Those contracts also typically require the contractor to proceed with directed work even if a dispute over scope or pricing exists. You should expect that a court will enforce such provisions in most cases. The contractor and subcontractor are now financing the job with little or no leverage to expedite that change order and the ability to collect payment for the work.
Savvy contractors have been seeking limits on such directed changes in contract negotiations. In 2023, the Texas Legislature followed suit, giving contractors and subcontractors a tool to limit directed changes. Two new statutes, Texas Government Code Section 2251.0521 and Texas Property Code Section 28.0091, which apply to contracts entered into on or after September 1, 2023, function to limit the right of owners and contractors to impose substantial changes in scope upon a contractor or subcontractor without their consent. We’ll discuss the statute applying to public and private work separately, but they are largely the same: if the contractor (or subcontractor) receives a directive and the value of that change plus other unresolved directives totals 10 percent or more of the original contract value, the contractor (or subcontractor) can decline the work.
Similarly, a subcontractor for a public project may elect not to proceed with additional work directed by a vendor under a subcontract if: the subcontractor has not received a written, fully executed change order for the governmental entity-directed additional work from the vendor; and the total actual or anticipated value of the additional work under the subcontractor’s subcontract terms, plus any previous governmental entity-directed additional work for which the subcontractor has not received a written, fully executed change order exceeds 10 percent of the subcontractor’s subcontract amount. Ultimately, a vendor or subcontractor who elects not to proceed with additional work as provided by this section is not responsible for damages associated with the election not to proceed.
It is important to note that these new statutes do not extend beyond that new change directive. The contractor and subcontractors remain responsible for performing their originally contracted scope of work. The purpose of these new statutes is to prevent an owner or contractor from requiring a contractor or subcontractor to add significant additional work to their scope without the assurance of a properly executed change order, thereby, removing much of the risk from the performing contractor or subcontractor.
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The statutes do not explicitly state the method of providing notice of a contractor’s or subcontractor’s election to not perform additional work pursuant to one of the statutes. However, the performing party should:
- Comply with requirements in original contract documents
- Make the election not to perform in writing as soon as possible after receipt of the direction to perform additional work
- Include possible consequences in the notice, including delay to the work
- Ask if the owner would like you to continue with the work that would be changed by the directive in question
- Clearly lay out the basis for the election in the notice by identifying the additional work that exceeds 10 percent of the contract price, or in the instance that the minimum 10 percent of the contract price was reached cumulatively through the aggregate of multiple past and present unsigned change orders, then a summary of all additional work relied on to reach the minimum should be included
- Clearly indicate in the notice that this election not to perform is made pursuant to either the private or public statute, as applicable to each project
The statutes allow subcontractors to refuse to do work after that 10 percent threshold has been met. What if the contractor wants to do the work (or would agree to perform because it wants to keep the relationship going), but a subcontractor might be in a position to refuse the change? The contractor should be consulting with the affected subcontractor(s) and might consider if and when it will have to get parallel pricing from another subcontractor in order to protect its position with the owner.
Also, consider that the legislation does not prohibit waiver of the new statutory rights by contract. Watch for such waivers in future contracts. And for that matter, the statute doesn’t prohibit contractors from negotiating lower threshold percentages in a contract.
Practical project developments have pushed more of the project finance burden onto contractors and subcontractors. The new statutes offer contractors and subcontractors some protection from further financing pressure. Additionally, they provide an opportunity for collaboration; owners now have an incentive to resolve outstanding change directives, even if their incentive is to be able to issue more. Consider scheduling regular meetings with the owner, in order to avoid any limitation on future directed changes.
