Permissible Changes in Scope of Work for Construction Contracts (2015)

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5with such competition as is practicable under the circumstances.”15 In emergency situations, agencies could exercise such broad authority by adding work to existing contracts to address emergencies. Another area that provides agencies flexibility is the “on-call” contracts. Some agencies, primarily in relatively uncomplicated highway work such as guard rail repair or striping work, will competitively procure one or more contractors to provide general scopes and pricing for such work, and then add that work on a task order basis to those contracts.16 For example, MassDOT, after a general competitive procurement, lets contracts in districts for various scopes of work for both scheduled activities and emergency activities and then issues work orders for specific assignments.17 Thus, the threshold competitive procurement allows the agency the flexibility of “adding” specific work to be performed, via task order, without having to com- petitively procure each item of specific work needed. A unique case from California illustrates an unusual exception to competitive bidding where competitive proposals would not produce an advan- tage, or where it is impractical to obtain what is required. In Graydon v. Pasadena Redevelopment Agency,18 the court approved a negotiated contract for construction of a subterranean garage without competitive bidding. The court reasoned that requir- ing competitive bidding would result in a delay of 14 months and affect the agency’s ability to pay its bonds, which was dependent on the flow of tax incre- ments resulting from the completion of the retail center. The court noted this exception to competitive bidding and concluded that the delay in the comple- tion of the retail center if the changed work had been competitively bid would have a direct bearing on the financial ability of the agency to meet its financial obligations and statutory purposes. IV. CONTRACT MODIFICATION BASICS Virtually all construction contracts contain a “changes” clause that allows the awarding agency to modify the scope of the work and time of performance, with or without the consent of the contractor. Under common law, an attempt to modify the contract by one party without the consent of the other party was considered a breach of contract. Thus, under common law, without a changes clause an owner could not modify the contract unless the contractor agreed.19 The changes clause is an essential element in today’s transportation contracts. The changes clause provides for flexibility by giving the agency the uni- lateral right to order changes in the work to accom- modate changes in needs, requirements, and cir- cumstances on the project. It also typically provides the contractor a means of proposing changes to the work to facilitate more efficient performance and improving quality and products.20 Changes may also be needed for other reasons, including correcting a design error, providing more detail on ambiguous or inadequate specifications or plans, or dealing with unanticipated site conditions that affect the cost and time of performance. The changes clause typi- cally gives broad authority to the contracting officer or engineer to order or approve changes without going through a new competitive procurement.21 Despite this flexibility, the changes clause often pro- duces controversy and is the most frequently liti- gated provision in construction contracts. The changes clause has been used by the federal government for over 100 years. The wording of the clause has been revised and modified by each state transportation agency, but the basic provisions used by states closely mirror the federal requirements. The changes clause also has been modified over the years to reflect new federal requirements that will be discussed later in this digest. Typical changes clauses have several common elements that include: s'IVINGAUTHORITYTOTHEOWNERTOMAKEUNILAT- eral changes; s)DENTIFYINGTHEBASESFORCHANGESTOBEMADE s )DENTIFYING THE PERSON AUTHORIZED TO MAKE changes; s2EQUIRINGTHATTHECHANGEBEINWRITING s2EQUIRINGSUPPORTINGINFORMATIONANDJUSTIl- cation for the change; s/UTLININGPERMISSIBLECOMPENSATIONAND s/UTLININGPERMISSIBLEEXTENSIONSOFTIME The American Association of State Highway and Transportation Officials (AASHTO) Guide Specifi- cations for Highway Construction contain sample 15 RI. GEN. LAWS § 37-2 -21 (b) (2014). 16 For a complete discussion on exceptions from com- petitive bidding, see 2014 Supplement, supra note 4, at 1-30 through I-44. 17 Copy of document on file with authors (Project No. 605005, Document A00801). 18 104 Cal. App. 3d 631, 164 Cal. Rptr. 56 (1980). 19 2014 Supplement, supra note 4, at 53. 19 2014 Supplement, supra note 4, at 53. 20 JOHN CIBINIC, RALPH C. NASH & JAMES F. NAGLE, ADMINIS- TRATION OF GOVERNMENT CONTRACTS 380 (4th ed. 2006) (here- inafter “Cibinic”). 21 Id. at 381.

