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

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12 unanticipated site conditions. The adoption of broad changes clauses enables contractors to reduce, if not eliminate, bid contingencies, recognizing that the contract provides effective adjustment mechanisms to address unanticipated site conditions or other changes in the work. That said, the right to make changes is not limit- less. As noted in this digest, usually standard con- tract specifications (and sometimes statutes and regulations) define the limits of authority of the agency to direct changes and the limits of entitle- ment for contractors to request changes. In general, the contractor is not obligated to perform work under the changes clause when the changed work is substantially different from the one the contractor agreed to perform when the contract was signed. In addition, some courts have addressed the scope of permissible changes by applying the “cardinal change” test and the “scope of the competition” test to limit the authority of agencies to change contracts after they have been bid and awarded. The afore- mentioned cardinal change doctrine is fact depen- dent, requiring an analysis of the magnitude or quantity of the changes and its effect on the entire project. In addition, similar concepts are found in numerous state court decisions where the courts have determined that competitive bidding is not required if the essential identity or main purpose of the contract is not altered by the change. Today’s modern changes clauses required for all federally aided construction projects are quite broad and permit contract modifications for significant change in the character of the work, suspension of work, and differing site conditions without a com- petitive procurement. Many states have adopted these broad adjustment provisions in their standard contract specifications even if they are not federally funded. As noted in the digest, the three federally mandated change clauses greatly expand the scope of the traditional changes clauses, erode the cardi- nal change doctrine, and authorize changes both in character and time of performance, all without con- ducting a competitive procurement. Most state agencies in their change order stat- utes, regulations, policies, and procedures do not explicitly address the interplay, let alone the trigger point, between change orders and competitive bid- ding. In general, state administrative manuals and procedures focus on justification, documentation, and procedure and do not address the necessity of conducting a competitive procurement. However, in their research and from the surveys, the authors found a few states where there was an explicit test for when a contract modification triggered an inquiry of whether a competitive procurement was required. In Oklahoma, for example, competitive bidding is required for change orders exceeding cer- tain monetary amounts specified in the Oklahoma statutes. The Ohio Revised Code and ODOT’s policy memos and guidance provide a detailed process for the approval of contract modifications without com- petitive bidding if the modification falls within numerous defined exceptions and requirements. Federal guidelines are limited to the Curriculum Manual, which indicates that the FHWA division office must determine if a contract modification of the origi- nal scope or a significant change would benefit from competitive bidding. In addition, the manual man- dates review of the circumstances, magnitude, quality, and the cumulative impact upon the whole project. Therefore, the authors have concluded that the common practice for state highway agencies is to per- mit wide latitude to issue contract modifications as long as 1) the modifications are permitted (or not pro- hibited) by statute, regulation, or specification and 2) the modifications are generally within the scope of the original contract, including the contract adjust- ment provisions and the aforementioned three feder- ally mandated change condition provisions. If these tests are met, then no competitive procurement of the revised scope of work is required in most cases. VIII. SELECTED CASE STUDIES Based on the preliminary research for this digest and the results of the surveys, the authors selected representative state transportation agencies for case studies. These representative state agencies’ programs vary from over $1 billion to under $500 million. Other- wise, all programs are similar in that they engage in competitive bidding practices with exceptions for emergencies. Differing site conditions and unantici- pated suspensions are statutory bases for change orders. Each of these programs requires a multi-tiered approval process for contract modifications necessitat- ing an increase in the original contract amount. A. Ohio Department of Transportation 1. Statutory and Administrative Constraints The Ohio Department of Transportation (ODOT) has an approximately $2 billion yearly construction program and has devoted serious attention to competi- tive bidding and change orders. ODOT’s construction program is governed by detailed Ohio Revised Code (ORC) provisions and written policies concerning the approval of change orders and competitive bidding. The ORC Section 127.16 mandates competitive selection and provides that except as otherwise pro- vided in the section, no state agency using money that has been appropriated to it directly shall spend

13 greater than $50,000 with one supplier within the fis- cal year unless the purchase is made by competitive selection or with the approval of the Controlling Board. The ORC also provides that the Controlling Board may approve the purchase without competi- tive bidding if it determines an emergency exists or there is a significant economic reason. Change orders in Ohio are considered purchases and the department reviews the change order to determine if it should be competitively bid, is exempted from competitive bidding, or requires Controlling Board approval. 2. Ohio Contract Modification Provisions ODOT contract provisions contain several impor- tant change provisions. Section 104.02 Revisions to Contract Documents of the Ohio Construction and Material Specification (CMS) includes: A. “General. The Department reserves the rights to revise the Contract Documents at any time. Such revisions do not invalidate the Contract or release the Surety, and the Con- tractor agrees to perform the Work as revised. The provisions of this section are subject to the limitations of ORC 5525.14.” B. Differing Site Conditions provision that conforms to the federally mandated provisions. C. Suspension of work provision that conforms to the feder- ally mandated provisions. D. Significant Change in Character of Work that conforms to the federally mandated provisions and provides a table for increase and decrease factors that adjust the compensa- tion provisions. E. Eliminated Items providing that the Department may partially or completely eliminate contract items. F. Extra Work providing that the contractor must perform extra work as directed by the Engineer. G. Unilateral Authority to Pay providing that ODOT has uni- lateral authority to pay the Contractor sums it determines to be due the Contractor for work performed on the project. 3. Modification Review Criteria Ohio Revised Code provisions also provide mone- tary limits (“contract limit”) for change orders that can be approved without competitive bidding or Controlling Board approval. The monetary limit is the amount of contract pay item that may be increased. The Ohio Code limits are: $25,000 for con- tracts having an original contract price of $500,000 or lower; 5 percent of total contract price for con- tracts with original contract price of $500,000 to $2 million; and $100,000 for contract with original con- tract price over $2 million.52 Ohio Revised Code § 5525.14 (A) provides that the Director of Transportation may increase and decrease the quantities of any items specified except as proved in Division B of this section; the additional cost shall not exceed the lesser of $100,000 or 5 per- cent of the total contract price. The monetary limits do not apply and competi- tive bidding is not required if the change order falls with the requirements of Division B: 1) To change orders when the total dollar value of the change is $25,000 or less. 2) To change orders that reflect increase in the plan quan- tity that is determined during the final measurement of an item of work. 3) To change orders that result from federally mandated requirements that did not exist at the time of the original award. 4) Circumstances that would create a life, safety, or health threatening situation or would unduly delay the completion of a project or increase its costs only if the Director makes a finding of such fact and declared an emergency and issues the findings. Extra work under these circumstances may include not only construction needed to complete project but also adjustments to meet changed conditions alteration in original plans, unforeseen contingencies or payments neces- sitated by contract termination or suspension. The definition of emergency is defined as a life, safety, or health hazard if work is not started within the next 6 weeks or if postponing the work up to 6 weeks will cause a delay or additional cost to the project. 4. Standard Ohio Contract Provisions and Policy Memoranda The ODOT standard contract provisions con- tained in CMS Section 104.02 provide that the Department reserves the right to revise the contract documents at any time.53 ODOT has adopted a change order memoran- dum54 that provides that it is the policy of ODOT to execute change orders to modify construction con- tracts to accomplish the following: add work that is necessary to complete the project as intended by the original plan and for any reason that is necessary to complete the project as intended and as necessitated by policy, contract, and applicable law. The policy further provides that work that is not necessary to complete the project as originally intended shall not be added to a project and shall be contracted through the department’s competitive 53 Phone conversation with ODOT engineer Pam Clawson on Oct. 7, 2013, and 2013 Change Orders, Office of Construction Management training curriculum. 54 Change Order Policy 27-010 (P), available at https:// www.dot.state.oh.us/Divisions/ConstructionMgt/Online Docs/Construction%20Policies/27-010(P)_06202003.pdf. 52 See Ohio Standard Procedure for Processing Change Orders, Standard Procedure No. 510-010 (SP) (June 18, 2010), available at http://www.dot.state.oh.us/Divisions/ ConstructionMgt/OnlineDocs/Construction%20Policies/ 510-010(SP)_03092012.pdf (last visited Feb. 26, 2015).

