Why Construction Creditors Must Pay Close Attention to Change Orders

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:

• Start with an email objection to work requested without a signed change order.
• Ask for confirmation when following up.
• Keep careful documentation throughout every step.
• Obtain legal guidance.

In addition to Lindley's recommendations, Smith advises paying attention to:

• Time is of the essence clauses. These clauses can commit sellers to challenging deadlines that can lead to more disputes down the road. Timetables are negotiable so make sure you have enough time to honor the change order and keep yourself from being liable for damages.
• Additional orders require a written change order clauses. If the contract specifies that changes or additional orders to the original contract be submitted as a change order, then the supplier should flag the customer account to reflect the written-change-order requirement. Otherwise, the seller may be at risk for delayed payments or worse, nonpayment, for not following the terms of the original contract.
• Notice requirements. If the change order includes a notice requirement with a deadline and you miss it, your company's rights might expire.
• Freight issues. If the completion schedule is tight and you need to use express shipping, ensure the written change order includes express freight. If not, this is often disputed in the end.
• Additional terms. Language that ties your company to additional terms and conditions not previously agreed to in the original contract.

Note: NACM's Construction Thought Leadership Discussion Group meets on the third Tuesday of the month to collaborate with other forward-thinking experts in the construction credit industry. If you would like more information about the group, contact Education Director Tracey Lerminiaux at This email address is being protected from spambots. You need JavaScript enabled to view it..

-Bryan Mason, editorial associate