The Bunker Hill Covered Bridge is a well-known historical landmark in Claremont, North Carolina, originally built in 1895. The bridge was damaged due to excessive rain, flooding, and erosion in the area, which prompted the Historical Association of Catawba County (the “Historical Association”) to hire NHM Constructors, LLC (“NHM”) to repair the bridge. A dispute arose between the parties, NHM filed a lien on the property, and subsequently filed a lawsuit, seeking payments from the Historical Association. The Historical Association alleges NHM is not owed additional payments because the costs exceeded the budget provided in NHM’s bid. The case will largely turn on the type of contract the parties executed and whether any change orders were properly executed to increase the cost of repairs.
Types of Construction Contracts
As provided in a prior blog post, the construction industry is largely governed by contracts. There are three primary types of construction contracts: lump sum or fixed price, cost plus, and time and materials.
Lump Sum or Fixed Price Contracts
A lump sum or fixed price contract is relatively self-explanatory. The parties agree, as a term of the contract, to the overall price. This price can only be changed by a properly executed change order, discussed below. While the certainty of this type of contract can be beneficial to some, it creates difficulty when, as is likely the case with the bridge, the soil conditions are unknown and could lead to unanticipated increases in cost.
If NHM and the Historical Association used a fixed price contract, NHM would likely only be entitled to payments beyond the fixed price if they are accounted for in enforceable change orders.
Cost Plus Contracts
A cost plus contract offers more flexibility and transparency between owner and general contractor. In this type of contract, the owner pays the direct costs (i.e., the cost of goods and labor) and the indirect costs (i.e., overhead costs, such as mileage, insurance, office space), plus an agreed-upon percentage of the contractor’s profit. Many cost plus contracts include a bonus structure in which the contractor is eligible for a bonus if the total cost falls below a certain amount.
If NHM and the Historical Association used a cost plus contract, NHM would likely be entitled to payments beyond its initial bid, to the extent these costs were properly attributed to particular work, properly accounted for, and timely shared with the Historical Association.
Time and Materials Contracts
A time and materials contract provides that the owner will pay the contractor the cost of materials, labor, overhead, and profit. In this type of contract, the labor rates are predetermined and owners will generally pay retail prices for materials, allowing contractors to increase profit if they can secure materials at wholesale prices. These contracts can, but do not always, include a not-to-exceed provision, establishing a maximum budget.
If NHM and the Historical Association elected to use a time and materials contract, NHM’s right to receive payments beyond the initial bid could be determined by the inclusion or exclusion of a not-to-exceed provision, and whether the parties agreed to any change orders.
Once a construction contract is executed, the terms of the contract cannot be altered except with the mutual agreement of all parties to the contract – a change order. Most construction contracts will include a provision permitting change orders, which are generally required to be in writing. A change order must be sufficiently detailed to inform the owner of the labor and materials required, and the cost involved.
As a practical matter in construction, an unforeseen condition on the premises may sometimes require an immediate change to the agreed-upon scope of work, and obtaining a written change order before performing the work could create a problem. In North Carolina, an oral agreement between the parties can create an enforceable change order, even if the contract requires written change orders, to the extent the conduct of the parties conforms to the oral agreement. Further, it is possible that the owner abandoned or waived the contractual requirement for written change orders by prior conduct (e.g., if the owner previously orally agreed to a change order and promptly provided payment).
If the contract between NHM and the Historical Association contains a change orders provision, NHM’s right to recover payments beyond the initial bid will depend on the factors discussed above. Namely:
- Does the change order provision require written change orders?
- What level of detail is required in a change order, and did NHM provide sufficient detail?
- If the contract contained a requirement for change orders to be in writing, but some change orders were purportedly executed pursuant to oral agreements, do circumstances exist that would allow these oral change orders to be enforceable?
If you have questions regarding a construction dispute, please call us at (704) 457-1010 to schedule a consultation. For more information regarding our firm, attorneys, and practice areas, please visit http://www.lindleylawoffice.com/.