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Changes in Trenchless Construction Contracts and the Protection Afforded to

Subcontractors under Contract Law

Lameck Onsarigo, Ph.D., A.M.ASCE1; and Simon Adamtey, Ph.D., A.M.ASCE2

1
Assistant Professor College of Architecture and Environmental Design, Kent State Univ., Kent,
OH. Email: [email protected]
2
Assistant Professor College of Architecture and Environmental Design, Kent State Univ., Kent,
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OH. Email: [email protected]

ABSTRACT

Changes are common in construction projects and are primarily due to design changes or
owner-directed changes. On average, 35% of projects experience at least one major change
during construction. Changes can occur at any stage of the construction process, can be caused
by a range of factors, and can have far reaching implications on project cost and schedule. Since
most trenchless companies generally operate as subcontractors on construction projects, it is
important to understand how these changes impact subcontract performance. Through an
extensive review of literature and some court cases in the U.S., this paper analyzes some of the
risks and protections afforded to trenchless subcontractors under contract law. A significant
finding is that the prime contractor is not required by law to subcontract with the listed
subcontractor if the work to be subcontracted has been changed substantially or deleted by a
change order. Another finding is that a subcontractor can use the third-party beneficiary theory to
recover damages from the owner even in the absence of contractual privity. Finally,
subcontractors must be wary of exculpatory clauses in the contract that may undercut their
efforts to recover damages. It is expedient and imperative for trenchless subcontractors to be
aware of these legal provisions and how they can leverage them to protect their companies from
loss.

INTRODUCTION

Changes can occur at any stage of the construction process, and can be caused by a range of
factors including design errors/deficiencies/defects, design changes (could be owner directed),
differing site conditions, impossibility of performance, acceleration, inspection, warranties,
unforeseen conditions, excusable delays (including force majure), regulatory issues, safety and
environmental issues, and changes in market conditions among other things (Smith, Currie &
Hancock LLP, 2015; Civitello, 1987; Purdy, 2014). It is in the contract between the owner and
contractor that the contractor’s performance obligations are articulated. However, because of the
potential for changes during execution, there needs to be some flexibility in the agreement that
enables adjustment to the actual construction conditions, hence the “changes” clause (Cantwell,
2012). The changes clause often specifies the method for determining the amount of additional
compensation or performance time that is due the contractor for changed or extra work. The
payment for the work that is changed is often accomplished based on an agreed or negotiated
lump-sum, unit price, or cost-plus (time and materials) basis (Smith, Currie & Hancock LLP,
2015).
There are five main types of changes in construction contracts: (1) changes that affect time
and/or cost, but parties are in agreement (change orders), (2) directed changes (no agreement

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between the parties: the owner directs the change), (3) minor changes (don’t affect project cost or
completion time), (4) deductive changes (decrease project cost and/or time), (5) cardinal changes
(a fundamental change that is beyond the original contract scope) (Smith, Currie & Hancock
LLP, 2015). A change order is effectuated by a written document, signed by the
architect/engineer (A/E), owner and contractor, describing the adjustments to be made, the
change in the contract amount, and any authorized time extension (Clough, 1986). There are
instances when an authorized agent of the owner could sign the change order on behalf of the
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owner. In such cases, the contractor must ascertain that the agent has the authority to obligate the
owner to make a binding change to the contract (Schaufelberger & Holm, 2002).
To receive compensation for any additional work that is a result of a change order, the
contractor must prove that it performed work that was beyond that which was agreed upon under
the original contract. In Duncan v. Cannon (1990) the court ruled that for a contractor to recover
additional payment from an owner for extra work, the contractor must establish by clear and
convincing evidence each of the essential elements in the case. The contractor must establish
that:
1. the work was outside the scope of the original contract;
2. the extra items were ordered at the direction of the owner;
3. the owner agreed either expressly or impliedly to pay extra;
4. the extra items were not voluntarily furnished by the contractor; and
5. the extra items were not rendered necessary by any fault of the contractor.
While a change order is prepared by the A/E and the changes are agreed upon by both the
owner and the contractor, the changes can affect the subcontractor’s work. Since the
subcontractor is not a party to the contract between the owner and the contractor, there are
protections under contract law that subcontractors can rely on should there be a change in the
contract to their detriment. Since most trenchless companies generally operate as subcontractors
on construction projects, it is important to understand how these changes impact subcontract
performance.
An extensive literature review was conducted, including a review of some court cases that
were, wholly or in part, a result of change orders. The court decisions are analyzed and
discussed, in the context of subcontractor defenses (protections) and risks under contract law.
The questions addressed include:
• In a case where the work to be subcontracted has been changed substantially or deleted
following a change order, is the prime contractor required by law to subcontract with the
listed subcontractor?
• Can a contractor who lacks contractual privity with the owner recover damages caused by
change orders through third-party beneficiary arguments?
• Where a subcontractor has accrued additional costs due to changes, the prime contractor
can assert a claim against the owner on the subcontractor’s behalf. However, are there
contractual provisions that can undercut the ability of prime contractors and their
subcontractors to assert pass-through claims?

