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

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9guidance can be obtained from the FHWA Con- tract Administration Core Curriculum Manual,45 which recognizes that it is unrealistic to expect con- struction projects to be built without deviating from the project plans. The manual provides that estab- lishing a strict set of rules to govern federal aid pol- icy in contract changes is not practical since the rules would need to recognize that contract changes involve unique circumstances. Generally the FHWA manual classifies change orders by plan changes, specification changes, and changes in cost and time. Federal policy requires that proposed major extra work or major changes in the contract plans be approved in advance, unless it is an emergency. Major change or major extra work means a change that would significantly affect the cost of the project to the federal government, or alter the limits, character, or scope of work. Early coordination between the state transporta- tion agency and FHWA is essential to reviewing and handling change orders. FHWA’s review of proposed change orders includes federal aid eligibility, impacts on the “original scope of work,”46 basis of payment, and time adjustments. The manual provides that in cases where the proposed work is beyond the “original scope of work,” the FHWA Division Office must determine whether the additional work is a modification of the original scope or a significant change that would benefit from competitive bidding. “The indi- vidual circumstances associated with the magni- tude of the work and quality of the change, as well as the cumulative impact upon the whole project, should be reviewed.”47 Among the considerations are: s(AVETHECONTRACTWORKELEMENTSCHANGED s(OWDOESTHEADDITIONALWORKIMPACTQUANTI- TIESANDCOST s$OTHEPROPOSEDCHANGESIMPACTTHECOMPLEX- ITYOFTHEWORK s 7HAT IS THE CUMULATIVE IMPACT ON THE PROJECT s7OULDTHEREBEASUBSTANTIALBENElTTOTHE public for the proposed change of work to be BIDOUT48 VI. REPRESENTATIVE STATE REQUIREMENTS ON CONTRACT MODIFICATIONS A. Competitive Bidding Statutes A review of state case law on contract modifications reflects that in certain defined situations, contract modifications do not require competitive bidding. The following statutory rules and principles can be ascer- tained from a review of state case law and statutes. Some states have strict monetary threshold lim- its for change orders that trigger competitive bid- ding. In Oklahoma, for example, the Oklahoma stat- utes provide that advertising for competitive bidding is required for change orders on contracts of $1 mil- lion or less where the change order exceeds 15 per- cent of the original contract amount, and advertis- ing for competitive bidding is required for change orders on contracts exceeding $1 million where the change order exceeds $150,000 or 10 percent cumu- lative increase in the original contract amount.49 South Dakota statutes provide an excellent example of state statutory requirements that gov- ern contract modifications. S.D. Codified Law 5-18B- 19 (2015) provides as follows: Any amendment or change order to an existing contract for construction, reconstruction, or remodeling of a public improvement, does not need to be bid if: (1) the contract contains unit prices for the same type or class of work; (2) the change or extra work is necessitated by circum- stances related to soils, utilities, or unknown conditions directly affecting the performance of the work that were not reasonably foreseeable at the time the underlying contract was let and the change or extra work is necessary to the completion of the public improvement. In South Dakota, since most transportation project contracts are unit price contracts, the changed or mod- ified work must be the same type or class or work spelled out in the contract. If the contract is not a unit price contract, then the statute requires that the change is necessary for completion of the project and could not have been reasonably foreseeable at time of contract letting. For example, in Thomas Bozied v. City of Brookings, South Dakota,50 the case was remanded for retrial to determine whether the change order for additional parking lot work required for tenant improvements was necessary to complete the project and was unforeseen at the time of contract letting. Another example of statutory restrictions on change orders is the Virginia Code in Title 43, which provides as follows: § 2.2-4309. Modification of the contract. 45 FHWA Contract Administration Core Curriculum Manual, Oct. 2014 (entire manual may be downloaded at http://www.fhwa.dot.gov/programadmin/contracts/coretoc. cfm (last visited Feb. 26, 2015)). 46 Id. at 153. 47 Id. 48 Id. 49 OKLA. STAT. tit. 61, § 121 (2014). 50 2001 SD 150, 638 N.W.2d 264 (2000).

