Construction projects do not always go according to plans and are often prone to delays or supply changes. When one of the parties to a contract requests changes to the agreement, a written change order is an effective tool to keep track of these changes; however, they must be carefully executed to ensure payment in a timely manner.
A change order should be created whenever terms in the original contract are amended. The most common changes that occur include the scope of work, completion time and price. During the most recent meeting of NACM's Construction Thought Leadership Discussion Group, Sam Smith, regional finance manager of Crescent Electric Supply Company (East Dubuque, IL), shared some of his experiences with change orders over the years as a supplier.
According to Smith, one of the biggest challenges is not knowing when you are going to receive a written change order that supports a verbal request. "Many times, a request for additional materials is received and we need to ship the material as soon as possible, but it takes weeks to get a written change order from the customer," he said. Suppliers that act on changes to an original contract without documentation could open themselves up to a dispute later on.
Change orders are often rushed to the extent that neither the supplier nor its customer has adequate time to carefully review the amendments to the contract, Smith said. Many credit professionals want to satisfy their customers to the best of their ability, but "when we don't [take the time to] ask, pushback or follow up on the written change order, we put ourselves at risk for delayed payment or even no payment," he added. Because change orders modify the original contract, the change order must be reviewed to understand the impact of the changes to the original agreement.
Much like the original contract, a change order could contain unfavorable language for the seller. If they are not carefully reviewed, a material supplier under the general contractor may find themselves at a disadvantage. Change orders can often be a "lightening rod" for disputes, said Randall Lindley, partner at Bell Nunnally (Dallas, TX). "If a client isn't getting paid, we must carefully review both the terms of the original contract and the change order," Lindley said.
Since the purpose of a change order is to document "additional work" not covered by the original contract, Lindley recommends that credit professionals carefully identify the new scope of work. "Using vague or unclear language in a change order, increases the likelihood there will be a dispute," he said.
Creditors also have the leverage of stopping work to encourage payment. However, Lindley cautions that material suppliers may be exposed to high risks by taking this route because they may be subject to claims of breach of contract. Instead, Lindley advises doing the following if a dispute surfaces:
In addition to Lindley's recommendations, Smith advises paying attention to:
-Bryan Mason, editorial associate