14 bidding process or the director’s emergency con- tracting authority. Construction or lower costs are not valid reasons to avoid competitive bidding requirements of state law. The policy further states that the work must be within the existing right of way, covered by environ- mental document and waterway and miscellaneous permits, and within the project limits stated in the plans. If necessary, the deputy director shall acquire additional right of way, reevaluate and update the approved environmental document and permits, and extend project limits utilizing forms contained in 510-010 (SP). Ohio contract provisions also provide for the pre- viously discussed changed condition clauses required under 23 U.S.C. 106 and C.F.R. 635.109 and required approval of the Federal Highway Division Adminis- trator under C.F.R. 635.120. 5. Administrative Approval Process Standard Procedure for Processing Change Orders No. 510-010 (SP) governs the ODOT approval pro- cess and provides that the procedure and policy will ensure fair and reasonable prices for change orders, prevent compromising of the competitive bidding process, prevent the appearance of favoritism to any contractor, and minimize the risk of fraud (empha- sis added). The procedure mirrors the aforementioned pol- icy statement and describes regular work change orders, extra work change orders, force account, Federal Highway Administrative Consultation and Concurrence, Program Managers Consultation and Concurrence, Approval Authority, Controlling Board Approval, Execution and Distribution, Authority to Proceed with work prior to processing change order, change orders on projects in litiga- tion, extension of project limits, and monitoring compliance. It outlines the document requirements for change orders (which include the terms, conditions, and justification), and provides for consultation with the district and the director. It details the requirement that all major changes in the plans and contract provisions and all major extra work shall have FHWA approval in advance of their effective dates and for non-major changes and for non-major work formal FHWA approval may be given retroactively. It further provides that all extra work change orders in excess of the contract monetary limits must be submitted to the Controlling Board for approval prior to performance and payment, as well as detailing the aforementioned Ohio Revised Code exceptions. The procedure provides that change orders be approved by the District Program Manager and the Central Office Program Manager (and discussed with the local participating agency prior to approval for an item containing local funding). It further details the approval authority in the district and main office levels and provides the requirements for change orders based on emer- gency declarations. The procedure grants the direc- tor emergency permission under Ohio Revised Code Section 5525.14 to proceed with added work that exceeds the contract limits prior to processing the change order. It provides that permission shall be in writing and granted to add work that is necessary to eliminate emergency circumstances that would create life, safety, or health situations, or unduly delay the completion of the project. The procedure requires a director’s declaration entitled “Declara- tion of Emergency and Permission to Proceed with the Work.” 6. Significant Case Law Developments None reported B. New York State Department of Transportation The New York State Department of Transporta- tion (NYSDOT) has a $1.5 billion annual construc- tion program. 1. Statutory and Administrative Constraints NYSDOT’s construction program is governed by several statutes, which include: New York Highway Law Section 38(3) (2014) pro- vides: “The contract of the construction or improve- ment of such highway or section thereof shall be awarded to the lowest responsible bidder as will best promote the public interest.” The provisions require that NYSDOT and the Office of the State Comptroller approve change orders. Section 38 (8) also provides: Contingencies and extra work. Whenever the commissioner of transportation determines that from any unforeseen cause the terms of any contract should be altered to provide for con- tingencies or extra work, he may, if funds are available for payment for the costs thereof, issue an order on contract therefor to the contractor, a copy of which shall be filed with the director of the budget and the state comptroller. The esti- mated expenditure pursuant to that order on contract shall not increase the total amount of the primary contract until the estimated expenditure shall have been approved by the commissioner of transportation and a duplicate of such approval shall have been filed with the comptroller. Section 112: 2.(a) of the State Finance Law pro- vides: “Before any contract made for or by any state agency department, board, officer or institution shall be executed or become effective, whenever

15 such contract exceeds fifty thousand dollars…in amount it shall be approved by the comptroller and filed in his or her office.” In addition, if federal funds are involved, approval of FHWA is also required. NYSDOT contract provisions contain numerous contract modification provisions, which include: 2. Contract Modification Provisions 104-02 CHANGES, CONTINGENCIES, EXTRA WORK AND DEDUCTIONS, provides: The provisions of Article 5, Alterations and Omissions of the contract agreement shall apply. Whenever the Department determines that from any unforeseen cause the terms of any contract should be altered to provide for changes, con- tingencies, extra work, or the deletion of work an order-on- contract may be issued to the Contractor, which shall promptly proceed with the performance of the work and the furnishing of the materials and equipment necessary for its accomplishment in accordance with the pertinent specifica- tions. Such changes in quantities and alterations shall not invalidate the contract nor release the Surety, and the Con- tractor shall perform the work as altered. No instructions, either written or verbal from any Depart- ment employee or agent shall be construed as an order for changes until receipt by the Contractor of written notifica- tion that an order-on-contract has been approved by the Department, or written notification from the Engineer that changes in the work are eligible and authorized for pay- ment in accord with Section 697 Field Change Payment. The Contractor may proceed with the work in advance of the approved order-on-contract if the Contractor has received an approved Authorization of Extra Work. 104-03 DIFFERING SITE CONDITIONS. NYSDOT specifications provide a unique approach of how to incorporate the federal changed condition provisions into the contract. They cite the required federal change condition provision and detail how they will be applied to the project. After the changes provisions, the NYSDOT specifications provide the required notice and record keeping requirements, response times, and refers to the applicable com- pensation provisions of the contract. The applicable NYSDOT specifications provide: In accordance with 23 CFR 635.109(a) (1): (i) During the progress of the work, if subsurface or latent physical conditions are encountered at the site differing materially from those indicated in the contract or if unknown physical conditions of an unusual nature, differ- ing materially from those ordinarily encountered and gen- erally recognized as inherent in the work provided for in the contract, are encountered at the site, the party discovering such conditions shall promptly notify the other party of the specific differing site conditions before the site is further disturbed and before the affected work is performed. (ii) Upon written notification, the Engineer will investigate the site conditions, and if it is determined that the condi- tions materially differ and cause an increase or decrease in the cost or time required for the performance of any work under the contract, an adjustment, excluding anticipated profits, will be made and the contract modified in writing accordingly. The engineer will notify the contractor of the determination whether or not an adjustment to the contract is warranted. (iii) No contract adjustment which results in a benefit to the contractor will be allowed unless the Contractor has provided the required written notice. The department will administer the above federal regula- tions as follows: During the progress of the work, if subsurface or latent physical conditions are encountered at the site differing materially from those indicated in the contract or if unknown physical conditions of an unusual nature, differ- ing materially from those ordinarily encountered and gen- erally recognized as inherent in the work provided for in the contract, the party discovering such conditions shall promptly notify the other party of the specific differing site conditions before the site is further disturbed and before the affected work is performed, with subsequent written notice to be provided later. The contractor shall comply with the notice and recordkeeping provisions of § 104-06 Notice and Recordkeeping. The contractor or the state, as the case may be, must make written notice to the other party of the existence of apparent subsurface or latent physical conditions if that party wishes to adjust the contract price or time of performance, including direct costs and/or time related compensation, if applicable. Such notice shall be given within ten (10) workdays of the time at which the party had knowledge, or should have had knowledge of the differing site condition. The department will have no liability and no adjustment will be made for any damages, which accrued more than ten (10) workdays prior to the filing of such a notice with the Engineer. Upon written notice, the engineer will investigate the site conditions, and if it is determined that the conditions materially differ and cause an increase or decrease in the cost or time required for the performance of the work, an adjustment, excluding anticipated profits, will be made to the contract. The engineer will make an initial response in writing to the contractor, within 15 workdays, with a determination whether or not an adjustment to the con- tract is warranted. Situations requiring examination of the site or input from other department personnel may require additional time to resolve. No contract adjustment will be allowed unless the contractor has provided the required written notice, or written notice was provided to the contractor by the state. The contractor shall keep daily records and make reports of all labor, material and equipment used in connection with such work and the cost thereof as specified in § 109-05C Force Account Reports. Compensation for increased costs of the work resulting from the differing site conditions will be made in accordance with § 109-05 Extra Work and Time Related Compensation. Compensation for time related costs, if any, will be made in accordance with § 109-05D Time Related Dispute Compensation.

