Unapproved Change Orders: Forcing the Issue
July 16, 2013
One of the big issues crossing my desk lately is the problem of ‘price and proceed’ change orders, unilateral change directives, and other directives to proceed with additional change order work. The contract documents typically require the contractor to perform ‘additional work’ upon receiving notice, yet the contractor cannot requisition for payment until ‘approval’ of the work at a later date. But what happens when the ‘approval’ is delayed for an inordinate amount of time? Often times, requisitioning for payment for unapproved changes results in rejected monthly requisitions. Must a contractor wait many months or even a year or longer to bill – let alone obtain payment - for ‘unapproved but authorized’ change order work?
I have this issue on several cases at the moment. In each instance, the client’s calls and letters to upstream contractors and owners have been unsuccessful to accelerate payment. However, if the project is a bonded ‘public project’ subject to the statutory requirements of the Federal Miller Act, there may be a way to force the issue.
Recently I came across the case of United States f/u/b/o Straightline Corp. v. American Casualty Co. of Reading, PA, 2007 WL 2050323 (U.S.D.C. N.D. West Virginia 2007), an unpublished opinion from the United States Federal District Court in West Virginia. In Straightline Corp., a subcontractor claimed it performed additional change order work with the prime contractor’s knowledge and approval, and sought payment of the same against the payment bond surety. The surety filed a motion to have the case dismissed via summary judgment arguing, among other reasons, that the subcontractor was only entitled to payment for extra work from the prime contractor to the extent that the prime contractor had received payment from the owner. The surety further argued that the subcontractor was required to pursue the claims not against the surety, but instead through the prime contractor to the owner pursuant to the contract’s pass-through clauses. The surety’s motion for summary judgment to end the case was denied by the Federal Court.
In denying the surety’s motion for summary judgment, the Federal Court reiterated a legal principal other Federal courts have held before: “[a] subcontractor’s right of recovery on a Miller Act payment bond accrues ninety days after the subcontractor has completed its work, not “when and if” the prime contractor is paid by the government”. Particularly interesting was the Federal Court’s reiteration that the Miller Act “conditions payment to the subcontractor not on payment by the government to the contractor, but rather on the passage of time from completion of the work or provision of materials.”
The above case has me thinking. If a subcontractor’s change order work is not approved by the owner within 90 days on a Federal Miller Act bonded project, is the surety liable to pay the subcontractor for the unapproved change on the 91st day? Will the same argument apply on a state ‘Little Miller Act’ claim? For example, the Maryland ‘Little Miller Act’ is patterned after the Federal Miller Act. So wouldn’t the same rationale apply?
My surety attorney colleagues will undoubtedly balk at such a proposition. However, what happens when discovery reveals that the bonded prime contractor did absolutely nothing to try and obtain owner approval on behalf of the subcontractor? What happens when the argument is made that the prime contractor was ‘protecting’ the owner with the hope of obtaining the next contract? I ponder these thoughts as I set out to explore the limits of surety exposure on Federal payment bonds for unapproved and unpaid change order work. At the very least, the pot will be stirred to focus everyone’s attention to my client’s claims. Hopefully this will expedite the approval process, but it has to be better than sitting back, doing nothing, and waiting indefinitely for payment.