Webinar: Change Orders — How Subcontractors Can Avoid Risks & Potential For Costly Lawsuits

Change orders can become a problem in a hurry on job sites. Handling change orders effectively and efficiently will protect your bottom line and prevent the threat of work stoppages.

In this free webinar, construction attorney Joseph Katz will share his insight and guidance for navigating change orders.

What we’ll cover:

• 3 change order roadblocks to look out for and how to respond to them
• Pricing elements of change orders
• Documentation tips and guidelines

Transcript

Kathryn Barona: (00:04)

Hi everyone. I’m Kathryn Barona with Levelset. I work with lawyers and our lawyer community to host these webinars weekly and bring you such great attorneys, such as Joe Katz of Katz Law. He’s based in the Baltimore Washington Metro area. And I will let Joe get started now and introduce himself, give you a little background and get started with his presentation. Thank you. And if you have any questions at all, please write them in the chat box in zoom or the Q and a panel in zoom. And we’ll be happy to get Joe to answer those questions for you.

Joseph Katz: (00:44)(00:44)

Thank you, Kathryn. And thank you everybody for tuning in on a Thursday afternoon. Um, change orders are, you know, I’ve kind of, uh, something that it’s something that I tell clients are change orders. You can’t can’t live with them. You can’t live without them. Um, and that’s because some concrete contractors, subcontractors have very different perspective towards change orders. Some people plan for them or submit their, submit their proposal planning for change orders and or giddy, uh, when change orders come through and others absolutely. It’s the bane of their existence. And, uh, they’re there there’s nothing that they hate more than having to deal with change orders. Um, I, my perspective is, is, is kind of in the middle, not, you know, their change orders are, are simply a matter of business fact of a matter of doing business, uh, cost of doing business in a sense, and the better we’re able to, uh, be prepared for change orders, the better we’re able to, uh, anticipate our change orders, price, our change orders completely, um, as early as possible and get them signed or otherwise stop work until they’re signed, then they can stay as change orders and not become claims down the road.

Joseph Katz: (02:25)

Because what happens with, with unpaid unapproved change orders is that they pile up, they pile up and at the end of the job, you’re looking at, you know, a very large claim, which perhaps you’re following the counseling for paying a bond claim, or you’ve you, you just got this large REA in a government in a government claim situation requests for equitable adjustment. And in, um, in the law of collections, there’s a, there’s a rule that says, you know, the something that’s not paid within the first 30 or 45, the chances of collecting it go way down exponentially with the amount of time it’s outstanding. Um, I think there’s something similar in, um, missing persons, right? Isn’t the show 48 hours all about, you know, those first 48 hours of a missing person’s file or the most crucial because 48 hours it comes and goes, and there isn’t a substantial lead and the chances of finding that person, uh, alive and well, unfortunately go down.

Joseph Katz: (03:29)

Um, so change orders are similar in the sense that if you, if you haven’t, uh, grabbed the bull by the horns and really addressed a change order before you do the work, uh, the change work or at minimum in the early stages of starting to do that work, the likelihood that you’re going to get paid for that in a timely fashion, uh, really goes down and then it becomes a claim towards the end of the job I’m going to present here. The, these three modules, I’ve got an overview, um, and then pricing pricing of a change order fully and completely. It’s very important. And then I’ve got, I think it’s about four or five roadblocks or, or tips, uh, that I found over the years are presenting contractors and subcontractors are really, really crucial points when dealing with change orders.

Joseph Katz: (04:30)

What is a change order going into RS means change order is a written authorization provided to a contractor, approving change from the original plans, specifications, or other contract documents, as well as the change in cost. This will also include a change in time, which is an important aspect of construction. We’ve got, you know, time is money. So the longer it goes on for the contractor, the more money it’s going to cost and the longer it goes on for the owner, the more of a cost to the owner, a loss of use is likely going to occur, which could become a back charge. If we haven’t crossed our T’s and dotting our I’s both in terms of the increased cost and increased time, make sure we get change orders increasing our time. Why are change orders issued? Well, change orders are usually for the most part, either adding work, subtracting work, or changing the work instead of the bathroom on the left, the bathroom, on the left, on the right, instead of, um, instead of, um, you know, adding a floor, subtracting a floor, you wouldn’t be surprised how common it is that a floors to two buildings get added or subtracted, uh, already it’s under contract.

