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HB 3485 will provide general contractors and subcontractors a statutory right to refuse to perform owner-directed additional work on public and private projects if: (1) the downstream party does not have a written and fully executed change order for that additional work, and (2) the aggregate value of all unexecuted change orders for owner-directed additional work exceeds 10% of the downstream party’s original contract (or subcontract) amount. If a general contractor or subcontractor elects not to proceed with the additional work on this basis, it would not be liable for damages associated with the decision not to proceed. This new law will apply to contracts entered into on or after September 1, 2023, and is not waivable by contract.
Key Considerations and Implications of HB 3485 for Construction Stakeholders and Schedule Management
This bill will materially alter the Construction Change Directive procedure written into many form construction agreements, with the overarching purpose of providing general contractors and subcontractors the security of a fully executed change order prior to proceeding with significant additions to their scopes of work. Under the new law, if (1) a builder’s-side party is faced with a request to perform owner-directed additional work exceeding—or anticipated to exceed—10% of its original contract (or subcontract) value without a written and fully executed change order, or (2) the aggregate of all unexecuted change orders for owner-directed additional work totals over 10% of the original contract (or subcontract) value, then that party will have the right to not proceed with the owner-directed additional work. But builders would still retain their obligations to proceed with work for existing scope during any disputes (i.e., original scope and additional scope memorialized in a written and fully executed change order). Importantly, if a builder’s-side party elects not to proceed with such additional work, HB 3485 would prevent that party from being liable for delay or other damages associated with that election.
All construction stakeholders need to be aware of HB 3485, with an eye towards schedule management and prompt execution of proposed change orders exceeding (or anticipated to exceed) 10% of an applicable contract’s original value, either standing alone or in conjunction with other proposed change orders. Public contractors and owners should be especially mindful of the logistics and turnaround time of producing a fully executed change order in light of typical, public-body approval processes on large, public projects. For example, if your project requires City Council approval of a material change order, a contractor may have no requirement to proceed with that additional work until the City Council meets and provides the necessary authority for City personnel to execute the associated change order. In many circumstances, that process can take weeks to complete, which could pose a schedule risk for critical-path changes.
Construction Change Directives v. Builder Change-Order Security
Many form construction contracts contain a procedure commonly referred to as Construction Change Directives. These directives typically provide an avenue to require construction parties to proceed with a directed scope change while negotiations over change-order terms (e.g., additional time, money) proceed. The purpose of this procedure was to keep the work moving and not allow any one party to “hold the project hostage” through negotiation of commercial terms on an owner-required change. This process would remain unchanged for an owner-directed change order valued at or under 10% of the applicable contract amount (or one that would not put the aggregate of owner-directed change-order work for which there is no executed change order above 10%). In practice, however, HB 3485 is likely to materially change, if not eliminate, the Construction Change Directive procedure for significant, owner-directed additional work in Texas construction contracts dated on or after September 1, 2023.
To illustrate the issue, the unmodified AIA A201-2017 General Conditions contain the following provisions:
§ 7.3 Construction Change Directives
§ 7.3.1 A Construction Change Directive is a written order prepared by the Architect and signed by the Owner and Architect, directing a change in the Work prior to agreement on adjustment, if any, in the Contract Sum or Contract Time, or both. The Owner may by Construction Change Directive, without invalidating the Contract, order changes in the Work within the general scope of the Contract consisting of additions, deletions, or other revisions, the Contract Sum and Contract Time being adjusted accordingly.
§ 7.3.2 A Construction Change Directive shall be used in the absence of total agreement on the terms of a Change Order.
Sections 7.3.3 through 7.3.10 then provide a procedure for the Owner, Architect, and Contractor to negotiate and potentially agree on time or money adjustments, with disagreements from that procedure becoming a “Claim” under Article 15. Importantly, the unmodified Article 15 of the AIA A201-2017 provides:
§ 15.1.4 Continuing Contract Performance
§ 15.1.4.1 Pending final resolution of a Claim, except as otherwise agreed in writing or as provided in Section 9.7 and Article 14, the Contractor shall proceed diligently with performance of the Contract and the Owner shall continue to make payments in accordance with the Contract Documents.
§ 15.1.4.1 read together with § 7.3 creates a situation where owners and architects could force contractors and subcontractors to carry significant costs associated with owner-directed additional work without any guarantee of payment. On the other hand, owners would argue that these requirements are fundamental to prioritizing schedule and delivery over negotiation of commercial terms. To correct what it viewed as an imbalance in this process, the 2023 Legislature appears to have shifted some of the burden back to owners, giving builders the option to require contractual certainty before that builder must proceed with additional, owner-directed work.