LITERATURE REVIEW

Subcontractors (specialty contractors) play a critical role in construction projects. They are
specialists in performing their scope of work, which is often a portion of the entire project
(Montoya & Campbell, 2019). Subcontractors have a direct contractual relationship with the
prime contractor, but do not have a contract with the owner or the design professional. As has

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been pointed out, changes in construction project are primarily due to design changes or owner-
directed changes. And while both the owner and designer have no contractual relationship with
the subcontractors, the changes that they make do affect the subcontractor’s work.
Rights of Listed Subcontractors
Courts have relied on the doctrine of promissory estoppel to hold subcontractors to the quotes
that they submitted to the prime contractor, and that the prime reasonably relied on in preparing
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the bid. Once the project is awarded, the subcontractor whose quote was used by the prime is
legally tied and should perform the work. Traditionally, unlike the subcontractor, the prime was
not bound to enter into contract with subcontractor after award. Consequently, some contractors
would disclose the bid prices that they used to other subcontractors in order to obtain lower
quotes. This unethical practice of bid shopping led some owners to require a listing of the
subcontractors whose bids are used in the prime’s bid to the owner (Montoya & Campbell,
2019). Under such contractual agreements, the prime who is awarded the contract is bound to
enter into contract with the listed subcontractors. There have been cases where the work to be
subcontracted is substantially changed or even deleted after award of the prime contract but prior
to commencement of work. At least one court has ruled on the rights of listed subcontractors in
such cases.
Third-Party Beneficiary Arguments
A “third-party beneficiary” is a party that is not among the original contracting parties but
that may bring an action to enforce the provisions of the contract. The third party must, however,
be an “intended beneficiary” of the parties in the contract (Smith, Currie & Hancock LLP, 2015).
Change orders can affect subcontracted work and cause potential damage to subcontractors who
are not in contractual privity with the owners. A third-party beneficiary theory is one of the
available avenues for a subcontractor that is not in contractual privity with the owner to recover
damages from the owner.
Pass-Through Claims
The other avenue for a subcontractor to recover from the owner when there is no privity of
contract between the two of them is by having the prime contractor assert the claim against the
owner on its behalf. This is known as a “pass-through claim.” A pass-through claim is a claim
by a party who has suffered damages against a responsible party with whom it has no contract
(Morrow, 2012). This claim must be presented through an intervening party who has a
contractual relationship with both parties. It is important for the owner to understand that the
prime contractor can obtain damages on behalf of the subcontractor, who is not in privity of
contract with the owner, through pass-through claims.
The owner can, however, defeat the subcontractor’s pass-through claim if the owner proves
that the prime contractor would not be liable to the subcontractor if it refused to present the pass-
through claim or to remit the recovery to the subcontractor (Calvert & Ingwalson, 1998). The
Severin doctrine, which is applicable in federal contracting and some states, can bar a
subcontractor’s pass-through claim. Although, most jurisdictions in the United States permit a
prime contractor to bring suit against an owner and seek recovery of damages on behalf of a
subcontractor on a pass- through basis (Dukellis, n.d.), there are states that do not allow pass-
through claims while courts in other states have not yet ruled on the issue. Often, there are time
and procedural requirements, unique to each jurisdiction, which must be satisfied in order to
bring a pass-through claim (Morrow, 2012).