Joseph Katz: (06:01)

Now there are less common sources for change orders, which include gap in scope either because the owner or the general contractor just failed to tee up all the work. And mid-construction suddenly everybody’s looking around, you know, who’s, who’s doing, who’s doing the grout and well nobody’s under contract for the grounding. So, you know, most likely is the contractor, either the subcon, the trade contractor, either just prior or just after that trade work is going to be asked to issue a change order and do that missing scope, um, instructions on means and methods. The very definition of a, of a contractor or an independent contractor is control over the means and methods of the work. If you’re, if you’re being controlled, uh, by if you’re being told the means and methods by which you do your work, you’re an employee, you’re not an independent contractor. Now it happens fairly often that an owner or GC actually says, you know, sees it a trade, doing something one way and says, no, don’t do it this way.

Joseph Katz: (07:13)

Do it, don’t do it that way. Do it this way, the way I want it done the way the owner wants it done. Um, and that is a that’s right for a change. If it causes an increase to the cost or an increase to the time of the trade subcontractors work. So instructions and similarly, you know, a sole source instruction, you know, don’t use carrier, use some other brand or vice versa if there was an increase in cost or time that’s right for a change order. And of course the relative to the time factor, we’ve got delay acceleration and overtime.

Joseph Katz: (07:53)

What, what drives the change order, design errors, probably number one, get in there. And the plan is wrong, could be slightly wrong, could be majorly wrong. Uh, but usually there’s a, there’s a change to the work that needs to be done, which leads to a change in the cost differing site or project conditions, whether it’s, whether it’s a renovation and it’s, you know, what what’s behind the walls that nobody knew beforehand, or even, even in new construction, we’ve got a groundwater, we’ve got unsuitable soils, um, incomplete drawings at the time of the bid, many, many large government, you know, us government contracts, projects, and state projects will actually not have 100% for construction drawings at the time of bid, right? The, the, the, the solicitation of government contracts and the award of government contracts is often driven by the end of the fiscal year. And whether the agency has money left over, they want to spend it because once the fiscal year has cons, they lose, they lose that allocation and the money’s taken away.

Joseph Katz: (09:09)

Uh, so very often ProMat projects will be put out to bid without a completely 400, a hundred percent for construction drawings prepared because the agency just wants the money awarded so that they don’t lose it at the end of the fiscal year. And what this means is that there most certainly will be changes because the drawings are not complete. And crucially, everybody knows that everybody, you know, all the stakeholders, the owner, the GC, they all know that, and they’re anticipating and they’re waiting for it. So there’s no reason in the world. Um, the subcontractor, the trade contractor, shouldn’t also keep their eyes out for change orders and, um, and exercise that right to, to change orders,

Joseph Katz:(10:02)

Uh, to get an idea of, of the, how often there are change orders. What this, what this table shows is. If you look at those, those two highest ones, the 30% within the six to 10% range and 41% within 11 to 15%, this tells us that over 70% of contracts of projects have changes between five and 15% value of the, of the job million dollar million dollar job. 70% of those of those million dollar projects are going to have, are going to have changes, change orders between 50 and 150,000 thousand dollars. And for a trade contractor, that would mean you can well expect that between five to 15% of your own scope of your, your, your price, uh, will be, uh, subject to change orders and increase usually, and change orders.

Kathryn Barona: (11:06)

Hey, Joe, we do have one question. First question is from Mark asks is means and methods inclusive of an improved safety plan.

Joseph Katz: (11:20)

Well, that’s an excellent question. Safety is often, you know, two or three pages of a subcontract that details the safety requirements. So means, and method is I would say, no, I would say safety is, is really for the most part, probably spelled out in the subcontract. Uh, so there’s a requirement to, to keep to, you know, the letter of the subcontract, whatever it says regarding safety, uh, and because safety is really paramount, uh, also governed by OSHA and corresponding state agencies. Um, an instruction as to safety would usually not be a means and method. Um, but if, if, if we, if you deem that, that safety requirement to be over and above the requirements of the already agree requirements of the subcontract, or over an agreed, uh, over and beyond the state law regulation, then sure. Then that’s, um, that’s an instruction to do something different than the, than the laws that you’ve agreed to abide by in the subcontract. And you should apply for a change order for that. So it’s kind of a, kind of a combination they’re looking. Yeah. Is there anything else?