16 104-04 SIGNIFICANT CHANGES IN THE CHARACTER OF WORK. NYSDOT has incorporated the federal significant change provisions and supplements with adjust- ment provisions for lump sum items, certain com- posite items, and fixed quantity items. The NYSDOT provisions provide: In accordance with 23 CFR 635.109(a) (3): (i) The engineer reserves the right to make, in writing, at any time during the work, such changes in quantities and such alterations in the work as are necessary to satisfactorily com- plete the project. Such changes in quantities and alterations shall not invalidate the contract nor release the surety, and the contractor agrees to perform the work as altered. (ii) If the alterations or changes in quantities significantly change the character of work under the contract, whether such alterations or changes are in themselves significant changes in the character of work, or by affecting other work cause such other work to become significantly different in character, an adjustment, excluding anticipated profits, will be made to the contract. The basis for the adjustment shall be agreed upon prior to the performance of the work. If a basis cannot be agreed upon, then an adjustment will be made by the department, either for or against the contrac- tor, in such amount as determined to be fair and equitable. (iii) If the alterations or changes in quantities do not signifi- cantly change the character of the work to be performed under the contract, the altered work will be paid for as pro- vided elsewhere in the contract. (iv) The term significant change shall be construed to apply only to the following circumstances: (a) when the character of the work altered differs materially in kind or nature from that involved or included in the original proposed construc- tion; or (B) when a Major Item of work, as defined elsewhere in the contract, is increased in excess of 125 percent, or decreased below 75 percent of the original contract quan- tity. Any allowance for a change in unit price shall apply only to that portion of work in excess of 125 percent of the original contract item quantity, or in the case of a decrease below 75 percent, to the actual amount of work performed. The department will administer the above Federal regula- tions as follows: The department may make, in writing, at any time during the work, any necessary changes in quantities and altera- tions to the work in order to satisfactorily complete the proj- ect. If the contractor or the department discovers a change that constitutes a significant change in the character of work as defined below, the party discovering the change shall promptly provide the other party written notice of the significant change in the character of work before addi- tional work is performed. The contractor shall comply with notice and recordkeeping provisions of § 104-06 Notice and Recordkeeping. The contractor or the state, as the case may be, must make written notice to the other party of the existence of an apparent significant change in the character of work if that party wishes to adjust the contract price or time of perfor- mance, including direct costs and/or time related compensa- tion, inapplicable. Such notice shall be given within ten (10) work days of the time at which the party had knowledge, or should have had knowledge of an event, matter or occasion which results in a significant change in the character of work. The department will have no liability and no adjust- ment will be made for any damages, which accrued more than ten (10) workdays prior to the filing of such a notice with the Engineer. Upon written notice, the engineer will investigate the changes and if it is determined that the alterations or changes in quantities significantly change the character of work, whether such alterations or changes are in them- selves significant changes in the character of work, or by affecting other work, cause such other work to become sig- nificantly different in character, an adjustment, excluding anticipated profits, will be made to the contract. The engi- neer will make an initial response in writing to the contrac- tor, within 15 workdays, with a determination whether or not an adjustment to the contract is warranted. Situations requiring examination of the site or input from other department personnel may require additional time to resolve. The basis for the adjustment shall be agreed upon prior to the performance of the work. If a basis cannot be agreed upon, then an adjustment will be made by the department, either for or against the contractor, in such amount as determined to be fair and equitable. No contract adjustment will be allowed unless the contractor has pro- vided the required written notice, or written notice was pro- vided to the contractor by the State. The contractor shall keep daily records and make reports of all labor, material and equipment used in connection with such work and the cost thereof as specified in § 109-05C Force Account Reports. Compensation for increased costs of the work resulting from significant changes in the charac- ter of work will be made in accordance with § 109-05 Extra Work and Time Related Compensation. Compensation for time related costs, if any, will be made in accordance with § 109-05D Time Related Dispute Compensation. A. Character of Work. The term “significant change” shall be construed to apply only when the character of the work dif- fers materially in kind or nature from that involved or included in the original proposed construction. B. Major Items. The term significant change shall be con- strued to apply to Major Items (as defined in § 101-02 Defi- nitions of Terms) only when the quantity of a Major Item is more than 125%, or is less than 75% of the original con- tract quantity. Any allowance for a change in the unit price shall apply only to that portion of work in excess of 125% of the original contract item quantity, or the actual amount of work performed if the quantity decreases below 75% of the original contract item quantity. The contractor or the state, as the case may be, must make written notice to the other party of the significant change in the quantity of a major item if that party wishes to adjust the contract price or time of performance. Knowledge of a significant change in quantity could result from receipt of an order on con- tract (approved or unapproved), a letter directing a change in the contract work, review of plan details and estimates, review of work completed or progress payment quantities, or a combination of the above. Payment for major items will be limited in accordance with § 109-02 Payment for Altered Quantities. C. Minor Items. The term “significant change” shall be con- strued to apply to Minor Items (as defined in § 101-02 Defi- nitions of Terms) only when extra work both (1) increases

17 the quantity of a Minor Item to more than 200% of the origi- nal contract quantity and (2) results in an increase of more than $1,000 from the original contract amount. Any allow- ance for a change in the unit price shall apply only to that portion of work both in excess of 200% of the original con- tract item quantity, and in excess of $1,000 from the origi- nal contract amount. D. Composite Items. Composite items, for the purposes of this subsection, consist of rock and non-rock components, and are limited to unclassified excavation and trench and culvert excavation. The term “significant change” shall be construed to apply only if the composite item is a Major Item, any individual component of the composite is less than 75% or more than 125% of the quantity stated in the Earthwork Summary Sheet used by the department in pre- paring the contract, and the reasonable costs of the compos- ite item either increases or decreases as a result of the change. The adjustment in payment shall be based on vari- ance in quantity of the individual components from the quantity stated in the Earthwork Summary Sheet. For con- tracts containing Major Items of unclassified excavation and/or trench and culvert excavation, the contractor shall submit, at the request of the Engineer, its price breakdown of the bid price of the composite item for the rock and non- rock components. E. Fixed Quantity Items. Certain items of work may be fixed quantity items, and payment will be restricted to the quan- tity stated in the Estimate of Quantities. The term signifi- cant change shall be construed to apply to fixed quantity items only if, during the progress of the work, the quantity of work is found to be less than 75% or more than 125% of the quantity stated in the Estimate of Quantities. F. Lump Sum Items. Certain items of work may be Lump Sum items, wherein a single bid amount is intended to pro- vide payment for all necessary work during the execution of the contract. The term “significant change” shall be con- strued to apply to lump sum items only to the extent that changes in other contract work items result in a significant change in the character of work required to complete “Lump Sum” items of work. Section 105.14 (Disputed Work and Dispute Reso- lution) from NYSDOT standard specification details the provisions on dispute resolution. This section sets forth that it is the goal to resolve disputes that may arise under the contract in a timely, just, and fair manner consistent with the terms of the con- tract. These provisions outline the details of dis- puted work; time related disputes; acceleration dis- putes; review time periods; disputes over $250,000; required contents of dispute submission; certifica- tions; auditing of records; closeout process, which included contract closeout meetings; gatekeeper concept; and referral of dispute to a dispute resolu- tion board (DRB) or facilitated closeout meeting. Section 109.05 (Extra Work and Time Related Compensation) details the compensation provisions for monetary compensation for extra work and time related costs, which include agreed prices, force account, and recoverable and nonrecoverable costs for time related damages and costs. 