LEGISLATIVE UPDATE: ILLINOIS' PUBLIC WORKS CONTRACT CHANGE ORDER ACT AND SIMILAR STATUTES FROM OTHER JURISDICTIONS

LEGISLATIVE UPDATE

Illinois’ Public Works contract change Order Act and Similar Statutes from Other Jurisdictions
by Christopher D. Montez

Owners and administrators of public improvement projects want to control the overall costs of a project to stay within the budgeted costs for the project. During construction, when a public owner receives hefty change order proposals totaling a third or more of the original contract price for the project, such a sharp increase in the costs of the project in most cases is shocking to the public owner. This Legislative Update reviews the Public Works Contract Change Order Act enacted by Illinois, which was adopted, in part to address a public owner’s ability to control costs resulting from large change orders. Also discussed are similar statutes from other jurisdictions that attempt to place controls on contractors to ensure that their bids are fiscally accurate and to avoid the use of change orders by a contractor to increase its bid to cover the contractor’s real costs.

Illinois’ Public Works Contract Change Order Act

Illinois’ Public Works Contract Change Order Act (the Act) requires units of local government and school districts to rebid change orders that are 50 percent or more of the original price.¹ The rebidding process for the portion of the contract covered by the change order is subject to all requirements of Illinois law in place at the time the original bid was submitted "together with any later requirements imposed by law."² The original version of the Act required the rebidding of a change order that increased the original contract price by 25 percent as opposed to 50 percent.³ The legislative intent of the Act is to rein in contractors who are awarded public works contracts with unreasonably low bids and then attempt to use runaway change orders to increase the contract price so that the contract amount will more accurately reflect the actual costs for the project..⁴
One purpose of the Act and similar statutes is to prevent contractors from using change orders to avoid the competitive bidding process that most, if not all, governmental entities employ to award construction contracts. A governmental entity does not want to be forced to accept an uncompetitive price for change order work when the scope of the work is large enough to warrant the administrative costs of a new competitive bid; nor does it want to be forced to accept the original contractor’s uncompetitive price for the same change order.
The Illinois Municipal League (IML), a political conglomerate of Illinois cities, towns, and villages,⁵ raised concerns about the Act when the Illinois General Assembly considered the legislation for enactment.⁶ the IML wanted to limit the applicability of the Act to projects that exceed a specific minimum dollar amount.⁷ The addition of a minimum dollar amount to the Act may eliminate the argument that the Act may increase the costs of a low-dollar project by forcing the governmental entity to rebid change order work and award the work to a new contractor, which would increase the entity’s administrative resources, thereby defeating any resultant cost savings. Aside from increased administrative costs due to the rebidding process and the lack of a minimum dollar amount, the IML argued that the Act may cause additional negative impacts: (1) the original contractor may suffer project delays while the rebidding process occurs; and (2) there is the potential problem of stacking of trades should the low bidder on the change order work be a different contractor than the original contractor and two different contractors then have to work side by side in completing the project.⁸
The Act became effective on June 1, 2004. To date, there are no Illinois appellate court decisions, state or federal, addressing this new legislation. One issue that may be raised on appeal is whether the Act applies to a series of change orders.⁹ For example, if three separate change orders are approved that increase the contract price by 40 percent and then a fourth change order is proposed that increases the contract price by at least 10 percent, the costs of all four change orders increase the contract price by more than 50 percent. Does the Act apply to the fourth change order in the above example even though its sole impact increased the contract price by only 10 percent as opposed to the requisite 50 percent? The relevant language of the Act states that it applies to "a change order for any public works contract [that] authorizes or necessitates any increase in the contract price that is 50% or more of the original contract price..."¹⁰ One can argue that the Act applies to the fourth change order because it applies to change orders that cause "any increase" in the contract price that is 50 percent or more of the original contract price, and the fourth change order would cause such an increase, albeit cumulative, in the contract price. Admittedly, this plain language argument is somewhat strained, but perhaps the Illinois appellate courts will have the opportunity to address the issue.

Similar Change Order Statutes from Other Jurisdictions

California
In California, projects for hospital districts require rebidding for change orders to public works contracts if the scope of a change order "materially" changes the scope of the original contract and if "each individual" change order totals more than 5 percent of the original contract.¹¹ A hospital district project is publicly bid if the original contract exceeds $25,000.¹²

Connecticut
In Connecticut, change orders to public school building contracts that receive state assistance are subject to Connecticut’s competitive bidding process.¹³ This rebid requirement applies only to change orders costing more than $10,000 and when the change order is not "determined by the Commissioner of Education" to be of an emergency nature.¹⁴

Delaware
In Delaware, change orders to public works contracts are not subject to competitive bidding requirements under Delaware state procurement laws.¹⁵ The Delaware change order statute allows changes to the contract that "may be necessitated by changed situations, unforeseen conditions, strikes and acts of God."¹⁶ The statute also allows changes "determined to be necessary and requested by the [governmental] agency, but not specified in the contract or its plans and specifications."¹⁷ The statute does not limit the dollar amount of changes that may be added to a public works contract.

