What Happens When the Owner and Contractor Lock Up on Change Orders?
In construction, the Proposed Change Order (PCO) and Change Order (CO) processes are vital for addressing unforeseen challenges and maintaining project alignment. But what happens when the owner and contractor reach an impasse? While disputes over change orders can be disruptive, they are not uncommon. Proper management and strategic resolution are key to minimizing their impact on the project.
At iMark Commercial, we’ve seen it all—from transparent negotiations to contentious disputes with significant legal implications. This blog explores what happens when disagreements over change orders escalate, why transparency is crucial, and how owners and contractors can navigate these challenging situations to ensure project completion.
The Root of Change Order Disputes
Conflicts over change orders often stem from two key issues:
- Lack of Transparency: When contractors fail to provide clear, detailed documentation for their change order requests, it raises red flags for owners. Questions like “What are we being billed for?” and “Why is this change necessary?” often go unanswered, creating mistrust.
- Perceived Overbilling or Fraud: In extreme cases, disputes may involve accusations of inflated costs or misrepresented work, sometimes with legal or even criminal implications.
Example Case:
In one of our recent projects, the owner and general contractor (GC) locked horns over two major change orders. In one instance, the GC’s lack of transparency delayed resolution by months. In another, the owner identified serious legal concerns related to the GC’s billing practices, requiring deeper investigation and legal involvement.
These examples highlight why clear documentation, open communication, and proactive resolution strategies are critical to avoiding disputes.
The Owner’s Leverage: Retainage and Building Use
Even when disputes escalate, owners have significant leverage in the form of retainage. Retainage is a portion of the contractor’s payment (often 10%) withheld until the project is completed to the owner’s satisfaction.
By withholding retainage, owners can ensure that contractors remain motivated to resolve outstanding disputes. Additionally, when the project reaches substantial completion, owners typically gain access to and use of the building. This dual leverage—retainage and occupancy—places owners in a strong negotiating position for resolving change order conflicts post-completion.
Strategic Response: Resolving Disputes at Project’s End
When change order disputes arise, it’s often best to focus on completing the project first, with the understanding that unresolved issues can be addressed at the end of the job. This approach minimizes disruptions and ensures the project stays on track. Here’s why this strategy works:
- Preserving the Schedule: Fighting over change orders during the project can cause delays, escalating costs for all parties. By “kicking the can down the road,” the team maintains momentum.
- Consolidating Leverage: Once the project is complete, the owner has full use of the building and retainage in hand, providing a strong position to negotiate or pursue legal action if necessary.
- Avoiding Escalation: Addressing disputes post-completion reduces the risk of heated conflicts derailing the project and helps avoid litigation during critical construction phases.
Transparency is the Best Policy
For contractors, transparency in the change order process is not just a best practice—it’s a necessity. Providing clear documentation that justifies costs and explains why changes are required builds trust and expedites resolution. Without this, disputes are inevitable and may lead to:
- Lengthy delays in approval.
- Strained relationships with owners.
- Legal consequences, particularly if overbilling or fraud is suspected.
For owners, asking detailed questions and demanding transparency can help uncover issues early. Examples of critical questions include:
- What is the full breakdown of costs, including materials, labor, and margins?
- How does this change impact the schedule and scope of work?
- What supporting documentation (e.g., subcontractor quotes) can you provide?
When Legal and Ethical Issues Arise
In extreme cases, change order disputes may uncover unethical or illegal contractor practices. These situations require swift action, including:
- Engaging Legal Counsel: Consult with construction attorneys to assess the validity of the contractor’s charges and potential legal claims.
- Documenting the Issue: Maintain thorough records of all communications, cost breakdowns, and project impacts.
- Considering Future Recourse: If necessary, pursue arbitration, mediation, or litigation after project completion.
At iMark Commercial, we understand the delicate balance between addressing immediate project needs and managing long-term disputes. In our example, the GC was given clear instructions to justify their charges, with legal action reserved for post-completion if transparency wasn’t achieved.
iMark’s Role in Navigating Disputes
iMark Commercial specializes in resolving change order conflicts efficiently and fairly. Here’s how we help:
- Comprehensive Evaluation: We thoroughly analyze all change orders, ensuring costs are justified and changes are necessary.
- Facilitating Communication: Acting as an intermediary, we bridge the gap between owners and contractors, reducing misunderstandings.
- Strategic Guidance: We advise owners on leveraging retainage and resolving disputes after project completion to maintain progress.
Final Thoughts
Disputes over change orders are inevitable in construction, but they don’t have to derail your project. By focusing on transparency, leveraging retainage, and addressing unresolved issues after project completion, owners and contractors can avoid costly delays and preserve working relationships.
At iMark Commercial, we’re here to support you through every step of the process, ensuring that even the toughest disputes are resolved with professionalism and care. If you’re facing challenges with change orders, contact us today to learn how we can help guide your project to success. Visit www.imarkcommercial.com for more information.