3. Modification Review Criteria The NYSDOT Contract Administration Manual provides that where changes involve major redesign or major increase in cost, pre-approval by the Office of Construction is required to ensure approval by the Office of the State Comptroller (OSC). The Office of Construction, if appropriate, may contact OSC in advance. The region should provide the following informa- tion, which includes: 1. Need for the change, costs and benefits, and consequences of the revision or inaction. 2. Essential cost of the change. 3. Comments by the Regional Design Group and Project Manager and the evaluation of the potential effects on other agencies and the public. 4. List of additional resolutions, right-of-way, and/or per- mits (environmental or other that may be required). 5. Evaluation of the impact on the contractor’s progress schedule and other contract work. 6. Need of any extensions of time and impact to time related provisions.55 In addition, although not codified in the construc- tion administration manual, NYSDOT also inquires if the work results from an emergency situation, involves existing contract bid items, cost of cost sav- ings and cost avoidance, or if the work violates any stakeholder commitments. Inquiry is also made as to whether the change order could result in a poten- tial bid reversal situation.56 4. Administrative Approval Process NYSDOT Contract Administration Manual details the change order approval process. Once the need for the change order is identified, the engineer in charge (EIC) or project manager (PM) oversees the preparation of the change order with explana- tion and supporting data. Reviews are conducted by the regional change order specialist, and then the Office of Construction in the main office. The change order is then reviewed by FHWA, if necessary, and if approved sent to the accounting bureau expenditure unit for verification of funding and then entered into the statewide financial system and forwarded to the OSC for approval through the site manager pro- gram. The OSC reviews the change order for com- pleteness and accuracy and verifies that the actions being taken are within the department’s authority 55 104.02 Changes, Contingencies, Extra Work and De- ductions, NYSDOT CONTRACT ADMINISTRATION MANUAL, pt. IV, June 2014. 56 Interview with Brian DeWald, NYSDOT Construc- tion Division (Sept. 10, 2013).

18 and the work is within the scope of the contract and that decisions have been made in accordance with approved department process and procedures. The multilayered approach ensures that proper docu- mentation is presented and appropriate procedures and processes have been followed. 5. Significant Case Law Developments These are covered in Section I of this digest. C. Rhode Island Department of Transportation Rhode Island Department of Transportation (RIDOT) has an annual highway program of $500 million. 1. Statutory and Administrative Constraints Rhode Island has statutes that require competitive bidding of government sponsored contracts. The stat- utes that affect highway construction projects are set below verbatim, in pertinent part, as there are certain thresholds that trigger the bidding requirements. Competitive Bidding Requirements: R.I. Gen. Laws § 37-2-18 Competitive sealed bid- ding provides, in relevant part: (a) Contracts exceeding the amount provided by § 37-2-2257 shall be awarded by competitive sealed bidding unless it is determined in writing that this method is not practicable or that the best value for the state may be obtained by using an electronic reverse auction as set forth in § 37-2-18.1. Fac- tors to be considered in determining whether competitive sealed bidding is practicable shall include whether: (1) Specifications can be prepared that permit award on the basis of either the lowest bid price or the lowest evalu- ated bid price; and (2) The available sources, the time and place of perfor- mance, and other relevant circumstances as are appropri- ate for the use of competitive sealed bidding. (b) The invitation for bids shall state whether the award shall be made on the basis of the lowest bid price or the low- est evaluated or responsive bid price. If the latter basis is used, the objective measurable criteria to be utilized shall be set forth in the invitation for bids, if available…. …. (j) As of January 1, 2011, this section shall apply to con- tracts greater than one million dollars ($1,000,000); on January 1, 2012 for all contracts greater than seven hun- dred fifty thousand dollars ($750,000); on January 1, 2013 for all contracts greater than five hundred thousand dollars ($500,000); and on January 1, 2014 for all contracts awarded pursuant to this section. Rhode Island has laws that require all state con- tracts (and modifications thereof) to be made through the state purchasing agent who is part of the Department of Administration. R.I. Gen. Laws Section 37-2-9 gives authority to the state purchas- ing agent over all “purchasing, management, and control of any and all supplies, services, construc- tion, and other items required to be purchased by the state.” R.I. Gen. Laws Section 37-2-12 transfers all authority of state agencies over, among other things, construction, to the chief purchasing officer. R.I. Gen. Laws Section 37-2-7 includes certain defi- nitions, including the following sections pertinent to construction contract modifications: (2) “Change order” means a written authorization signed by the purchasing agent directing or allowing the contractor to proceed with changes, alterations, or modifications to the terms, conditions, or scope of work on a previously awarded contract. …. (4) “Construction” means the process of building, altering, repairing, improving, or demolishing any public structures or building, or other public improvements of any kind to any public real property. It does not include the routine mainte- nance or repair of existing structures, buildings, or real property performed by salaried employees of the state of Rhode Island in the usual course of their jobs. (5) “Contract” means all types of agreements, including grants and orders, for the purchase or disposal of supplies, services, construction, or any other item. It includes awards; contracts of a fixed-price, cost, cost-plus-a-fixed-fee, or incentive type; contracts providing for the issuance of job or task orders; leases; letter contracts; purchase orders; and construction management contracts. It also includes sup- plemental agreements with respect to any of the foregoing. “Contract” does not include labor contracts with employees of state agencies. (6) “Contract amendment” means any written alteration in the specifications, delivery point, rate of delivery, contract period, price, quantity, or other contract provisions of any existing contract, whether accomplished by unilateral action in accordance with a contract provision, or by mutual action of the parties to the contract. It includes bilateral actions, such as supplemental agreements, and unilateral actions, such as change orders, administrative changes, notices of termination, and notices of the exercise of a contract option. (7) “Contractor” means any person having a contract with a governmental body. The Rhode Island Department of Administration (RI DOA) has adopted regulations that govern RIDOT. Section 12, Rhode Island Department of Transportation Projects, adopted June 20, 2011, provides in Section 12.102 (Bidding Requirements and Conditions) and Section 12.103 (Award and Execution of the Contract) detailed requirements 57 R.I. GEN. LAWS § 37-2-22 provides: Procurements, not to exceed an aggregate amount of ten thousand dollars ($10,000) for construction and five thousand dollars ($5,000) for all other purchases may be made in accordance with small purchase regulations promulgated by the chief purchasing officer. Procure- ment requirements shall not be artificially divided so as to constitute a small purchase under this section.