Kathryn Barona: (12:41)

There is one other question from Lynn, what are the consequences for the contractor? If they do not notify how much extra time a change order will add to the project?

Joseph Katz: (12:56)

So you might get your, you might get your Mount, you might get your change order, you know, your five, $10,000 change order. But if you’ve got a liquidated damages provision that says thousand dollars a day for every day, you’re late and you’re 30 days late because of that, you’re going to be given back 30,000 and liquidated damages. If you didn’t also negotiate an extension of time. Um, and even if you don’t have liquidated damages, if you’re late, then the general contractor or the owner, if you’re a GC can still seek common law damages on account of, of your being late. So if there was, if you’re late and therefore, if it’s a, if it’s a student housing and they couldn’t get the students in there, uh, you know, by September when they were, when they were arriving, it can lose a whole semester, a whole year’s worth.

Joseph Katz: (13:49)

They could argue they’ve lost a whole year’s worth of friends, uh, that they want you to pay for. So, uh, it’s, it’s crucial when you figure out the amount of money at the end of the day, every chain, there’s no reason in the world, a change order should be submitted without, uh, without a time increase. If you’re asking for more money, because there’s more work, you’re also entitled to more days to do this more work. So definitely throw in whether it’s, you know, 10 days your, your, your change order form should have a already prefilled five day or a 10 day minimum of extra time as requested. And that should be obviously the bigger, the change. The more time should be requesting. Um, this table demonstrates that with the exception of mechanical, you can see very often the, the distribution of change orders among trades is fairly static within 10 to 20% for, uh, structural electrical and finishes, uh, that, you know, they’re gonna, they’re gonna, they’re going to be seeing between 10 to 20% changes and mechanical, uh, statistically has by far the most changes often. That’s, um, that’s duct Ron’s interferences with dr. Ron’s loads in terms of, uh, in terms of cooling and, and conditioning the airspace.

Joseph Katz: (15:16)

But the point is that, that everybody all trades, this applies change orders apply to all trades pretty much equally.

Joseph Katz: (15:26)

Okay. We have one other question right now. Sure. It is from Edward asks. It’s kind of a long one. If you, I don’t know if you can see the chat box, but I’ll just read it off. And if you want to reread it, um, can the GC or the owner legally force a subcontractor to perform work prior to approval of a change order due to time sensitive work. And in the past, the AIA had a document called construction change directive, which directed the GC or subs to do, to proceed with work and discuss the cost of the change at a later date.

Joseph Katz: (16:06)

Excellent question. And that is essentially the subject of, you know, the, the final, uh, 10 minutes or so. Um, so hold that thought, uh, let’s, let’s kind of do this in order. Let’s kinda go through the, the pricing. What I’m trying to do here is demonstrate that change orders are absolutely the totally expected fair game, fair play in the construction industry. There’s no reason in the world to be hesitant about identifying and submitting change orders. We’ve got to price them correctly so that they actually serve you and, and don’t cost you. And then we’re going to talk about all the, all the, all the defenses or the walls that GCs throw up. Um, but that’s all, that’s all they are roadblocks. And, um, we’re going to learn some, discuss some work arounds. I am trying to, I, Kathryn and I, I know you told me I could go over a little bit. I’m going to try as much as possible to stick to the one 30, uh, end time, because I know people have, uh, scheduled things around that. Uh, but we may, yeah, I, I suppose anybody that’s interested can stay on for five to seven minutes, uh, if it’s discussed those roadblocks a little more.

Kathryn Barona: (17:27)

Yeah. And I just want to let everyone watching out there know that you will receive the recording of this in your email in a few days, maybe early next week. Um, but please stay on with us for now. And if you can, um, just keep your questions coming or at the end. Thank you.

Joseph Katz: (17:46)

Okay. So, um, would this table shows, and I don’t, I don’t make this stuff up. This is, this is a researched, uh, data, uh, really from all over the world. I just, one of the earlier study, I know it was a Norwegian study. I don’t know, um, specifically where this one came from, but I believe it’s also a, uh, internationally based, um, 50% of all change orders are fixed price negotiations, uh, beyond that, then you get into static pricing methodologies, usually because either the unit price is stated in the bid or actually in the subcontract, or it’s an adjusted unit price, um, or is simply a cost plus, right? The actual cost plus a pre identified margin for profit and overhead, usually five somewhere between five and 10%. Um, those are the minority, right? The majority, what this table shows us is that most change orders are negotiated at a fixed price.

