A California appellate court has clarified for public owners and contractors (a) what the results may be if the owner does not timely sign a change order and (b) under what circumstances a change order is required. In G. Voskanian Construction, Inc. v. Alhambra Unified School District, No. B221005 (Cal. Ct. App. Mar. 29, 2012), following competitive bidding, the contractor and the District entered into a written contract for moving portable buildings and making improvements. The contractor secured the required performance bond. The underlying contract included the standard “written change orders required” language, along with a provision relating to how change orders were to be approved. The District’s “designee” identification, however, was left without express direction or guidance. During the course of the contract, the District’s Assistant Superintendent directed the contractor to work with the District’s construction manager regarding change orders, and stated that the District would then approve whatever they agreed to. Given that the work related to portable classrooms to be used during the school year, the project was on a very tight summer schedule. Any extra work had to be performed immediately, and the change orders would be bundled and later processed by the District.

At the time of the pre-bid walk, classes were in session and so only two of the 16 buildings could be visually reviewed by bidders – and from the doorways only – without the plans. Further, in the course of this tight construction timeline, and post-award, errors by the District’s architect were discovered, including the failure to specify any fire alarms for the moved portables. The District directed the contractor to make changes to correct the errors and issued another bid, for which the same contractor was the lowest bidder, to add the fire alarms. The contract terms were the same regarding the written change orders and bonds as the initial contract. In the course of the work, several portables were also discovered by the contractor to include more rooms in the portables than shown on the plans obtained post-award, in some cases five more rooms per portable than represented. The contractor requested change orders for the errors in the plans. The District refused. The contractor submitted a claim as required under the contract, and the District rejected the claim. Litigation followed, and included a claim by the District against the bonds by cross-complaint.

After analyzing prior California law, which historically narrowly allowed an oral modification of a public contract and had recently rigidly rejected any oral modifications of public contracts, the appellate court ruled that as to the first contract, what was at issue was not that there were no change orders, but the timing of the written change orders. In that instance, the court found that the District ultimately did approve of the written change orders by the contractor after the contractor followed the proper process, but it was the amount that was at issue. As the contractor had complied with the contract in performing the work even though the cost was disputed, and had submitted the appropriate claim work required by the contract, the court ruled that the change order sums were recoverable in full. As to the second contract, relating to the errors by the District’s architect for the fire alarms, the court held that the errors in the plans necessitated the extra work and therefore no change order was required to entitle the contractor to the extra payment for the additional work. As to the errors in the plans and specifications, which misled the contractor to his detriment on his bid, the court ruled that the District had committed a breach of the warranty of correctness. Since these errors did not rely on the issuance of written change orders, the court held that the written change orders were not required for the extra compensation.

Of additional note is the appellate court’s upholding of the attorney fee award, not on the construction contract, but on the bonds. The court noted recent California caselaw in 2010 wherein the public entity’s action of filing a cross-complaint and putting the bonds in issue – by seeking affirmative recovery and fees that were not otherwise at issue – allowed a reciprocal finding by the court when the public entity did not prevail on its claims. Because the contractor and the sureties were represented by the same counsel and the facts and theories were so intertwined, the court upheld the fee award against the District, essentially doubling the contractor’s award against the District.

The takeaways for a public agency: a narrow and short-sighted denial of undisputed work necessary to complete the project can cost the natural expense requested by the contract plus interest and attorney fees, and for a contractor: know your contracts and be diligent about compliance to document your entitlement to the additional costs of the work.