19 for RIDOT bidding procedures and documentation. (Hereinafter the RI DOA regulations governing RIDOT will be referred to as “DOA Section 12.”) DOA Section 12.3.3 provides that RIDOT’s Stan- dard Specifications for Road and Bridge Construc- tion shall be incorporated into and made part of all DOA solicitations for bids for RIDOT projects.58 Change Order Requirements: R.I. Gen. Laws Section 37-2-7(6) permits the chief purchasing officer/purchasing agent to delegate to the director of RIDOT the delegated purchasing authority to enter into binding contract amend- ments on behalf of the state, as authorized by the chief purchasing officer by written determination, for all RIDOT projects that were originally solicited by the chief purchasing officer or his/her designee.59 However, the delegation of authority is limited to the amount of state and/or FHWA funds that have been allocated to the particular project.60 DOA Section 12.101 provides a series of defini- tions.61 Pertinent ones include the following as it relates to contract modifications: 12.101.12 CONTRACT ADDENDUM. Any change to the Contract made after its initial execution, which change shall become part of the Contract Agreement. Contract Addenda must be set forth in writing and executed by the original signatories, or their successors in interest, or their designees. Each Contract Addendum must be preceded and documented by a corresponding Report of Change. 12.101.25 EQUITABLE ADJUSTMENT. An adjustment in the Contract price and time occasioned by the performance of work beyond that required by the original Contract, including extra work, changes, differing site conditions and changes in quantities. The equitable adjustment of Con- tract price will be based on an agreed upon lump sum, agreed upon unit prices, force account, or the actual cost of the work. The equitable adjustment of the Contract time will be based on a comparison of the time demonstrated by the Contractor’s schedule and the time required for the execution of the work. 12.101.27 EXTRA WORK. Work not provided for in the Contract as awarded but considered essential to the satis- factory completion of the Contract. 12.101.36 MAJOR AND MINOR CONTRACT ITEMS. Any item having an original value in excess of 5 percent of the original Contract amount shall be considered to be a major item. All other original Contract items shall be considered minor items. In addition, any minor item which increases by 100 percent will be considered a major item. The revised quantity will then be considered the original Contract quantity for purposes of determining a major item of work under Subsection 12.104.07; Significant Changes in the Character of Work. 12.101.55 REPORT OF CHANGE. A written order to the Contractor covering contingencies, extra work, increases or decreases in Contract quantities, and additions or altera- tions to the Plans or Specifications, within the scope of the Contract, and establishing the basis of payment and time adjustments for the work affected by said changes. A Report of Change provides the required documentation for the exe- cution of a Contract Addendum. 12.101.75 SUPPLEMENTAL AGREEMENT. A Contract Addendum signed by the Department and the Contractor for the performance of work which is beyond the scope of the original Contract but which the Department elects to per- form in conjunction with the existing Contract. DOA Section 12 also has detailed provisions deal- ing with the process and basis for contract modifica- tions. The relevant sections include the following: 12.104.02 CHANGES IN THE CONTRACT. a. Right to Change. The Engineer reserves the right to make changes in the Contract at any time during the prog- ress of the work as are necessary to satisfactorily complete the Project. Such changes shall not invalidate the Contract nor release the Surety. The Contractor agrees to perform the work as directed by the Engineer. Any costs applicable to such changes will be paid for by the execution of an appropriate Contract Addendum. b. Causes for Changes. Changes in the Contract may result from any of the following causes: 1. Differing site condi- tions. 2. Alterations in the Plans or Details; additions to, reductions in, or elimination of an existing item of work contained in the Proposal. 3. Extra or unforeseen work for which there is no item of work in the Proposal. 4. Suspen- sion of the work for any reason. 5. Significant changes in the character of the work. 12.104.03 DIFFERING SITE CONDITIONS. During the progress of the work, if subsurface or latent physical condi- tions are encountered at the site differing materially from those indicated in the Contract or if unknown physical con- ditions of an unusual nature, differing materially from those ordinarily encountered and generally recognized as inherent in the work provided for in the Contract, are encountered at the site, the party discovering such condi- tions shall promptly notify the other party in writing of the specific differing conditions before the site is disturbed and before the affected work is performed. Upon written notifi- cation, the Engineer will investigate the conditions, and if it is determined that the conditions materially differ and cause an increase or decrease in the cost or time required for the performance of any work under the Contract, an adjustment, excluding anticipated profits, will be made and the Contract modified in writing accordingly. The Engineer will notify the Contractor of the determination whether or not an adjustment of the Contract is warranted. No Contract adjustment, which results in a benefit to the Contractor will be allowed unless the Contractor has pro- vided the required written notice. No Contract adjustment 58 See R.I. GEN. LAWS § 37-8-38 (Issuance of Specifica- tions). 59 DOA § 12.2.2. 60 Id. 61 OA Section 8 (Contracts) also includes definitions of “change order” (Section 8.1.1), “contract modification” (Section 8.1.3), and “contract addendum” (Section 8.1.4)— these incorporate the definitions of such terms from R.I. GEN. LAWS § 37-7-2.

20 will be allowed under this clause for any effects caused on unchanged work. 12.104.04 ALTERATIONS IN THE PLANS OR DETAILS. The Engineer may order changes in the Plans or Details, increase, reduce, or eliminate any Contract work item deemed necessary to satisfactorily complete the Project. Should such alterations in the Contract result in changes in the quantities of work to be performed, the Contractor shall complete such altered quantities in the same manner pre- scribed for the corresponding unaltered quantities. Unless otherwise provided for under Subsection 12.104.07; Signifi- cant Changes in the Character of the Work, such altered work shall be paid for at the same unit prices as for the corresponding unaltered items of work. …. 12.104.05 EXTRA WORK. The Contractor shall perform extra work, for which there is no price included in the Con- tract, whenever it is deemed necessary or desirable to com- plete the work as contemplated. Such work shall be per- formed in accordance with the Specifications and as directed, and will be paid for as provided under Subsection 12.109.04; Differing Site Conditions, Changes, Extra Work, and Force Account Work. 12.104.07 SIGNIFICANT CHANGES IN THE CHARAC- TER OF THE WORK. The Engineer reserves the right to make in writing at any time during the work, such changes in quantities and such alterations in the work as are neces- sary to satisfactorily complete the project. Such changes in quantities and alterations shall not invalidate the Contract nor release the surety, and the Contractor agrees to perform the work as altered. If the alterations or changes in quantities significantly change the character of the work under the Contract, whether such alterations or changes are in themselves sig- nificant changes to the character of the work or by affecting other work cause such other work to become significantly different in character, an adjustment, excluding anticipated profits, will be made to the Contract. The basis for the adjustment shall be agreed upon prior to the performance of the work. If a basis cannot be agreed upon, then an adjustment will be made either for or against the Contrac- tor in such amount as the Engineer may determine to be fair and equitable. If the alterations or changes in quantities do not signifi- cantly change the character of the work to be performed under the Contract, the altered work will be paid for as pro- vided elsewhere in the Contract. a. Circumstances for Significant Change. The term “signifi- cant change” shall be construed to apply only to the follow- ing circumstances: 1. When the character of the work as altered differs materi- ally in kind or nature from that involved or included in the original proposed construction or; 2. When a major item of work, as defined elsewhere in the Contract, is increased in excess of 125 percent or decreased below 75 percent of the original Contract quantity. Any allowance for an increase in quantity shall apply only to that portion in excess of 125 percent of original Contract item quantity, or in case of a decrease below 75 percent, to the actual amount of work performed. DOA Section 12.105.18 (CLAIMS FOR ADJUST- MENTS AND DISPUTES) sets forth the process for contractors to follow to request contract modifications. a. Notification. If the Contractor deems that additional com- pensation is due for work or material not clearly covered in the Contract, the Contractor shall notify both the Engineer and the Chief of Construction Operations in writing of its intention to make claim for such additional compensation before beginning or continuing the affected work; also, the Contractor shall proceed diligently with performance of the contract pending final resolution of any request for relief, payment, claim, appeal or action arising under the contract, and comply with any decisions of the Engineer. If such noti- fication is not given, or the Contractor does not afford the Engineer proper facilities for keeping strict account of the actual costs, the Contractor thereby waives any claim for additional compensation. Notice by the Contractor, and the fact that the Engineer has kept account of the costs, shall not be construed as substantiating the validity of the claim. b. Submission. Claims must be submitted within 120 days of substantial completion of the project. Claims submitted after 120 days will not be accepted. An equitable adjust- ment will be made to the Contract if the claim is found to be just. Nothing in this Subsection shall be construed as estab- lishing any claim contrary to the terms of Subsections 12.104.02; 12.104.03; 12.104.04; 12.104.05; 12.104.06 and 12.104.07 of these Standard Specifications. c. Documentation of Claims. Any claim shall be in sufficient detail to enable the Engineer to determine the basis for entitlement and the resulting costs. [Minimum require- ments for claim supporting materials are listed, but not rep- licated here.]62 2. Contract Modification Provisions RIDOT’s Standard Specifications for Highways and Bridges, also known as the “Bluebook,” contains the same provisions as are provided in DOA Section 12, as discussed in Section I of this digest, so they are not repeated here. 3. Modification Review Criteria See Section I of the digest, where DOA Section 12 spells out the type of contract modifications that are permitted on RIDOT projects. Section 12.104.2.a (CHANGES IN THE WORK) defines the right of the engineer to make changes “as are necessary to satis- factorily complete the Project” and Section 12.104.2.b, which lists “causes” for changes. Section 12.104.05 (EXTRA WORK) provides: “The Contrac- tor shall perform extra work, for which there is no price included in the Contract, whenever it is deemed necessary or desirable to complete the work as contemplated.” Section 12.104.04 (ALTERATIONS IN THE PLANS OR DETAILS) provides: “The Engi- neer may order changes in the Plans or Details, increase, reduce, or eliminate any Contract work 62 Claims must also be certified (DOA § 12.105.18.d) and are subject to audit (DOA § 12.105.18.e).

