At Tom Vignali CPA, Inc., we were recently engaged to assist with the compiling and review of financial records for a construction contractor who was involved in litigation regarding a project they had worked on.
The contractor had been awarded a contract to construct a building according to the terms and specifications that were part of the contract. The terms included materials (plus an agreed-upon markup), labor (at an agreed-upon price), and a nominal profit margin on the total cost of the project. The contractor’s total bid price for the project, including all terms of the contract, had been accepted and they were awarded the contract.
Change orders? Get them in writing
As work proceeded on this project, the contractor began to receive various change orders from the client. The change orders were usually requested verbally, over the phone, and the contractor calculated the costs of the change orders and then called the client to discuss. In most instances, the proposed increased costs for the change orders were verbally accepted by the client. The contractor kept notes of the calculated costs for the change orders and proceeded with the work.
Unfortunately, at no time were written changes made to the contract to outline these verbal change orders, no written change orders were ever documented (as required by the terms of the contract), and no changes were made to the blueprints or designs for the building. All of the changes requested were verbal and verbally agreed to.
As the project advanced, the client from time to time indicated that they didn’t like how some of the proposed changes turned out and requested that these changes be reversed back to the original design. The contractor informed the client of the additional expenses that would be incurred by reversing the changes. Again, everything was agreed to verbally.
Ultimately, there were so many changes and reversal of changes that a significant amount of expenses were incurred on the part of the contractor. When the contractor finally billed the client for these expenses, the client balked at the amount and refused to make payment. This resulted in legal actions on the part of both parties.
Remember: the contract is king
Tom Vignali CPA, Inc., was engaged on behalf of the contractor to assist with financial data compilation and document review to assist their legal actions. Data compiled supported all of the verbally requested change orders regarding material and labor costs.
The final decision of the court referred back to the terms of the original contract. Because no modifications had been made to the contract to reflect any of the verbal change orders, they were deemed to be invalid based upon the differing recollections of the two parties. Although we were able to provide accurate data to support all of the changes made, without written change orders according to the terms of the mutually agreed upon contract, the contractor ultimately lost his claim for payment.
Our recommendation is that all contracts be reviewed in detail, and any modifications to a contract be executed according to the terms outlined in the contract. In this instance, although the contractor was attempting to fulfill the wishes of the client in a cooperative fashion, the violation of the terms outlined in the contract for change orders resulted in a devastating loss for the contractor.
If you would like to further discuss this issue or any other accounting issues, don’t hesitate to contact us at: Tom Vignali CPA, Inc.
Contact Us:
Thomas W. Vignali CPA Inc.
118 Point Judith Road
Narragansett, RI 02882
T: (401) 415-0798
tom@tomvignalicpa.com
www.tomvignalicpa.com
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