caltrans contracted with Atkinson
to construct a 1.6 mile-long section of Highway 101.


Problems arose early in the project due to extremely wet soil conditions,
prohibiting construction as specified under the bid plans. Over the course
of the project, state engineers ordered numerous changes.


Initially, Atkinson signed the change orders, which generally provided for
extra work at a specified price. However, Atkinson soon began protesting
and refusing to sign change orders for a specified price because its entire
project schedule was disrupted and delayed. Atkinson then demanded reimbursement
for all of its extra costs and, after completion of the project, submitted
a claim for $1.5 million in additional compensation. After several years
of review, Caltrans denied the claim.


Under the state procedure, the dispute was then submitted to arbitration.
Following a lengthy hearing, the arbitrator found the state liable for additional
compensation by reason of the change orders (which altered the character
of the original contract) and the breach of an implied warranty (that the
excavation materials were suitable for embankment construction).


The arbitrator awarded Atkinson 65% of its claimed damages, finding that,
"There were cumulative effects of all of the ordered changes. It is
not feasible or possible to separately identify or measure those costs which
were incurred by Atkinson as a result of the actions by the state."


The state petitioned to vacate the award. The trial court entered judgment
confirming the award in favor of Atkinson. The state appealed. Interestingly,
the Court of Appeal found that the force-account provision in the contract
itself provided a basis for determining an adjustment in compensation if
an ordered change in the plans or specifications materially changed the
character of the work. That basis was the difference between the actual
unit cost to perform the itemized work as originally planned and the actual
unit cost as changed, calculated on a "force-account basis."


The court noted that any attempt to calculate precise costs "as planned"-when
the work was not performed under those specifications-presents an enormous
accounting problem.


The state argued that the damages claimed by Atkinson were not shown to
have any relationship to any wrongful conduct by the state. The court disagreed,
finding that the changes ordered by the state were major, ongoing and seriously
impacted the entire project in terms of efficient use of labor, machinery
and planning ability. The court stated, "The entire operation was disrupted
by the ongoing piecemeal changes ordered by the state. The suggestion that
only a small amount of the total embankment fill was actually replaced by
other materials fails to recognize these massive 'ripple effects.' "


Quoting from a federal court decision, the court found ". . . in cases
like this, if not in every complex case, it is humanly impossible to trace,
find and specify in detail, and quantify in effect the numerous circumstances
[that] cause or contribute to financial consequences."


Atkinson was faced with a cumulative impact to its costs from ongoing piecemeal
changes. In cases involving a multitude of changes, one Board of Contract
Appeals noted that such costs are not attributable to any one change, but
flow from the synergy of the number and scope of changes issued. The underlying
theory is that numerous changes cause a cascading, ripple-type impact on
performance time and efficiency; this ripple effect is too uncertain or
diffuse to be readily discernible at the time of pricing each individual
change.


Contractors would be well advised to consider the time and productivity
impacts of changes on the unchanged work when pricing changes. With proper
planning and scheduling, the impact can be estimated and predicted. This
will, in turn, minimize the uncertainty of changes.


Parvin is a senior executive in the law firm of Parvin, Wilson & Barnett,
P.C., serving the construction industry throughout the U.S. in construction
claims, litigation, ADR, corporate planning, dispute avoidance, environmental
and labor matters. You may write to him in care of the editor.

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