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Exculpatory Clauses
Often, contracts contain broad exculpatory clauses that disclaim liability for the accuracy of
the plans, specifications, borings, and other subsurface data. It is reasonable to presume that the
party which writes these clauses desires of them to have a significant effect, but courts have
often held otherwise (Smith, Currie & Hancock LLP, 2015). The “no-damages-for-delay” clause
is one such clause that is written to excuse one of the parties to a contract from liabilities which it
would otherwise incur in the event of a delay on a project (Kraftson, 2012). This raises the
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question on whether the no-damages-for-delay provision or any other exculpatory provision in

subcontracts undercuts the ability of contractors and subcontractors to assert pass-through
claims.
Kraftson (2012) states that a subcontractor’s agreement to such clauses as the ‘no-damages-
for-delay’ clause, means that the sub has forfeited some rights which may include:
• Compensation for delays caused by the other party to a contract;
• Compensation for delays caused by third parties to a contract; and
• Compensation under a clause granting time extensions for delays but which is silent as to
money.

REVIEW OF CASES

The cases reviewed in this section of the paper examine court decisions on the issues
presented in the literature review section. The cases address these three main questions: (1) in
cases where the work to be subcontracted is changed substantially or deleted via a change order,
is the prime contractor required by law to subcontract with the listed subcontractor? (2) Can
subcontractors who are not in contractual privity with the owner recover damages (caused by
changes) through third-party beneficiary arguments? (3) When changes result in damages, the
subcontractor can “pass through” the claim to the general contractor who in turn passes it
through to the owner. However, can the presence of a no-damages-for-delay provision or any
other exculpatory provision in subcontracts undercut the ability of federal contractors and
subcontractors to assert pass-through claims?
Case 1: Affholder, Inc., v. Mitchell Engineering, Inc
A change order has the potential to substantially change some of the bid items in the project
or even delete them. But is the prime contractor still required by law to subcontract with the
listed subcontractor in a case where the work to be subcontracted has been changed substantially
or deleted following a change order? The Court of Appeal, First District, Division 3, in
California addressed this issue in Affholder, Inc., v. Mitchell Engineering, Inc.
In Affholder, Inc., v. Mitchell Engineering, Inc (2007), Affholder was listed by Mitchell in
its bid to the district as the subcontractor for the tunnel portion of the Bradshaw Interceptor
Section 6B/Bradshaw Road Improvements Project, which they were later awarded. As a result of
a change order, the tunnel portion was substantially changed, and Mitchell sent out a new request
for proposals for the changed work. Affholder did not submit a proposal and after the bid, the
contract was awarded to another subcontractor. Affholder filed a superior court complaint
alleging that Mitchell refused to award it a subcontract for the tunnel work. The court ruled
against Affholder affirming that a subcontractor whose work has been deleted ceases to be listed
and the prime contractor, in that case, is not required by law to subcontract with the listed
subcontractor.

