Change is an essential part of energy construction. The owner or sponsor (“Sponsor”) of the project must be able to implement changes after a construction agreement has been signed. Time is usually of the essence with energy projects. If the Contractor’s consent must be obtained for a change, then it can slow down a project or, worse yet, enable the Contractor to use its consent to extract unearned value from the Sponsor. Construction agreements typically address these concerns through three separate documents: the Change Directive (which is filed by the Sponsor); the Change Request (which is filed by the Contractor); and the Change Order (which is jointly executed by both the Sponsor and the Contractor).
Change Directive. The “Change Directive” enables the Sponsor to unilaterally—without the Contractor’s consent—modify certain exhibits describing the Contractor’s work. Note that Change Directives cannot alter the body of the agreement itself (i.e., the terms and conditions). The content of a Change Directive depends on the circumstances of the change. At a minimum, the Change Directive must specify the modifications being made to the scope of work or specifications. If the Sponsor believes that the Change Directive is increasing the Contractor’s cost or extending its schedule, then the Change Directive also should include the Sponsor’s calculation of the price increase and schedule changes. Similarly, if the Change Directive is reducing the amount of the Contractor’s work, it should include the amount of the associated price decrease or schedule acceleration. This establishes a baseline for the Contractor to evaluate the impact of the Change Directive and decide whether it wishes to seek additional relief.
Change Request. The “Change Request” enables the Contractor to either (i) propose a change to the exhibits or (ii) seek price or schedule relief (following a Sponsor’s Change Directive). The use of the word “request” connotes the difficult nature of Contractor-initiated change. The Sponsor controls the project—and can therefore direct changes. But the Contractor can only request that the Sponsor make a change. As such, a Change Request is most commonly used as a Contractor’s response to a Change Directive. The Contractor may believe that the Sponsor’s proposed change imposes additional costs on the Contractor or impacts its schedule. Rather than delay the change while the amounts of money and/or time are being negotiated, the Change Request commences a process by which the Contractor can be made whole in parallel with undertaking the additional work. Unlike Change Directives, Change Requests are never binding on the parties.
Change Order. While a Change Directive is immediately effective and binding without the Contractor’s approval, a “Change Order” is agreed upon, and signed by, both the Sponsor and the Contractor. In this respect, a Change Order is effectively an amendment to the work-related exhibits. Change Orders can serve a variety of purposes:
- Confirming a Change Directive. If the Contractor has no objections to a Change Directive, then the parties can confirm the Change Directive by executing a Change Order.
- Bypassing a Change Directive. If the Sponsor and the Contractor mutually negotiate the terms of a change before it is issued, then they can simply sign a Change Order—without the Sponsor first issuing a Change Directive.
- Incorporating a Change Request. If the Sponsor wishes to accept the Contractor’s Change Request, then its terms are incorporated into a Change Order and executed by the parties.
- Settlement agreement. The practical result of the filing of a Change Directive and a Change Request may be a negotiation and compromise. The settlement reached can be embodied in a Change Order and executed by the parties.
Once a Change Order is executed, its terms and conditions take precedence and control over any prior Change Directive. Change Orders also serve to establish finality; once a Contractor has executed a Change Order, it may not thereafter seek any price increase or schedule extension with respect to the content of that Change Order.
The below figure is an example of how construction agreements integrate the use of Change Directives, Change Responses, and Change Orders:
See Chapter 6 of my textbook Construction Energy Development for additional discussion of the change process.
About the Gaille Energy Blog. The Gaille Energy Blog discusses issues in the field of energy law, with weekly posts at http://www.gaillelaw.com. Scott Gaille is a Lecturer in Law at the University of Chicago Law School, an Adjunct Professor in Management at Rice University’s Graduate School of Business, and the author of three books on energy law (Construction Energy Development, Shale Energy Development, and International Energy Development).
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