This article addresses the situation when a project is flooded with extra work orders, emergency field orders, and major and minor systems changes. Although you price out each of the extras and, if you are really good, code and track the labor, equipment, materials, supervision, etc., for each extra, you are still losing money. To make matters worse, your cost overruns are on unchanged work.
How can you account for the loss? Is the loss recoverable as a matter of law?
Lawyers and consultants refer to this kind of problem as the cumulative effect of changes. This argument is usually used when no other theory seems to fit the circumstance. Legally, the argument is weak, even in the most egregious cases. At best, “cumulative effect” is designed to provide a foundation for using a “total cost” formula of recovery.
What is cumulative effect?
There is little doubt that a ripple effect of multiple changes exists. Indeed, even with one design change, a contractor can experience a temporary suspension of the work affected, a reassignment of crews, and delay. The harder issue lies in detection.
In one case, the architect regularly issued revised drawings, noting on each sheet what revisions were being made. Unfortunately, there was little coordination of the drawings between electrical, mechanical, and architectural. Hundreds of hidden design mistakes resulted, which were only discovered as the work progressed.
In another matter, the electrical contractor accepted a fixed-price contract on a power plant while knowing that the design was incomplete. The contractor argued that the owner “did not honor the change clauses when changes were made for engineering finalization... by informal design changes conveyed by handwritten notes, speed memos, and field sketches.”
Both of these matters involved cumulative impact, and the contractor was successful in the first case, and lost in the second. The difference in the holdings was this: in the first case, the contractor prepared a thorough Critical Path Method (CPM) analysis.
The conclusion to be drawn is that broad-brush contention of cumulative impacts cannot prevail without a detailed cause-and-effect schedule analysis.
The effect of signing a change order
Standard form contracts contain clauses for changes. Whether the extra work is lump sum or time and material, the change order form is designed to reflect an agreement between the parties about the resultant cost and time of performance. The change order is a contract by itself and modifies the existing agreement. It is as difficult, legally, to reopen a change order as it is to re-open the entire contract.
By signing the change, you have probably waived any other related but unclaimed costs. Theoretically, you were to have reviewed the schedule impacts, if any, before agreeing to the change. In federal government contracting, a change order also bars unasserted delay claims.
Thus, the question is: If you cannot later assert an impact claim from one change order, how can you raise a global claim relating to multiple change orders?
As one court stated:
We reiterate... that a pricing agreement extinguishes all entitlement of the contractor to an equitable adjustment under the changes clause for all costs it incurs after the change has taken place-unless the Board can find . . . for “cumulative impact,” that the parties expressly or impliedly agreed to exclude certain costs.
How do you prove cumulative impact?
If the adverse effects of excessive changes only show up gradually, over time, and cumulatively, how can you show the cause-and-effect relationship of the changes to the losses?
One court summarized it this way:
While it is not, in our view, necessary, or even feasible, to show the precise extent of impact from specific changes, the evidence offered by [the subcontractor] to support the existence and extent of cumulative impact was too general and sketchy to carry its burden of proof on entitlement.
So the judicial decisions imply that, to prove cumulative impact, you need to satisfy at least three criteria.
1. That there was an express or implied agreement that impact costs were not included in the change order;
2. That the cause-and-effect analysis cannot be too general; and
3. That the criteria for using the “total cost” approach are satisfied:
(a) The nature of the particular losses makes it impossible to determine them with a reasonable degree of accuracy;
(b) The contractor’s bid or estimate was realistic;
(c) The contractor’s actual costs were reasonable;
(d) The contractor was not responsible for the added expense.
With such stringent burdens, how can anyone still believe the cumulative impact theory works?
One contractor tried a somewhat unique variation of these themes. Without using the term “cumulative impact,” the contractor argued that the great number of design changes and modifications during performance proved an “abandonment” of the contract by the owner. According to the contractor, the original concept of a fixed-priced, specified job was intentionally set aside for a design-as-you-go contract. This theory lost in court.
What to do
Do not get caught up in quasi-legal terminology. Too often, a contractor will decide that it has either a delay claim, or one involving acceleration, job suspensions, changed conditions, or interference by other contractors, when in fact several of these events have come into play at the same time. Similarly, the contractor may use terms of art such as stacking of trades, out-of sequence work, and stop-and-start operations. These phrases may describe the result of the problem, but they do not identify the cause.
In prior articles, analysis was presented on delay/disruption claims, acceleration, claims presentation, schedule analysis, and project documentation. Consult all these materials before presenting an important claim.