Joseph Katz: (18:55)

Uh, the subcontracts will typically have negotiated as the, as the, as the best option. And if negotiation can’t be achieved, if agreement can’t be achieved, then, uh, either it goes to actual cost plus a margin, or it actually just becomes a claim. And at that point, you know, you’re forced to do the work, uh, but you’ve got to kind of make a claim for it, uh, down the road. So what, when we’re talking about pricing, the change order, what does that, what does that comprise that? What does that price comprise of? There are the direct costs, which is the actual costs. The straight cost of the work that’s added or changed, meaning the labor, the materials and the equipment, or any subcontractors, sub sub contractor costs, if that becomes necessary, those are straight costs. But if all you got where you’re, where you’re straight costs back, you’d only you’d maybe be breaking even. Um, probably not because there’s a lot of hidden costs, indirect costs, um, you know, your field supervision, you’re salaried, you’re salaried, uh, supervision is salary to you, but not salaried to the, to the GC. They should, they should definitely, uh, be added to extend any additional time, uh, is necessary. Then on account of the change, they should definitely be in there. The field overhead. This is often for, uh, for a delay, um, and then extended main office overhead. That’s some people may know as equally calculation typically,

Joseph Katz: (20:35)

Then you’ve got impact costs. Every change order should be evaluated for its overall impact to the project. This means that, whereas, whereas the work itself, the cost of the work itself, we’re being reimbursed for, we’re not being reimbursed unless we ask for it, unless we include it in there. We’re not being reimbursed for the loss of efficiency, a loss of productivity. Um, the actual change condition is doing more than, uh, the, the whole is greater than the sum of its parts. You can’t just add in labor materials equipment and have our price because it slows down efficiency and productivity. And there are various different methods to calculate that there’s, what’s called a measured mile, um, which, which kind of measures, if everything was optimal, what performance would be. And then when the current situation what’s the performance and, and that, that factor is used for to realize that recovery, and then don’t forget any, and all miscellaneous costs, fuel lodging, tolls, uh, bond. If, if you’re increasing the contract price, then you also are supposed to be increasing the bond. You could put it in there and, you know, if your bonding agent never asks you for it, um, you never ask you for any legal fees associated with the change, additional insurance, et cetera.

Joseph Katz: (22:10)

This is more, you want to track your costs. Ideally, a change order is negotiated and signed before the work is done. Um, and if, if that’s the case, if costs were more than you than you anticipated, unless you have a very good reason, uh, it’s going to be, it’s gonna, you’re gonna own that, and you’re gonna have to eat that. Uh, but regardless cost tracking is important because oftentimes your PCO will not be paid and it will become a claim at the end of the job. And if you haven’t tracked the costs associated with this specific change, you’re gonna have a very hard time proving your entitlement because at some point, you know, job cross just become contract versus extra work becomes very difficult to after the fact separate, which is which unit prices, right? If you have an, if, if, if you removing unsuitable foils, if you haven’t tracked the cubic yardage of what you’re removing on account of the unsuitable versus on account of the removed quantity in your, in your subcontract, or, um, if you’re an electrician installing outlets and you’re, you’re, you’re sewing in additional outlets, boring conduit, whatever, whatever you were doing that subject to a, to a set measurement, whether a number, number, linear feet or cubic yardage.

Joseph Katz: (23:40)

If, if you haven’t calculated, how, how much is the change condition versus the contract condition? You’re going to have a hard time getting paid for it. All right. So to summarize this section, the pricing section and the overview section, what I tell my clients is you anything that happens from a change order lens, meaning that not everything is necessarily a change order, but the question should be asked in every situation, is this appropriate for a change order? Can I, if something’s going on, that’s affecting my efficiency, my productivity, my cost, my time, any, any effect that anything different than the way this project was bid and anticipated to run the question should be asked, can I extract the change order? And if so, then, then definitely do that. Alright. Um, unfortunately we just have a few minutes left, uh, but, um, I’ll stay on probably till about one 35, uh, going through this, each section was supposed to be about 10 minutes.

