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Who Finances Extra Work?

Saturday, December 03, 2005 04:41 pm

Who Finances Extra Work?

When a project owner issues directives calling for extra work, the contractor's cost of performance may increase substantially. Even assuming there is no dispute regarding the contractor's entitlement to additional compensation, the contractor can only receive progress payments for work completed and in place. Who finances this changed work?

The general rule is that a contractor is responsible for obtaining adequate capital to prosecute the work called for in a contract. This remains true even when the project owner expands the scope of work. Consequently, the contractor is usually responsible for financing extra work. There is, however, a line of case law in the federal contracting arena which at least contemplates contractor recovery of the cost of financing change order work. These cases may be instructive when addressing the issue in other forums.

One way to characterize the cost of financing extra work is to include "imputed interest" in the price of a change order. This imputed interest is the contractor's cost of its own equity capital used to perform the change order work. Case law indicates it is difficult for contractors to prevail in this type of claim.

In one case involving a VA hospital construction contract, the government issued a change order which redesigned the radiology rooms. This was a capital intensive change in the work, but the parties could not agree on the price for over a year. And the contractor could not be paid until a price was established. The contractor contended it should recover imputed interest on its equity capital which had been used to finance the change order work over s [...]

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