21 item deemed necessary to satisfactorily complete the Project.” 4. Administrative Approval Process RIDOT has a Policy and Procedure for Change Orders. In the preamble it notes that change orders can be made for reasons “including but not limited to, increases to existing contract quantities, modifi- cations to a design or plan of specification, modifica- tions to scope of work, differing site conditions, time extension, adding or deleting an item, emergency work, or any other extra work.” The Policy and Pro- cedure63 specifies how to justify the change order hWHYWASTHEMODIlCATIONREQUIREDv HOWTOPRICE the change order; the backup required for price and time recommendations; the administrative process to obtain necessary approvals (including the approval of FHWA for “extra work” over $50,000); and delegated authority based on the amount of the change order. The change order form for FHWA approval requires classification of the change order by the following categories: Potential Design Errors/ Omissions or Unbuildable Design; Discretionary— Quality Adjustment; Differing Site Conditions; or Quantity Adjustments. 5. Significant State Case Law Developments None reported. D. MassDOT Highway Division MassDOT Highway Division has an annual state- wide highway program of under $500 million. 1. Statutory and Administrative Constraints Massachusetts has statutes that require competi- tive bidding of most public works projects. The stat- utes that affect highway construction projects are set forth below verbatim, in pertinent part, as there are certain thresholds that trigger the bidding requirements. Competitive Bidding Requirements: Massachusetts General Laws (M. G. L.) Chapter 30, Section 39M provides, in relevant part: Every contract for the construction, reconstruction, altera- tion, remodeling or repair of any public work, or for the purchase of any material, as hereinafter defined, by the commonwealth, or political subdivision thereof, or by any county, city, town, district, or housing authority, and esti- mated by the awarding authority to cost more than ten thousand dollars, and every contract for the construction, reconstruction, installation, demolition, maintenance or repair of any building by a public agency, as defined by subsection one of section forty-four A of chapter one hun- dred and forty-nine, estimated to cost more than $25,000 but not more than $100,000, shall be awarded to the low- est responsible and eligible bidder on the basis of competi- tive bids publicly opened and read by such awarding authority forthwith upon expiration of the time for the fil- ing thereof….64 Change Order Requirements: Massachusetts has statutes that require certain types of contract modifications to be permitted as a matter of law—these include differing site condi- tions and suspensions. The statutes require that these provisions appear in highway construction projects.65 The statutes are set forth below verbatim, in pertinent part. M.G.L. Chapter 30, Section 39I provides, in rele- vant part: Every contractor having a contract for the construction, alteration, maintenance, repair or demolition of, or addi- tion to, any public building or public works for the com- monwealth, or of any political subdivision thereof, shall perform all the work required by such contract in confor- mity with the plans and specifications contained therein. No willful and substantial deviation from said plans and specifications shall be made unless authorized in writing by the awarding authority or by the engineer or architect in charge of the work who is duly authorized by the award- ing authority to approve such deviations. In order to avoid delays in the prosecution of the work required by such con- tract, such deviation from the plans or specifications may be authorized by a written order of the awarding authority or such engineer or architect so authorized to approve such deviation…. M.G.L. Chapter 30, Section 39N provides: Every contract subject to section forty-four A of chapter one hundred and forty-nine or subject to section thirty-nine M of chapter thirty shall contain the following paragraph in its entirety and an awarding authority may adopt reason- able rules or regulations in conformity with that paragraph concerning the filing, investigation and settlement of such claims: If, during the progress of the work, the contractor or the awarding authority discovers that the actual subsurface or latent physical conditions encountered at the site differ substantially or materially from those shown on the plans or indicated in the contract documents either the contrac- tor or the contracting authority may request an equitable adjustment in the contract price of the contract applying to work affected by the differing site conditions. A request for such an adjustment shall be in writing and shall be 63 The RIDOT Policy and Procedure also requires that change orders be prepared in accordance with Sections 8 and 9 of the Procedures for Uniform Record Keeping Manu- al (PURK). 64 See also MASS. GEN LAWS ch. 149, § 44J, which sets forth certain procedures to be followed for those contracts that are required to be competitively bid pursuant to MASS. GEN LAWS ch. 30, § 39M. 65 See Reynolds Bros., Inc. v. Commonwealth of Mas- sachusetts, 412 Mass. 1 (1992) (even if contract fails to include ch. 30, § 39O, the contract must be read as con- taining it).