Joseph Katz: (24:53)

It looks like I went over gender roadblocks, and more importantly, how to avoid them. The very first roadblock where the very first difficulty a subcontractor runs into when dealing with the change order actually happened long before the change was recognized and happened. Even before the subcontractor has set foot on this project. It happened when the subcontract was signed. Um, if you’re, if you’re not reviewing your subcontracts and carefully not wholesale redlining them and sending it back with, with red marks on every page and cross outs and additions, that that has very little chance of being successful. Successful GC normally just respond. You know, this is really a bit, we don’t make changes to our subcontracts. Um, so it needs to be done with tact and it needs to be done kind of on the thinking of the most, you know, the minimum changes necessary, uh, but important changes that really do level the playing field.

Joseph Katz: (26:05)

You’ve got to, you got to keep in mind that the general contractor has drafted the subcontract to protect itself as much as possible, and to really shift all as much risk as possible to the general contractor onto the specific trade subcontractors. So instead of taking all that risk, push back a little bit, think of an unmodified subcontract as an IED, an improvised explosive device that, that famous scene from the green mile or where he’s standing there and he’s got three IDs all around him, these provisions of the subcontract were already set in place, uh, the beginning of the job. And they’re just really waiting to explode in your face at the right time. Uh, just like, just like that IED, for example, I think this actually addresses the question that we were, um, going to come back to many sub-contracts will say, you’ve got to do the change order work even without any agreement on price.

Joseph Katz: (27:15)

And even if we dispute that it’s even that it’s a change, you still have to do it. And we’ll argue about it later. We’ll fight about it later. Uh, but you’ve got to, you’ve got to do the work. So that is something that can be, that can be modified at the end of the day. There are many subcontractors, many trade contractors out on that, on that job. And there are many more in a way waiting in the wings, right? Because, you know, we see when a trade contractor leaves or is terminated, someone else has always found two to come in and do the work. So it’s absolutely not crazy to carve out in a subcontract that, that no, if we cannot reach mutual agreement on price, then we don’t perform, I’ve done it and it’s gotten through. Um, so Dan to the question is you could be forced to do change order work, even without agreement on price or without agreement that it’s a change if that’s what your sub contract says.

Joseph Katz: (28:16)

Um, but if you’ve modified your subcontract so that you have the right to take or not take change, order work, if there is an agreement on price, then you’re all the better for it. Um, something else to be, to really watch out for is those typical subcontracts that, that GCs themselves draft and have some contracts. Some contractors sign very clearly say, you do not perform work. If you don’t have a signed change order and you will not be paid for work performed change, work performed without us without a signed change order. And then you never hear that again, uh, on the job, it’s always do the work, do the work, do the work we’ll, we’ll figure out, changes later, do the work, do the work, do the work without ever getting a signed change order. So hold, hold their feet to the fire, hold their feet to the language they themselves drafted.

Joseph Katz: (29:11)

And they themselves had you sign and indicate that I’m sorry, I, you, your own country. My subcontract does not allow me to do the work. If there isn’t a signed change order, which typically it won’t do now, there are, there are options there. Um, some of the subcontracts will say, you know, it could be done on force account, and we argue about it later, but make them do that right, rather than just do the work, because you were verbally told to do the work and don’t worry about it. We’ll take care of you without any writing saying, do this work, you know, on a force account or make them send that, that direction, do the work. So that at least there down the road, there’s going to be agreement, right? That a paper trail that you were forced to do this work. And then, then you can argue about what the cost is and whether it’s a change order or not. But if you don’t even have an agreement, uh, an instruction to do the work, then you’re, you’re not, you’re not as well off.