10 A. A public contract may include provisions for modification of the contract during performance, but no fixed-price contract may be increased by more than twenty-five percent of the amount of the contract or $50,000, whichever is greater, with- out the advance written approval of the Governor or his des- ignee, in the case of state agencies, or the governing body, in the case of political subdivisions. In no event may the amount of any contract, without adequate consideration, be increased for any purpose, including, but not limited to, relief of an offeror from the consequences of an error in its bid or offer. … C. Nothing in this section shall prevent any public body from placing greater restrictions on contract modifications. Thus, VDOT has some statutory restrictions on the scope of contract modifications that can be approved by the Governor, but in this instance there is at least an implicit threshold where a decision could be made to competitively procure additional work. B. AASHTO Guide Specifications and Typical State Guidelines and Specifications The AASHTO Guide Specifications for Highway Construction contains sample changes clause provi- sions that many state transportation agencies have adopted or modified in their contracts. The guide specifications recognize the need to make changes in the contract for time and cost of performance. The permissible changes include differing site condi- tions, significant changes in the character of the work, suspensions of work ordered by the engineer, and extra work. The specifications provide: 104.02 Contract Revisions A. General. The Agency reserves the right to revise the con- tract at any time. These revisions do not invalidate the con- tract or release the surety, and the Contractor agrees to complete the contract as revised. Do not proceed with the work without the Engineer’s written authorization. Upon receiving written approval, proceed immediately with the revised work. The Agency will only consider requests from the Contractor for a revision to the contract amount or time if the Contrac- tor first notifies the Engineer as specified in Subsection 104.03. If the Engineer determines that a revision is necessary, the Agency will revise the contract time as specified in Subsec- tion 108.06 and will pay for the revised work at the contract unit bid prices unless the Contractor’s cost of production or the character of the work is materially changed, in which case the Agency may revise the contract as specified in Sub- section 109.04. The Agency will not pay for lost or antici- pated profits resulting from a revision to the contract. If the Engineer decides that a potential contract revision identified by the contractor is not necessary, and the Con- tractor does not agree with the Engineer’s decision, the Con- tractor may pursue a claim as specified in Subsection 105.18. B. Differing Site Conditions. If either of the following condi- tions is encountered during the progress of the work, immediately notify the Engineer of the conditions as speci- fied in Subsection 104.03 before they are disturbed and before performing or continuing with the affected work. 1. A subsurface or latent physical condition differing mate- rially from those indicated in the contract; or 2. An unknown physical condition of an unusual nature, dif- fering materially from those ordinarily encountered and generally recognized as inherent in the work provided for in the contract. C. Significant Changes in the Character of Work. The Engi- neer may alter the contract quantities, the work, or both as necessary to satisfactorily complete the project. If such alterations significantly change the character of the work, the Agency will make appropriate adjustments in the con- tract as specified in Subsections 108.06 and 109.04. Consider either of the following to be a “significant change”: 1. When the character of the work as altered differs materi- alliy in kind or nature from that involved or included in the original proposed construction; or 2. When the quantity of a major item of work is increased in excess of 125 percent or decreased below 75 percent of the original contract quantity. Any allowance for an increase in quantity applies only to that portion in excess of 125 per- cent of original contract item quantity, or in the case of a decrease below 75 percent, to the actual amount of work performed. Before performing significantly changed work, reach agree- ment with the Agency concerning the basis for the adjust- ment as specified in Subsections 109.04 and 108.06. If the alterations do not significantly change the character of the work specified in the contract, the Agency will pay for the altered work at the contract unit price. If the Contractor disagrees as to whether an alteration con- stitutes a significant change, use the notification procedures specified in Subsection 104.03. D. Suspension of Work Ordered by the Engineer. If the Engi- neer suspends or delays all or any portion of the work for an unreasonable period of time (not originally anticipated, cus- tomary or inherent to the construction industry), and the Contractor believes that additional compensation, contract time, or both is due because of the suspension or delay, the Contractor shall notify the Engineer as specified in Subsec- tion 104.03. The Engineer will evaluate the Contractor’s request. If the Engineer agrees that the cost, time or both required for the performance of the contract has increased due to the suspe- nion or delay and the suspension or delay was caused by conditions beyond the control of and not the fault of the Contractor, its suppliers, or subcontractors at any approved tier and not caused by weather, the Engineeer will revise the contract as specified in Subsections 108.06 and 109.04. The Agency will not grant or consider revisions based on an Engineer-ordered suspension 1. without timely written notice as specified in Subsection 104.03; 2. to the extent that performance would have been sus- pended or delayed by any other cause;