August 12, 2019

By: Dorthy Koncur, Associate, Peckar & Abramson, P.C.

Disputes regarding changes in the scope of work constitute one of the most frequently litigated areas of construction law. Although the vast majority of general contractors are familiar with potential disputes concerning additions and substitutions to the scope of work, they do not typically consider the prospect of claims involving deductions to the scope of work. Scenarios related to an owner’s decision to implement deletions to the scope of work may have considerable consequences for the general contractor in terms of upstream and downstream claims, particularly as to the ability to recover anticipated profit. In order to avoid costly litigation, general contractors would be well served by carefully examining the terms of their contract with the owner at the outset of each project to determine whether a reservation exists allowing the owner to unilaterally implement reductions to the scope of work and by implementing reciprocal language flowing down to each of its subcontracts.

Disputes concerning deletion of work generally involve issues of contract interpretation which are well-settled and seek to enforce the clear terms of the agreement as negotiated by the parties. Construction contracts usually accomplish deletions to the scope of work through provisions known as “deductive changes” or “terminations for convenience.” Although deductive change and termination for convenience provisions have become more common in state and private contracts, there is an absence of case law among jurisdictions analyzing issues concerning deletions to the scope of work and the general contractor’s ability to recover certain categories of costs, such as anticipated profit. Federal precedent examining federal contracts [which are governed by the Federal Acquisition Regulation (“FAR”)] provides guidance when deletions to the scope of work become contentious.

Deductive Changes and Terminations for Convenience Under Federal Law
In the federal contracting context, the government is afforded the ability to unilaterally implement deletions to the scope of work through two provisions; one regarding changes and another clause pertaining to terminations for convenience. While there is no bright-line rule for determining the propriety of utilizing either provision, the general consensus is that minor changes in the specifications or scope of work should be treated as deductive changes, whereas major changes in contract tasks should proceed as terminations for convenience. However, federal authority provides that determining whether a deletion of work constitutes a deductive change or termination for convenience is a fact-sensitive issue that is best resolved by examining the circumstances of each case. Ultimately, the decision to employ either provision is a determination left to the Contracting Officer. The general contractor’s ability to recover costs is significantly impacted by the method of deletion chosen by the Contracting Officer.

The primary distinction between deletion of the scope of work through a deductive changes clause or termination for convenience provision relates to the general contractor’s ability to recover anticipated profit. Although federal precedent uniformly endeavors to provide an equitable outcome when measuring the adjustments for deleted work, the focus of deductive changes remains the general contractor’s cost savings, whereas the termination for convenience looks to the costs that the general contractor incurred, along with the contract price. More specifically, deductive change orders are calculated by reducing the contract price by the total of the cost savings realized by the general contractor as a result of the change order and the reasonable amount of profit on the deleted work. Conversely, terminations for convenience enable a general contractor to recover the costs related to its performance, expenses related to settling with and paying terminated subcontractors and suppliers, costs incurred in preparing the termination or settlement proposal, costs associated with the storage, transportation, preservation, protection and disposition of terminated inventory, and a reasonable profit on the costs incurred unless it appears that the general contractor would have sustained a loss on the entire contract in the absence of the termination for convenience.

A general contractor tends to have a better opportunity to maximize recovery when the deletion of work is accomplished through a deductive change since the provision allows for the recovery of reasonable profit, unlike the termination for convenience provision which does not allow for such recovery. This demonstrates the importance of including a provision in private contracts which expressly provides that anticipated profits can be recovered for deleted work, regardless of whether it is accomplished by deductive change or termination for convenience.

The federal precedent concerning deletions in the scope of work demonstrates that navigating through the salient terms of a contract to remove certain tasks is complicated. General contractors should familiarize themselves with the applicable terms of their own contracts at the outset of a project and develop a strategy for minimizing the prospect of disputes regarding reductions to the scope of work. The following guidelines are particularly relevant:

  1. Review the contract to determine whether a reservation exists allowing the owner the unilateral ability to delete work and if an entitlement to anticipated profits is expressly provided;
  2. Determine whether the owner’s ability to delete work is conditioned upon a showing of necessity and ascertain the underlying basis for the reduction;
  3. Implement reciprocal reservation terms in each of the subcontracts; and
  4. Analyze job costs to determine the potential impact associated with deductions to the scope of work.

In the event that issues concerning deletions to the scope of work arise, consult with counsel in order to carefully analyze the contract and the specific factual scenario to make an informed decision regarding how to maximize your cost recovery and mitigate exposure to subcontractor claims.

The views expressed in this article are not necessarily those of ConsensusDocs. Readers should not take or refrain from taking any action based on any information without first seeking legal advice.