Joseph Katz: (30:17)

Okay. So marking up the subcontract is crucially important. Uh, you want to be able to, like, we discussed have the right, not to perform work. If an agreement on price is not achieved. Um, and here’s something else you want to, you know, many times contract subcontractors are going to be working in situations of pay if paid or pay when paid payment to the, to the trade. Subcontractor is dependent on the general contractor, receiving payment from the owner. And because you’ve got mechanically and rides and painted the bond claims, that’s not necessarily such a bad situation. As long as I tell all my clients, you have the right to stop work. If you’re not paid after 30 days, 45 days, 60 days, maybe. And that’s your, that’s your control though? What? You’re not working, you know, six months without getting, without getting paid. Um, but you want to make sure that if you’re doing a change that that’s not dependent on the owner payment or not particularly because the change might be a scope gap that the general contractor is responsible for. If you bid out, you know, work a and C and didn’t bid out B, then you know that that’s his fault and that he’s not going to get paid by the owner specifically for that B work. Cause it was never a part of part of his own estimate. So why should you wait for the owner to not pay? And then you yourself not be paid.

Joseph Katz: (31:47)

All right. And then, uh, releases here, um, or you never want to sign a release that release it even a partial release that releases payment for all work done to the date of the release or the date of the last pay application. Uh, because many times you’re going to have unapproved yet as yet change order work being done during that time. And you’re not paid by the end of the job. And you try to get paid for those change orders. You can be sure the GC or more often their lawyer are going to be pulling out these monthly partial releases. You signed and say, Hey, month after month, you released us from all this money. So we’re not going to pay it now. And that will, that will be a defense to a mechanics lien, there’ll be a defense to the payment bond claim courts around the country. Routinely rule a release is a release is a release. A release is perhaps the strongest document, uh, general contractor or surety can come up with to not pay a subcontractor, have a construction lawyer review your contracts. That is an absolute, absolute requirement of construction these days.

Joseph Katz: (33:07)

Uh, you’ve gotta be careful about an overreaching scope. Many con many contracts will say you’ve got to do everything necessary. And if there’s, uh, any kind of, um, conflict between the drawings and the specs, the most strenuous, the strictest most inclusive standard is what prevails here. I’m going to skip right to the bottom for time exclusions. Are your friend, use them or lose them. Um, you know, you should know where you run into problems where you become required to do things that you didn’t think about. Weren’t planning for it big time, um, rather than fight about it afterwards, making an exclusion to your proposal and make sure that that is carried through to the subcontract. Very often, you’ll give a proposal saying what your scope of work is. And then the subcontract will say your scope is all of this section and all of that section, all of the mechanical work, all of the electrical work without regard to the exclusions of your proposal. So you’ve got to, you’ve got to make sure when the scope of work, the scope of work document, um, to the subcontract, you’ve got to review that super carefully and make sure that it matches your proposal either either you’ve got an reference, your proposal language, or literally add in the exclusions from your proposal, because remember your price was based on your inclusions and your exclusions. If the, if the GC is now taking your rate, you’re taking something else. That’s not your price anymore.

Joseph Katz: (34:48)

Um, so you know, this should be what your exclusions are, should be a constantly like a Google doc. It should be, it should be alive in the sense that whenever you’ve got, um, situations come up in projects, uh, add the, add that to your ex for the future for your next project, make sure you make the mistake mistake twice. And you know, after a few years you should have a very robust set of exclusions that serve to protect you. All right, pass through claims. Uh, very often, um, this is usually for a, for a government owner. There’ll be, there’ll be a requirement to pass through the claim, uh, or be a right, rather for the subcontractor to fight the owner directly through the pass through mechanism. But the GC may well not pass that through because why should he, why should he take on that headache if he’s not really going to see much, um, much outfit?

Joseph Katz: (35:53)

Um, so what you’ve got to do is you’ve got to hold their feet to the fire to pass that claim through a meaning. When you, when you sit, when you identify the changes, the increased cost, the increased time, you’ve got to, um, indicate that you’re triggering your right to, to bring this as a pass through. And this will then place the burden on the general contractor to do what he is supposed to do, and actually pass that up and make the government address. It oftentimes we’ll have to certify, uh, your claim. You’ve got to be careful. You know, a lot of, a lot of people, a lot of folks are nervous about certifying a claim. But to me, you know, if you’re telling the truth, the truth will set you free. You never have to be nervous about telling the truth. If you’re not telling the truth, then you shouldn’t be making the claim in the first place,

 Joseph Katz: (36:45)

Change order documentation. There’s, there’s what I call the formal documentation and the informal. So if you’re doing it, if the informal universe includes FIS, proposed change orders notices whether of, of, uh, of a cost or the delay, but then you’ve also got a host of informal documentation in your, in your toolbox. And that’s email, text photos, video, uh, these are all tools that have to be used. Uh, so that there’s a real time record of the fact that there was a change today that, that, you know, the, the auger hit rock or whatever it was today, right. Not some point, uh, down the road.