6changes clause provisions that state transportation agencies have adopted or modified in their contracts.22 A. Cardinal Change The authority to order or permit changes is not unlimited. In general, the contractor is not obligated to perform work under a unilateral change order when the changed work results in a project scope that is substantially different from the one that the contractor agreed to perform when the contract was signed. The courts, based upon federal procurement, have coined the term “cardinal change” to describe changes materially beyond the scope of the original contract. The litigated cases fall within two sources: 1) where the contractor is displeased with the request for changed work and seeks a determination that the work is beyond the contract scope, and 2) where a competitor of the contractor protests the issuance of the change order as violating competi- tive bidding requirements and depriving it of the opportunity to compete for the work.23 Most of the cases interpreting the changes clause analyze whether the change is within the scope of the contract. The cases that fall within this category deal with disputes between the contractor and the awarding agency or cases involving protest by com- petitors to the awarding agency. Courts have adopted the cardinal change doctrine in “beyond the scope of contract” cases. Understanding the cardinal change doctrine is important to assessing what changes may require competitive bidding. 1. Unwilling Contractor and “Cardinal Change” Contractors unwilling to perform directed changed work often dispute the change, asserting that the change is not within the general scope of the original contract and therefore is a “cardinal change.” The contractor argues that it is not obligated to perform the work where the changed work is substantially different from the work the contractor agreed to per- form when it signed the original contract. Asserting the cardinal change doctrine, the contractor argues that the changed work is not within the general scope of the work as bid. The cardinal change doc- trine has two purposes: 1) to protect a contractor from being compelled to perform work substantially different from the work it agreed to perform when the contract was signed, and 2) to prevent the agency from circumventing the competitive bidding process by ordering substantial modifications to the work beyond the original scope of the contract as bid.24 The cardinal change doctrine is fact dependent, requiring an analysis of the facts regarding the magnitude or quantity of the change and its effect on the entire project. At the conclusion of the analy- sis the basic question is whether the contractor has been ordered to perform changes that are substan- tially different from what the contractor agreed to perform when it accepted the contract.25 Although the cardinal change doctrine has not been universally accepted in all states, its underlying concepts have been applied in various court decisions. In Alfred Elia Bldg. Co. v. New York State Urban Dev. Corp.,26 the court made no reference to cardinal change, but held that a change order may be issued without competitive bidding so long as the modifica- tion does not alter the essential identity or main pur- pose of the contract. The court reviewed a contract modification that added tunnel construction to the building of a convention center in Niagara Falls, New York. The petitioner challenged the modification, asserting that it was outside the scope of the original contract and required competitive bidding. The court determined that the test is whether the supplemen- tal work ordered was so varied from the original plan, was of such importance, or so altered the essential identity or main purpose of the contract that it consti- tutes a new undertaking.27 The court concluded that the added tunnel construction was of such impor- tance that it constituted a new undertaking requiring competitive bidding.28 From a historical perspective, similar case hold- ings highlight if the work is of minor importance, if it is new and different in main aspects, or if it amounts to a new undertaking or alters the essen- tial character of the project.29 This same test has been uniformly applied in sev- eral opinions by the New York State (NYS) Comp- troller. For example, as to a modification for $40,000 of additional sewer repairs under a $349,000 sewer contract, the NYS Comptroller opined that the addi- tional work was incidental to the original work and did not so substantially vary from the original plan or materially alter the main purpose of the contract as to constitute a new undertaking.30 22 Further discussion of AASHTO guide specifications is included later in this digest. 23 Cibinic, supra note 20, at 381. 24 2014 Supplement, supra note 4, at 5-8. 25 Id. 26 54 A.D.2d 337, 388 N.Y.S.2d 462 (1976). 27 Id. at 343. 28 Id. at 344. 29 Id. at 342 (citations omitted). 30 Office of The State Comptroller of New York, Op. 83- 52, 1983 N.Y. Comp. Lexis 430 (Mar. 17, 1983); see also Office of the Attorney General of the State of New York, 1957, N.Y. Op. (Inf.) Att’y. Gen. 108, 1957 N.Y., AG Lexis 212 (Oct. 9, 1957); Office of the State Comptroller of New York, Op. 81-224, 1981 N.Y. Comp. Lexis 661, N. St. Compt. 241 (July 1, 1981).

