While change orders are always part of construction projects, it’s important to know whether a public agency is limited on how much it can increase the scope of the work through change orders. A contractor in Virginia found out the hard way that the state agency did not have the authority to increase the scope of the project and thus the contractor could not collect for the extra work.
In Carnell Construction Corp. v. Danville Redevelopment & Housing Authority, the contractor was hired by the housing authority to prepare a site for construction. The project did not go well and both sides blamed the other for delays and increased costs. After being removed from the project, the contractor sued the housing authority for, among other things, breach of contract. The jury awarded the contractor a total of $915,000 for the housing authority’s failure to pay for extra work and improper removal.
The trial court reduced the verdict to $215,000 based on a Virginia statute that restricts the amount by which a public contract may be increased through change orders. In essence, the court concluded that even if the housing authority demanded that the contractor perform extra work, the contractor cannot recover because the housing authority failed to obtain permission from the state to increase the contract amount.
This case illustrates a real problem for contractors on public projects in states that have statutory cap statutes. The contract may require the contractor to continue with the work pending negotiation/approval of the change order. And, even when both parties agree to the change order, the public entity may not have obtained the necessary approvals to implement the change order. In those situations, the contractor may not be able to recover the cost of the extra work.
Take Away: Contractors have to be aware of state laws that limit the amount by which a contract may be increased. If the state statute limits the increase to a certain percentage, the contractor must make sure that the agency obtains the proper permission to increase the scope of the contract before undertaking the additional work.