Joseph Katz: (37:29)

Alright. Um, so here’s a, here’s a situation of using email to your advantage. This is kind of just, you know, freehand draft of an email that says, uh, you know, we experienced increased costs on account of obstructions in the duct run of building a roof trusses, catwalks pipe in other obstructions, national on the drawings require continuous rerouting of a doctor don’t ever. It’s a, it’s a live situation, right? The very first time you read a doc, you don’t know necessarily this is going to be a recurring problem. So you might decide to just swallow it. You probably will just swallow it. You probably won’t even know, you know, the, the, the owner, uh, or, you know, the, the project executive or project manager may not even know about it. It might just be something that, you know, your worker is doing the field, reroute it, put it in an elbow and keep going.

Joseph Katz: (38:18)

But at some point there’s going to be a realization that this is happening more and more often, and it’s going to affect our bottom line at that moment. Uh, there should be an email sent out immediately, as soon as it’s, as soon as you’ve realized that this is going to be a situation where we’re going to, we’re going to lose some money if we don’t get paid for it, and then what you want to do. So here, um, he’s, he’s attached. He says, he’s, he’s tracking time dedicated to the rerouting of the duct is attached a rate sheet, uh, labor rates and equipment rates. And, um, you know, this will, this will be applied to all future instances of rerouting, meaning Delta’s going to track, uh, instances of, of locations and instances of rerouting. Uh, and then crucially that last sentence. If I do not hear back, we’ll have to stop hanging duct until this matter is resolved, right? Don’t just be, um, you know, an indentured servant to the GC, but exercise your right to pull back until it’s resolved appropriately. You can talk, you can think about a fixed in place, camera, video, drone, when a situation gets really out of hand.

Kathryn Barona: (39:27)

Hi, Joe, real quick. Um, we do have a couple of questions that were posted in the Q and a panel. So I just want to make sure that, um, these two people that are still on, we get their questions answered to maybe go back to where you were. Sam says we are there, we are a material supplier. Often a subcontractor will issue the original PO and then call and add more material and tell us to use the original PO are we protected on the original PO?

Joseph Katz: (39:59)

Uh, I mean, the shorter answer is no, if you don’t, if you don’t have that, uh, the price, uh, the purchase order increase, then there’s not going to be an obligation and necessarily to pay for more than what was agreed upon. Um, now it doesn’t need that doesn’t mean necessarily that a new PO or a formal amendment needs to the PO needs to be issued. Many times this could be emails, believe it or not emails are, are records or documents. They’re electronic documents, but there’s nothing that’s not binding about an email, particularly when nowadays everybody’s got these email signatures at the bottom of their, of their emails. Many courts have specifically address, many States have statutes called electronic data or electronic records that say that electronically electronic documents and electronic signatures have the same effect as blue ink signatures, and many, many courts, many state courts around the country have ruled at an email, an email with an offer acceptance functions as a binding contract. Um, so the, the supplier should definitely make sure that this, that this transaction for additional material and the cost that will be, that will be, um, that will be imposed, is tracked in an email.

Kathryn Barona: (41:23)

Okay, great. And the other from Lynn is the GC had to bring up, bring electric up to code saying the building departments that it was due to the way I wrote the scope of work. GC did electrical work without an electrical license and without permit. So the electricians are telling me they are responsible. GC is going to try to charge me for a change order that I’ve not signed or agreed to. Can the GC charge me for extra electrical charges without a signed change order?

Joseph Katz: (42:02)

Okay. So that’s a, you know, what we call in the industry a back charge, right? A, a change order typically is by agreement, a back charge is going to be when someone, when one is unilaterally charging back, the other for work that they deem is the responsibility of the other. Um, it’s a little bit of an evolved situation, but it just, you know, the, the 10,000 foot view, uh, to me says, if you wrote the scope of work in a way that something wasn’t included, um, what that means is that your price is for that scope. And if that’s the agreed upon scope, then you’re not responsible for it. You shouldn’t be held responsible for additional costs, uh, because that wasn’t in your scope, right? It could be, you should be held responsible for your scope, um, at, at the agreed upon price. But if the scope is now is now increasing, is now something different than I think you’ve gotta be paid for that difference.