Florida
In Florida, change orders to public contracts for the construction and maintenance of all roads that expand the "physical limits" of the project "shall not exceed $100,000 or 10 percent of the original contract price, whichever is greater."¹⁸ This Florida statutory provision places a cap on change orders that "expand the physical limits of a project only to the extent necessary to make the project functionally operational in accordance with the intent of the original contract."¹⁹ The effect of this statute is to prevent a contractor from avoiding the competitive bid process by seeking approval of change orders that are in excess of $100,000 or 10 percent of the original contract price, whichever is greater.

Georgia
In Georgia, change orders to public contracts "may not be used to evade the purposes of this [statute].²⁰ This statutory scheme appears to provide owners on public contracts discretion in rebidding a change order.

Indiana
In Indiana,²¹ change orders to public projects shall not "increase the scope of the project beyond 20 percent of the amount of the original contract.²² The purpose of such a cap is to prevent contractors from using change orders to avoid competitive bid requirements that Indiana governmental entities generally use to award construction contracts.

Kansas
In Kansas, change orders to public works contracts shall be negotiated "unless the secretary of administration requires such change order to be let by competitive bids as a separate contract..."²³ Accordingly, under the Kansas change order statute, the secretary of administration has discretion in determining which change orders to competitively bid. Kansas’ secretary of administration heads the Department of Administration, which facilitates services for the Kansas state government.²⁴

Louisiana
In Louisiana, change orders to public contracts that are "outside the scope" of the original contract are required to "be let out for public bid..."²⁵ Under the Louisiana statutory scheme, the phrase "change order outside the scope of the contract" means "a change order which alters the nature of the thing to be constructed or which is not an integral part of the project objective."²⁶

Nevada
In Nevada, the State Public Works Board oversees state public construction projects.²⁷ The board may authorize change orders to a state public works contract, but such change orders must not "exceed in the aggregate 10 percent of the total awarded contract price..."²⁸ Similar to the Indiana statute, the Nevada cap on change orders prevents contractors from using change orders to evade the competitive bid process that the board relies on to award original contracts.

New York
In New York, New York City health and hospital corporations must publicly bid a contract for the construction of a health facility that exceeds $10,000 and award the contract to the lowest responsible bidder.²⁹ For change orders to these contracts, the corporation may approve a change order without rebidding the work if it "determines that circumstances exist whereby it would be detrimental to or impracticable for the corporation to comply with the public letting requirements..."³⁰ Similar to the Kansas statute, this New York statutory provision provides the governmental entity discretion regarding whether to rebid a change order.

Ohio
Generally, all public improvement contracts with the state government of Ohio are awarded to the "lowest responsible bidder..."³¹ Despite this broad statutory provision, for change orders to construction contracts for roads, highways, and bridges with the Ohio department of transportation, "competitive bidding" is not required if the additional cost of the change order does "not exceed the lesser of one hundred thousand dollars or five percent of the total contract price."³² This cap does not apply to change orders that are less than $25000 or those that arise from: (1) an increase in the quantity of work under the original contract; and (2) federal law requirements that did not exist at the time the original contract was awarded; and (3) the declaration of an emergency by the director of transportation caused by circumstances creating a "life-,safety-, or health-threatening situation..."³³ The cap on change orders seeks to prevent contractors from avoiding the competitive bid process by submitting large change orders for work for which the Ohio state government may obtain a better price if it is publicly bid instead.

Oklahoma
In Oklahoma, change orders to a public works contract of $1,000,000 or less "shall not exceed fifteen percent (15%) cumulative increase in the original contract amount."³⁴ For public works contracts over $1,000,000, change orders "shall not exceed the greater on One Hundred Fifty Thousand Dollars ($150,000.00) or a 10 percent (10%) cumulative increase in the original contract amount."³⁵ Change orders, or a series of change orders, that exceed either of these two limits must be rebid to complete the scope of the change order work.³⁶ This rule does not apply to public contracts that contain unit pricing.³⁷

South Dakota
In South Dakota, section 5-18-18.3 provides an exemption from the bidding process requirements for change orders to public works contracts.³⁸ Change orders that do not qualify for the exemption must be competitively bid in accordance with South Dakota Law.³⁹ Section 5-18-18.3 provides three categories of change orders that are exempt from a competitive bidding process: (1) contracts that contain unit pricing "for the same type or class of work"; (2) change order work that is "necessitated by circumstances related to soils, utilities, or unknown conditions directly affecting the performance of the work that were not reasonably foreseeable" at the time the original contract was let; and (3) when the total amount of the proposed change order added to all prior unbid change orders does not exceed the following guidelines: (a) for contracts not more than $500,000, the greater of $25,000 or 15 percent of the original contract price (b) for contracts more than $500,000 but less than $2,500,000 the greater of $75,000 or 10 percent of the original contract price: and (c) for contracts more than $2,500,000, the greater of $250,000 or 5 percent of the original contract price.⁴⁰