To effectuate that purpose, HB 3485 added new sections to both Texas Government Code Chapter 2251 (prompt payment act for public projects) and Texas Property Code Chapter 28 (prompt payment act for private projects). As with existing prompt payment laws, the new protections in HB 3485 are not waivable, meaning that any contractual agreement purporting to waive the statutory rights afforded by HB 3485 are void as a matter of law. Tex. Gov’t Code § 2251.004; Tex. Prop. Code § 28.006 (with a limited exception for certain residential projects). For example, if an owner attempts to enforce AIA A201-2017 § 15.1.4.1 to compel a contractor to immediately proceed with added critical-path work totaling over 15% of the contract value without a fully executed change order, § 15.1.4.1 is void if enforced in a manner that would negate the contractor’s statutory right to refuse to perform that work.
Resulting Uncertainties
Given the potential far-reaching implications of this law, it’s likely that implementation is going to be unpredictable in the near term, potentially resulting in unintended consequences. Primarily, HB 3485 has the potential to materially negate an established procedure in many form construction contracts, and it will take time for the industry to adapt accordingly. As with any other material change to existing workflows, this is bound to create misunderstandings and headaches.
Further, the law seems to presume that a purely objective determination of change-order pricing exists, and that there is a completely neutral manner of drawing a bright-line distinction between a 9% change and a 10% change to the contract value. Given how change order pricing can seemingly change by the day depending on the overall project temperature, we know that no such neutral arbiter of costs exists, at least amongst the project participants. Rather, HB 3485 likely instead results in (1) owners having an incentive to keep proposed changes at or below 10% of the contract value, if possible, and (2) contractors having an incentive to price proposed changes over 10% of the contract value, if possible. On a troubled project, those incentives will quickly be at odds with each other.
Similarly, the bill measures the additional, owner-directed work at issue by its “actual or anticipated value,” without clarifying whose anticipated value governs. It’s unclear how courts or arbitrators will apply this measure to assess whether the owner is right that the proposed change order is a 9% increase versus the contractor claiming it’s over 10%. On one hand, an unhappy contractor potentially looking for a project exit could argue that its 10%+ bid for the change work is the “anticipated value,” but the owner presumably could rebut that with third-party cost data. The architect or other initial decision maker will also have a role to play in sorting out such disputes, and inevitably, parties will have to prepare to defend their cost interpretations in court or arbitration.
The issue is compounded when parties dispute whether the additional work is “additional” in the first place. Assume that during construction, the parties discover that additional roof support is needed for a building to meet code, and the cost to do so is objectively over 10% of the contract value. The contractor argues that the design missed it and it is additional work under HB 3485, but the owner and designers argue that the added support was due to the contractor not installing as-designed support correctly. Meanwhile, the building is still without a roof, which can’t be installed until the support issue is solved. Presumably, this new law would give the contractor the right to refuse to complete the added-support work and force the owner to hire a different contractor to do it, assuming commercial terms cannot be agreed upon. In that instance, the original contractor would arguably be entitled to sit by while the project is delayed without consequence (and the roof remains open), only to commence its remaining scope in closing up the roof once the owner’s third-party contractor completes the additional support work. This scenario is now a risk with any additions to critical path work, and it’s possible that disputes over the substance of the change may not be resolved until well after the fact via binding dispute resolution.
Those cost and substantive change-interpretation battles will come with potential major consequences, specifically the potential for wholesale elimination or retroactive application of delay damages, depending on who convinces a judge, jury, or arbitrator that their costs fit HB 3485’s measure of value. Owners and contractors must therefore be diligent and objective in pricing additional, critical path work if a dispute over such pricing is likely. Initial decision makers should similarly proceed with caution when analyzing change-order costs and allocation of responsibility, as owners may look to those decisions to allocate responsibility for delays in the event the contractor is later found to be statutorily protected from delay damages and the initial decision maker originally held otherwise. That derivative liability may typically be disclaimed by contract, which should be a consideration for owners and initial decision makers in contract drafting going forward.
In terms of how HB 3485 will play out in practice, it’s too early to tell, but construction stakeholders should proceed carefully once the law takes effect and applicable contracts begin construction. Substantiating proposed change-order costs, keeping change-order tracking up to date, and engaging in proactive change discussions with contractors and designers may help mitigate the risk of protracted change-order negotiations and associated delays. That said, for troubled projects, it’s very likely that HB 3485 will become a frequent topic of discussion, both at the project level and in dispute-resolution proceedings.