7Similar decisions can be found from the courts in Massachusetts. In Morse v. City of Boston,31 for example, the court reviewed a contract modification that more than doubled the estimated quantity of earth and gravel fill and changed the payment provisions substituting truck measurements of less than 10 percent, rather than the “in place” measure- ment required in the original contract. The court held that the city could change the contract within reasonable limits, but that an alteration that results in an essential change of such magnitude as to be incompatible with the original contract is not per- missible under the competitive bidding statute. The court reviewed the change to determine whether the alteration was new and different in main aspects and not incidental to the main contract (emphasis added). The court determined that the aggregate amount of the change was a large sum of money and not incidental to the main contract. The change altered the contract and resulted in a new and dif- ferent contract in violation of the competitive bid- ding statute.32 Other courts in Massachusetts have noted the danger of attempting to significantly change the terms of competitively bid public con- tracts and thereby restrict the power of public offi- cials to amend or alter public contracts.33 Similar concepts can be found in Arkansas, where in Shackelford v. Campbell,34 the court reviewed a contract modification, indicating that the analysis should be determined, not by the cost of the change, but by the relation the change bears to the main work. The court concluded that the change from steel construction to reinforced construction would not alter the substantial character and general plan of the building or increase its cost to an unreasonable amount that would require competitive bidding It needs to be noted, however, that the cardinal change doctrine has not gained wide acceptance in public transportation contracting and has been eroded by federally mandated changed condition clauses. The Surface Transportation and Uniform Relocation Assistance Act (STURAA) of 1987 required the Federal Highway Administration (FHWA) to develop standardized changed condition clauses that were to be included in all federal aid construction projects. The intent behind the legisla- tion was the concept that new change order (adjust- ment) clauses would reduce contractor contingencies included in bids, resulting in reduced costs.35 The standardized changed condition clauses required by 23 U.S.C. § 112(e) and implemented by federal regu- lations, 23 C.F.R. 635.109, must be included verba- tim in all federally aided state contracts, unless it is prohibited by state statutes. Alternate clauses must be approved by the FHWA Administrator. The three federal change clauses provide for adjustments for 1) significant changes in the charac- ter of the work; 2) suspension of work; and 3) differ- ing site conditions. The significant changes clause provides two definitions of significant change: 1) instances where the character of the work is changed or modified and differs materially from the work in the original contract, and 2) where a major item of work as defined in the contract provisions is increased or decreased by more than 25 percent from the original bid quantity. The clause provides that either party may seek an adjustment in time and/or additional costs. This changes clause is widely used by transportation agencies. The suspen- sion of work provision provides a compensation mechanism for written stop work orders, while the differing site conditions provision provides for com- pensation of both time and money for changes char- acterized as Type 1 (differing conditions based upon what is depicted in the contract documents) or Type 2 (differing conditions based on changes not gener- ally recognized as inherent in the work). As noted above, under the cardinal change doc- trine the test is whether the modification exceeds the scope of the contract.36 The three federally man- dated changes clauses greatly expand the scope of the traditional changes clause. These provisions are broad; anticipate, authorize, and permit changes both in character and time of performance to the contract work; and erode the continued application of the cardinal change doctrine. 2. Third Party Protest—“Scope of Competition” Test When a competitor protests the issuance of the change order in lieu of conducting a competitive procurement, the test is whether the proposed change is within the scope of the original bidding competition. Courts have analyzed the “scope of competition test” as essentially the same as “scope of the contract” with a slightly different focus. For example, in AT&T Communication Inc. v. Wiltel, Inc.,37 the court reviewed the solicitation to deter- mine what contract modifications might be called for. The court indicated “we also consider whether 31 253 Mass. 247, 148 N.E. 813 (1925). 32 Francis A. Morse v. City of Boston, 253 Mass. 247, 254 (1925). 33 Construction Industries of Mass., Inc., et al. v. City of Peabody et al., 6 MASS. L. REP. 615 (1997). 34 110 Ark. 355, 161 S.W. 1019 (1913). 35 2014 Supplement, supra note 4, at 5-9. 36 2014 Supplement, supra note 4, at 5-8. 37 1 F.3d 1201 (FED. CIR. 1993).