22 delivered by the party making such claim to the other party as soon as possible after such conditions are discov- ered. Upon receipt of such a claim from a contractor, or upon its own initiative, the contracting authority shall make an investigation of such physical conditions, and, if they differ substantially or materially from those shown on the plans or indicated in the contract documents or from those ordinarily encountered and generally recog- nized as inherent in work of the character provided for in the plans and contract documents and are of such a nature as to cause an increase or decrease in the cost of perfor- mance of the work or a change in the construction methods required for the performance of the work which results in an increase or decrease in the cost of the work, the con- tracting authority shall make an equitable adjustment in the contract price and the contract shall be modified in writing accordingly. M.G.L. Chapter 30, Section 39-O provides: Every contract subject to the provisions of section thirty- nine M of this chapter or subject to section forty-four A of chapter one hundred forty-nine shall contain the following provisions (a) and (b) in their entirety and, in the event a suspension, delay, interruption or failure to act of the awarding authority increases the cost of performance to any subcontractor, that subcontractor shall have the same rights against the general contractor for payment for an increase in the cost of his performance as provisions (a) and (b) give the general contractor against the awarding authority, but nothing in provisions (a) and (b) shall in any way change, modify or alter any other rights which the general contractor or the subcontractor may have against each other. (a) The awarding authority may order the general con- tractor in writing to suspend, delay, or interrupt all or any part of the work for such period of time as it may determine to be appropriate for the convenience of the awarding authority; provided however, that if there is a suspension, delay or interruption for fifteen days or more or due to a failure of the awarding authority to act within the time specified in this contract, the awarding author- ity shall make an adjustment in the contract price for any increase in the cost of performance of this contract but shall not include any profit to the general contractor on such increase; and provided further, that the awarding authority shall not make any adjustment in the contract price under this provision for any suspension, delay, interruption or failure to act to the extent that such is due to any cause for which this contract provides for an equitable adjustment of the contract price under any other contract provisions. (b) The general contractor must submit the amount of a claim under provision (a) to the awarding authority in writ- ing as soon as practicable after the end of the suspension, delay, interruption or failure to act and, in any event, not later than the date of final payment under this contract and, except for costs due to a suspension order, the award- ing authority shall not approve any costs in the claim incurred more than twenty days before the general contrac- tor notified the awarding authority in writing of the act or failure to act involved in the claim. 2. Contract Modification Provisions MassDOT Highway Division’s Standard Specifi- cations for Highways and Bridges has the following standard provisions, summarized below:66 Section 1.20 Extra Work [Definition]: Work which 1. was not originally anticipated and/or contained in the contract: and therefore 2. is determined by the Engineer to be necessary for the proper completion of the project: and 3. bears a rea- sonable subsidiary relation to the full execution of the work originally described in the Contract. Section 4.02 Alterations: The Engineer is permitted, in writ- ing, to make alterations in the form, character, or detail of any of the work done or to be done. The contractor shall accept as full compensation the contract unit prices for the actual quantity of work performed in an acceptable manner. Section 4.03 Extra Work: The Contractor shall do any work “not herein otherwise provided for when and as ordered in writing by the Engineer.” This section also addresses time for completion of the contract and the amount and value of the extra work (with reference to other sections of the specifications). Section 4.04 Changed Conditions: This section sets forth verbatim the language of M.G.L. Chapter 30, Section 39N, as quoted above. Section 4.05 Validity of Extra Work: The Engineer may issue Extra Work Orders for such additional work outside the scope of the original Contract as in his judgment is reason- ably necessary for the satisfactory completion of the proj- ect…providing that the work to be done under such an Extra Work Order shall not result in a change of such mag- nitude as to be compatible with the provisions of….67 Chap- ter 149, Section J of the General Laws. Section 4.06 Increased or Decreased Contract Quantities: The contractor shall accept as full payment the original con- tract unit prices when accepted quantities of work vary from the bid schedule quantities. The Engineer may order omitted from the work any items or portions of the work found unnecessary to the improvement. Certain limitations on recovery for omitted work also are provided. 3. Modification Review Criteria See Section 2 above, where standard specifica- tions define what is and is not allowable under the contract as it relates to contract modifications. As to extra work, see Section 4.05 that permits the engi- neer to issue Extra Work Orders “for such additional work outside the scope of the original Contract as in his judgment is reasonably necessary to completion of the project….” 66 The provisions cited or quoted are from the 1988 Standard Specifications for Highways and Bridges, which is generally used by MassDOT Highway Division in its highway construction projects. 67 Chapter 38 of the Acts of 2013 at 44 repealed MASS. GEN LAWS ch. 29, § 20A, which is cited in this section.

23 4. Administrative Approval Process MassDOT Highway Division uses Standard Operating Procedure (SOP) CSD 25-12-000, entitled Extra Work Orders over $100,000 (effective August 1, 2011). In summary, it provides that Extra Work Orders are prepared in the district office and pro- cessed in the Boston office. “Extra Work” is defined as follows: 1. was not originally anticipated and/or contained in the contract, and 2. is determined by the Engineer to be neces- sary for the proper completion of the project, and 3. bears a reasonable subsidiary relation to the full execution of the work originally described in the contract; i.e. is work that is reasonably similar in type and character to the work origi- nally described in the Contract. The SOP describes various steps in preparing an Extra Work Order, which includes a description of the character, necessity, and location of the work, together with estimated cost and schedule impacts. More detailed requirements include, among other things: scope and significance of the proposed work; the economic and engineering necessity for the pro- posed work; a statement that there is not a more equitable or practicable alternative than that pro- posed, and a description of any efforts made to mini- mize the cost of the extra work. Approval of the Extra Work Order is subject to certain signatory authorization levels. There is an exception for emer- gency extra work, where there is authority for the chief engineer to approve the work before proceed- ing, with a follow up Extra Work Order in due course, meeting the other requirements of the SOP. The SOP also permits Multipart Extra Work Orders to avoid delays, when the task can be defined but the full scope and cost cannot be determined until com- pletion of the work, or when it is “necessary to pro- ceed” before the full scope, pricing, or timeframe can be determined and negotiated. There also is a section dealing with “Disputed Extra Work” where there is a question during the performance of any contract work as to whether or not “Extra Work” may be involved. In this case, the resident engineer keeps time and material records. 5. Significant State Case Law Developments None reported. E. Vermont Agency of Transportation 1. Statutory and Administrative Constraints Vermont Agency of Transportation (VTrans) has a $200 million yearly construction program. The State of Vermont, Agency of Administration, Bulletin 3.5 provides that It is the policy of the State of Vermont to obtain high quality services and materials in a cost effective manner through the use of an open and competitive contract solicitation pro- cess to ensure proper development and review of contracts prior to their being signed and to oversee established con- tracts effectively through their completion.68 Construction contracts are awarded after public bidding pursuant to Section 1502 of the Vermont Stat- utes Annotated (V.S.A.), which provides that the agency may comply with federal rules and regulations and may use such funds available for highway pur- poses as shall be necessary to secure federal funds. Vermont essentially relies on federal rules and regulations and state policy as the authority to con- duct competitive bidding. In order to obtain federal funds, VTrans must comply with all federal requirements, including 23 C.F.R. 635.104 that provides: Section 635.104 Method of Construction (a) Actual construction work shall be performed by contract awarded by competitive bidding unless as provided in Sec- tion 635.104 (b), the STD demonstrates to the satisfaction of the Division Administrator that some other method is more cost effective or that an emergency exists. The STD shall assure opportunity for free, open and competitive bidding, including adequate publicity of the advertisements or calls for bids. The advertising or calling for bids and the award of contracts shall comply with the procedure set forth in Sec- tion 635.12 and 635.114. 2. Contract Modification Provisions VTrans specifications contain various provisions that relate to changes, including: 104.01 INTENT OF CONTRACT. The intent of the Contract is to provide for the construction and completion in every detail of the work described. The Contractor shall furnish all labor, materials, equipment, tools, transportation, and sup- plies required to complete the work in accordance with the Plans, Specifications, and other provisions of the Contract. 104.02 ALTERATION OF PLANS OR CHARACTER OF WORK. To suit conditions disclosed as the work progresses, the Engineer may, without notice to the Sureties on the Contractor’s bonds, make alterations in the design, in type of materials, in the quantities or character of the work or materials required, in the cross-sections, in dimensions of structures, in length of project, in locations, and any other ways deemed appropriate. Alterations will not constitute a change in other parts of the Contract or a waiver of any condition of the Contract, and shall not invalidate any of the provisions of the Contract Documents. Payment for work occasioned by changes or alterations will be made according to Subsections 109.04 and 109.05. If the altered or added works are of sufficient magnitude to require additional time in which to complete the project a time adjustment will be made pursuant to Subsection 108.11. 104.03 EXTRA WORK. The Contractor shall perform extra or unforeseen work for which there is no quantity and price 68 State of Vermont, Agency of Transportation, Bulletin 3.5, July 15, 2008, at 6.

