Managing Change in Public Infrastructure Projects

Change management issues in engineering, procurement and construction (EPC) contracting often negatively affect project execution and unnecessarily complicate disputes. This can happen even when an EPC agreement contains robust change management procedures. Owners and contractors should be aware of the potential pitfalls of change management in order to most effectively avoid these issues.

Contractor claims for extra work are commonly assessed in Canada by reference to the general framework set out in Kei-Ron Holdings Ltd. v. Coquihalla Motor Inn Ltd. The framework involves an inquiry into four elements:

• Nature of the Work: Was the work genuinely extra and beyond the original scope of the contract?
• Owner Authorization: Did the owner expressly or implicitly authorize the work?
• Awareness of Cost Increase: Was the owner informed or aware that the extra work would increase costs?
• Waiver: Did the owner waive written change order requirements or acquiesce by ignoring them?

When all of these elements are satisfied for a particular claim, courts and arbitral tribunals will typically permit recovery of reasonable remuneration for the contractor’s extra work. The calculation of reasonable remuneration is informed by the nature of the pricing mechanism otherwise set out in the contract in question (e.g., time and materials, cost plus, fixed fee or unit rate).

It is notable that this framework has been found to apply even when an EPC agreement expressly precludes changes unless done strictly in accordance with the defined change management procedure. EPC agreements commonly include provisions intended to prevent a contractor from relying on an owner’s waiver of contractual requirements unless that waiver is acknowledged in writing. Adjudicators nonetheless exercise their discretion in declining to strictly enforce change management procedures when an owner acquiesces to a contractor’s departure from those procedures. A finding of acquiescence increases in likelihood when there is consistent conduct that departs from the requirements of the contract.

Implementing robust internal systems to ensure consistent adherence to change management procedures is essential to the successful execution of any project. These systems and related compliance monitoring help preserve an owner’s entitlement to insist on strict compliance with contractual requirements and are a meaningful way to de-risk projects during the execution phase. Set out below are high-level considerations for change management processes that may be tailored to a particular project.

Drafting Change Order Procedures

Clear change management provisions ensure that contracting parties understand the financial and procedural implications of a change order. Foundationally, the parties must be aligned about what is a “change.” Careful drafting is essential to clearly outline the type of event that will give rise to a right to recognition of a change and should be supported by a well-defined baseline scope of work.

Another key question is the methodology for the valuation of changes. Pricing mechanisms and formulas are particularly helpful to set clear expectations. By incorporating pricing formulas into change management procedures, owners may mitigate the risk of cost claims and help to control price escalation on the project.

While there are many other important change management considerations that will depend on the nature of the project, good change management procedures will invariably address the form and timing of notice required for change orders, the way in which change orders may be authorized, and the requirements for potentially removing scopes of work.

Documentation of Change Requests

Documentation requirements for change requests enhance communication and support transparency between owners and contractors. Contractors should be expected to maintain detailed accounts and records that clearly substantiate the costs associated with performing work pursuant to a change order. This includes information about labour, materials, equipment and time impacts. It is also helpful when change management procedures describe the type of detail required in change requests and explain that the change request will be rejected if sufficient particulars are not provided.

Change Order Management

Consistency is critical to the successful implementation of change order procedures. Owners have a strong incentive to limit discrepancies between change order practices and the requirements of a governing contract, given that departures from the contract may be recognized by the adjudicators as a waiver of strict enforcement of change order requirements.

An essential component of consistent change management is a defined process for the authorization of extra work. Owners should require that any additional work be supported by a formal change order that has been reviewed, approved and executed by authorized personnel before the work proceeds.

Consent of Surety

If the contract between the owner and contractor is secured by a performance bond, it is important that they seek the surety’s consent to any material change in the contract and appropriately formalize that consent. This ensures continued coverage by a bond and avoids potential issues with bond enforcement. A material change in a contract has been found to be a valid reason for a surety’s refusal to pay a performance bond.

Conclusion

Clear, consistent and well-documented change order practices are essential for successful project delivery. Proactively managing change orders helps to preserve working relationships between owners and contractors and ensure that projects remain aligned with the parties’ expectations and financial goals.

Our team at Blakes regularly helps clients draft effective change management procedures and provides advice related to the implementation of those procedures, as well as the resolution of disputes. For more information, please contact the authors or any other member of our Infrastructure group.