Joseph Katz: (42:57)

So, you know, you can’t stop the GC from issuing a back charge, but you can fight it in the sense of not agreeing to it and, and retaining, uh, the, the balance owed to you and therefore, and then chasing your every days, whether it’s mechanics, liens, payment, bonds, or straight lawsuit releases, we spoke about how these partial releases are actually final releases through that date and time. So just like you wouldn’t sign a final release at the end of the job, if you’re still owed money, don’t sign a partial release. If you’ve not paid, if you, if you’re not being paid all the money, uh, that you’ve put onto that job yet, which includes unapproved change orders are pending change orders. And because you haven’t been paid for your pending change orders, don’t sign that partial release until you accept out a unapproved change orders are pending change orders.

Joseph Katz: (43:50)

And I have, um, an exception here, uh, this language, I think it’s going to be available on my website. Um, I suggest a rubber stamp. He’s nowadays a lot of this stuff’s done electronically. So you could just cut and cut and paste this, but, uh, you stamp this honor on your release, whatever that really says, this is kind of magic language, not withstanding anything here into the country contrary, which means whatever it says in here, I’m, I’m adding, uh, a clause to that that says it’s not gonna apply to pretension unapproved and or unbilled change orders or any other extra work and work performance since the last billing cycle.

Joseph Katz: (44:35)

Okay. Now, um, with, with the pandemic going on now for upwards of six months, some things you’ve gotta, you gotta think about a force majeure clause, some contracts have them, some don’t moving forward, everybody should have it. Uh, which says basically that if, if, if there’s a national kind of emergency, which, you know, hurricane tornadoes, if you’re in those locations where those are often, um, you know, those can be expected, acts of God, terrorism, war pandemic, that’s a common, uh, that’s a common situation. That’s called that in a force majeure clause. It says that you can, you can get either you can get out of it because of that. And, or you can be entitled to the increased costs if you don’t, if your, if your current contract doesn’t have it, or if it GCs trying to get you to sign a subcontract that doesn’t have a force majeure clause, make sure you get one in there.

Joseph Katz: (45:29)

And, uh, particularly now there’s a, there’s a labor shortage, and there are increases in material costs. So you very likely, if you have a force majeure clause, you want to make sure you’re applying for your you’re submitting PCs for the increase in labor and the increase in material. Um, and then any kind of, you know, oftentimes even if you don’t have a force majeure clause, you were likely being subjected on current jobs to PPE requirements, to social distancing requirements. Maybe you’ve got to work odd shifts to be, you know, not, not have too much congestion on the job site. If these are mandates from the GC or from the owner, they are absolutely ripe for change orders.

Joseph Katz: (46:16)

And what I end every presentation with, to subcontractors is remember your Trump card, no pun intended the mechanics lane, the pain upon the option. Those are your, your shortest, shortest mechanisms tools to getting paid in a timely fashion. And you don’t have to wait until you do all the work. If there’s an issue, if there’s a change order that you’re performing and you’re not getting paid for it file that mechanically. You can, you can update it as, as the work increases. You can update it, uh, file that bond claim. Uh, it will definitely flag attention to your situation from, from, you know, from the highest executive levels on that job, and more likely than not, you will get paid. Thank you very much for tuning in, um, uh, and for sticking around those that are still here. My website, Joe Katz, law.com a change order w what it has on the screen there, we’ll provide, uh, some of the templates and a summary of what we talked about. And, uh, thank you, Katherine. And thank you Levelset. Thank you, uh, to my, uh, assistant Dylan, Shane for all his work and putting together this, uh, presentation.

Kathryn Barona: (47:33)

Thank you so much, Joe, for your time and your presentation today. I know people did get a lot from this, and we had a few questions that, um, you will receive this via email or full recording of it. So you can go back and reference. And if you have any questions for Joe specifically, feel free to reach out to him and connect with him. And you can also post a question on Levelsets platform, anytime, and we host webinars weekly. So please subscribe or sign up or follow Levelset wherever you are out in social. And we’ll be sure to, um, keep you informed of upcoming webinars if you just sign up. Thanks so much, everybody, um, stay safe and have a great day.