24 included in the Contract according to the Contract or as directed by the Engineer whenever it is deemed necessary or desirable by the Engineer in order to complete the work as contemplated; payment will be made pursuant to Sub- section 109.06. 104.08 DIFFERING SITE CONDITIONS. (a) During the progress of the work, if subsurface or latent physical conditions are encountered at the site differing materially from those specified in the Contract or if unknown physical conditions of an unusual nature, differ- ing materially from those ordinarily encountered and gen- erally recognized as inherent in the work provided for in the Contract, are encountered at the site, the party discovering such conditions shall promptly notify the other party in writing of the specific differing conditions before they are disturbed and before the affected work is performed. (b) Upon written notification, the Engineer will investigate to determine if the conditions materially differ and will cause an increase or decrease in the cost or time required for the performance of any work under the Contract. The Contractor will be notified of the Engineer’s determination, whether or not an adjustment of the Contract is warranted. If an adjustment is warranted, the Contract will be modi- fied in writing accordingly. Any adjustment made will exclude loss of anticipated profits. (c) No Contract adjustment that results in a benefit to the Contractor will be allowed unless the Contractor has pro- vided the required written notice. (d) No Contract adjustment will be allowed under this clause for any effects caused on unchanged work. 109.04 SIGNIFICANT CHANGES IN THE CHARACTER OF WORK (a) General. At any time during work the Engineer reserves the right to make, in writing, changes in quantities and alterations in the work as are deemed necessary or desir- able to satisfactorily complete the project. Changes in quan- tities and alterations in the work will not invalidate the Contract or release the Contractor’s surety, and the Con- tractor shall perform the work as altered. (b) Significant Alteration/Change to Character of Work; Adjustment to Contract. If the alterations or changes in quantities significantly change the character of the work under the Contract, whether or not changed by different quantities or alterations, a monetary adjustment will be made to the Contract; loss of anticipated profits shall not be included. The basis for the adjustment shall be agreed upon prior to the performance of the work. If a basis cannot be agreed upon, an adjustment will be made as the Engineer determines to be fair and equitable. (c) Alterations/Changes Not Significant. If the alterations or changes in quantities do not significantly change the charac- ter of the work to be performed under the Contract, the altered work will be paid for as provided elsewhere in the Contract. (d) Significant Change Defined. The term “significant change” shall be construed to apply only to the following circumstances: (1) When the character of the work as altered differs materially in kind or nature from that involved or included in the original proposed construction; or (2) When a major item of work, as defined, is increased in excess of 25 percent above or decreased below 75 percent of the original Contract quantity. Any allowance for an increase in quantity shall apply only to that portion in excess of 125 percent of the original Contract item quantity; any allowance for a decrease in quantity below 75 percent shall apply to the actual amount of work performed. (e) Major Item Defined. A major item of work is any bid item that has a total bid value greater than 20 percent of the total bid amount of the Contract. 109.05 COMPENSATION FOR ALTERED PLANS OR QUANTITIES. (a) General. When alterations in the Plans or quantities of work are ordered and performed as provided in Subsection 104.02 and when such changes or alterations result in an increase or decrease of not more than 25 percent of the total original Contract amount, or the length of the project is not increased or decreased more than 25 percent of the original length shown in the Contract, the Contractor shall accept payment in full at the Contract unit price for the actual quantities of work done. (b) Adjustment When Exceeded. When changes or altera- tions result in a sum total change of more than 25 percent of the total cost of the Contract calculated from the original bid quantities and the original Contract unit prices, or a length increased or decreased more than 25 percent, and a demand is made by the Contractor or the Agency, a negoti- ated Supplemental Agreement shall be signed by both par- ties setting forth the necessity for the change and an adjust- ment of unit prices agreed upon as satisfactory to both parties. In order to bring a claim for additional compensa- tion, the Contractor shall meet all applicable requirements of Subsection 105.20. (c) No Further Allowance. No further payments will be made for changes/alterations, including no further allow- ances for any increased expense, loss of expected reimburse- ment, or loss of anticipated profits suffered or claimed by the Contractor resulting directly from the changes/altera- tions or indirectly from unbalanced allocation of overhead expense among the Contract items by the Contractor and subsequent loss of expected reimbursements therefore or from any other cause. 109.06 EXTRA AND FORCE ACCOUNT WORK. Extra work ordered and accepted as specified in Subsection 104.03 will be paid for on a unit price or lump sum basis under a Supplemental Agreement. The agreement will be made before the work is started. When the Engineer deems it impractical to handle any Extra Work ordered on a unit price or lump sum basis, a Supplemental Agreement will be made and the work will be ordered done and paid for on a force account basis. 3. Modification Review Criteria The VTrans construction administration manual provides some guidance and cautions resident engi- neers to recognize whether the proposed change is a “nicety” or a “necessity.” A change that is a “nicety” is one that may be an improvement to the project, but is not actually needed for the successful completion of the project. A change classified as a “necessity” is one that is required in order to complete the proj- ect according to sound engineering principles

25 or would be of considerable importance to future maintenance and public safety. Further changes considered a “nicety” must be carefully weighed in terms of added costs to the project and delays to the contractor.69 The questions that need to be answered and dis- cussed include: s)STHEWORKELIGIBLEFORFEDERALAID s7HAT IS THE IMPACTON THEORIGINAL SCOPEOF WORK s7HATISTHEBASISOFPAYMENTANDWHATCOST analysis must be accomplished to support the negotiated prices that are part of the Change /RDER Changes that are determined to be a “necessity” require the completion of the change order form. The manual provides that the proposed change be dis- cussed with the regional construction engineer and project manager before making all but minor changes. If the project involves full federal oversight, it is necessary to discuss it with the FHWA area engineer to prepare for FHWA approval. In all cases where there is a question of whether the work is of a “minor” or “major” nature, the regional construction engineer should be consulted. Changes that require work outside the project construction limits, as well as changes in drainage features, impervious surface, or illicit discharges, may require review by the Envi- ronmental Unit. 4. Administrative Approval Process Additional change order guidance is provided in the VTrans procedure for approval of change orders in Appendix B-21 of the Construction Administra- tion Manual. The appendix provides detailed guid- ance for verbal approvals, drafting change orders, price analysis, reason codes, review of draft change orders, entering information in site manager, change order review team, approval level, and distribu- tion.70 The appendix notes that the resident engi- neer should discuss the change order with the regional construction engineer, project manager, and FHWA. The change order shall contain a description of the change, quantities to be added, time added, necessity of revision, location of the change, when the change was recognized, parties involved, price analysis, and applicable reason code. The multilevel review process includes review by the regional con- struction engineer, regional technician, regional pro- gram services clerk, finals engineer, construction service engineer, construction executive assistant, resident engineer, Certification and Independent Assurance (C & IA) supervisor, project manager and quality assurance engineer, director of program development, and FHWA engineer. Of significance was the amendment made to the Construction Manual on March 3, 2010, by construc- tion engineer David Hoyne, setting forth an FHWA report on Independent Cost Analysis of New Items by Change Orders. The field memo contained excerpts from the FHWA Core Curriculum Manual referring to FHWA guidelines for approval of change orders previously discussed in this digest. The field memo noted FHWA review of major contract modifications beyond the scope of work and the FHWA role to determine whether the additional work would ben- efit from competitive bidding. 5. Significant State Case Law Developments None reported. 69 Vermont Construction Administration Manual, § II, 2-110.20 (on file with authors). 70 Vermont Construction Administration Manual, App. B-21: Drafting and Executing Change Orders–Guidance and Procedures, 2013.