Texas
In Texas several statutes place caps on change orders approved for public works contracts with certain governmental entities. The original contract price of a contract with a Texas municipality "may not be increased [through change orders] by more than 25 percent."⁴¹ The same provision applies to a contract with a municipal civic center authority,⁴² sports facility district established by a county,⁴³ jail district, ⁴⁴ and other governmental entities.⁴⁵ A contract with a Texas county has the same 25 percent cap; however, a Texas county may increase the contract by more than 25 percent if "necessary to comply with a federal or state statute, rule, regulation, or judicial decision enacted, adopted, or rendered after the contract was made."⁴⁶ The purpose of these statutes is to prevent a contractor from avoiding the competitive bid process by attempting to increase the amount of its public works contract with change orders.

Conclusion
Illinois’ Public Works Contract Change Order Act and the other similar statutes mentioned are attempts by state public owners to prevent contractors from evading the competitive bidding process by obtaining the contract award with a low bid and recapturing the actual increased costs during construction through excessive change order proposals. The various statutes employ minimum-dollar-amount caps or percentage caps based on the original contract price on change orders, as well as other methods to achieve this objective.

Endnotes

1. 50 ILL.COMP. STAT. ANN. 525/5 (2004)
2. Id.
3.Bill Status of HB0940, 93d General Assembly, available at http://www.legis.state.il.us/legislation/BillStatus.asp?DocNum=940&GAID=3&DocTypeID=HB&Legld=1448&SessionID=3 (accessed Oct. 18, 2004).
4.Michael Jurusik , The Public Works Contract Change Order Act: The Creation of the Re-bid Requirement, 40:9 LOCAL GOV’T LAW 1 (Illinois State Bar Association Section on Local Government Law, Springfield, IL, June 2004)
5. Illinois Municipal League—Directory Listing , available at http://www.iml.org/cdps/cditem.cfm?NID=54 (accessed Oct. 18, 2004).
6. Legislative Bulletin 2 (Illinois Municipal League, Springfield, IL, Feb. 6, 2004).
7. Id.
8. Jurusik, supra note 4, at 3.
9. Id.
10. 50 ILL. COMP. STAT. ANN. 525/5 (emphasis added).
11. CAL. HEALTH & SAFETY CODE section 32132(c) (Deering 2004).
12. Id. section 32132(a).
13. CONN. GEN. STAT. ANN. section 10-287(b) (2003).
14. Id.
15. DEL. CODE ANN. tit. 29, section 6963 (2004).
16. Id. section 6963 (b).
17. Id.
18. FLA. STAT. ANN. section 337.11(8)(b) (West 2003).
19. Id.
20. GA. CODE ANN. section 36-91-20(e)(2004) (emphasis added).
21. IND. CODE ANN. section 36-1-12-18 (Michie 2004).
22. Id. section 36-1-12-18(d).
23. KAN. STAT. ANN. section 75-3741a (2003) (emphasis added.)
24. Agency List, access Kansas: The Official Web site of the State of Kansas, available at http://www.accesskansas.org/government/agency-detailed.html#a (accessed Oct. 18, 2004).
25. LA. REV. STAT. ANN. section 38:2212(A)(6) (West 2004).
26. Id. section 38:2211(A)(3) (2004).
27. NEV. REV. STAT. ANN. section 341.145 (Michie 2004).
28. Id. section 341.145 (8)(b).
29. N.Y. UNCONSOL. LAW ch. 214-A, section 8 (1) (2004).
30. Id.
31. OHIO REV. CODE ANN. section 125.11(A) (West 2004).
32. Id. section 5525.14 (A).
33. Id. section 5525.14 (B).
34. OKLA. STAT. ANN. tit. 61, section 121(A) (West 2004).
35. Id. section 121.(B).
36. Id. section 121(C).
37. Id. section 121(H).
38. S.D. CODIFIED LAWS section 5-18-18.3 (Michie 2004).
39. Id. sections 5-18-2, 5-18-3, 5-18-9.4 (2004).
40. Id. section 5-18-18.3(3).
41. TEX. LOC. GOV’T CODE ANN. section 252.048(d) (Vernon 2004).
42. Id. section 281.046(e).
43. Id. section 325.040.
44. Id. section 351.137(c).
45. TEX. WATER CODE ANN. section 60.410(b) (Vernon 2004) (navigation districts).
46. TEX. LOC. GOV’T CODE ANN. section 262.031(b).