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Case 2: Shaw Constructors, Inc., v. ICF Kaiser Engineers, Inc., and PCS Nitrogen
Fertilizer, L.P. et al
There are some jurisdictions that do accept third-party beneficiary arguments as was the case
in Shaw Constructors, Inc., v. ICF Kaiser Engineers, Inc., and PCS Nitrogen Fertilizer, L.P. et al
(2005). In this case, PCS entered into a contract with ICF Kaiser Engineers, Inc. and Henry J.
Kaiser Company (Kaiser) to design and construct a project called the 1265 STPD Nitric Acid
Facility at the PCS nitrogen plant near Geismar, Louisiana. Kaiser then subcontracted a portion
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of the construction project to Shaw. After performing work, the general contractor materially
breached its primary obligation to pay the subcontractor the $5,238,217.90 million balance due
for work on the owner’s facility. Shaw filed suit against PCS and Kaiser in state court. Kaiser
and Shaw entered into a “Compromise Agreement”. The agreement required Kaiser to make
payments to Shaw, but Shaw did not waive any claim it had against PCS. After making partial
payments to Shaw, Kaiser discontinued payments, leaving an unpaid balance of $2,037,084.77,
and filed a bankruptcy proceeding. PCS demanded that Shaw cancel the claim, privilege or lien
and dismiss this lawsuit against PCS with prejudice, but Shaw refused. The parties consented to
adjudication before a magistrate judge who ruled in favor of PCS dismissing Shaw’s claims and
ordering Shaw’s lien removed from the public records. Shaw then appealed to the United States
Court of Appeals for the Fifth Circuit.
The court ruled that Shaw, the promisor, had the right to raise against PCS, the beneficiary,
any defense based on the subcontract that Shaw could have raised against Kaiser, the stipulator
or promisee. The court recognized the validity of Shaw’s claim and privilege under the Louisiana
Private Works Act (LPWA) against PCS personally, and against its property upon which Shaw’s
work was performed.
Case 3: Lundeen Coatings Corp. v. Department of Water and Power
In Lundeen Coatings Corp. v. Department of Water & Power (1991), the subcontractor,
claiming to be a third-party beneficiary, sued the Department of Water and Power (DWP),
among others, alleging it was owed more than $ 1 million for services rendered on a construction
project. The DWP served as the project manager and failed to retain sufficient amounts from its
payment to the general contractor to pay the subcontractor's claim. The DWP also allegedly
knew there existed defects to the project which caused the subcontractor to incur delays and
additional work. (Id. at pp. 823-824.) The subcontractor filed suit, alleging causes of action for
breach of contract, fraudulent intentional interference with economic advantage, conspiracy to
induce breach of contract and commit fraud, and money had and received. (Id. at p. 826.)
The Court of Appeals rejected the plaintiff’s appeal finding no express intent of the
contract’s parties to benefit the subcontractor. The plaintiff was at most an incidental beneficiary
of that contract and may not recover for its breach. The court stated that subcontractors cannot
recover directly from public entity owners of a construction project on a theory of third-party
beneficiary of the prime contract, unless they are specifically intended to benefit from the
issuance of the prime contract.
Case 4: Interstate Contracting Corporation v. City of Dallas
On September 14, 1994, the City of Dallas and Interstate Contracting Corporation (ICC)
entered into a fixed sum contract for the construction of levees around a City water treatment
plant; the excavation of two areas to create storm water detention lakes; and miscellaneous work
including trash removal, surveying, and linear depth checking. ICC subcontracted Mine Services,

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Inc. (MSI) to excavate the storm water detention lake and construct the levees. MSI was to use
the excavated material to construct the levees. After commencing work, MSI discovered that
some of the material in the lakes differed from what it expected and could not be directly used to
construct the levees. MSI was forced to manufacture fill material by mixing sand with limited
quantities of clay which, in effect, decreased its productivity and increased its costs. ICC
informed the City of MSI’s additional costs, but the city refused to pay for MSI’s additional
costs. ICC filed suit on behalf of MSI against the City for breach of contract, quantum meruit,
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breach of implied warranty, and fraudulent inducement. The district court allowed ICC to bring
these claims on behalf of MSI and a jury found that the City breached its contract with ICC. The
jury also found that the City breached an implied warranty to provide accurate and suitable plans
and specifications which were inconsistent with the onsite conditions. The City appealed to the
Fifth Circuit, arguing that the district court erred in concluding that ICC could seek and obtain
damages on behalf of its subcontractor because there is a lack of privity of contract between the
City and MSI.
In its ruling on the case of Interstate Contracting Corporation v. City Of Dallas (2003), the
Supreme Court of Texas held that, similar to many other jurisdictions, Texas would permit a
contractor to pursue claims on behalf of its subcontractor, provided the contractor remains liable
to the subcontractor.
Case 5: Harper/Nielsen-Dillingham, Builders, Inc. v. United States
In Harper/Nielsen-Dillingham, Builders, Inc. v. United States (2008), the general contractor,
Harper, brought a claim against the government on behalf of its subcontractor, Karleskint-Crum,
Inc. (KCI), to recover $770,565 in excess costs that KCI incurred as a result of delays caused by
the government and because of the wage classifications established by the contract. However, the
subcontract contained a “no-damages-for-delay” provision whereby KCI agreed to a time
extension for any delays caused by the contractor or the owner. Harper faced delays that were
caused by the government’s engineering contractor, Jacobs Engineering, and that firm’s
subcontractor, which were responsible for removing underground storage tanks and
contaminated soil from the site. The U.S. Court of Federal Claims found that Harper was not
liable to KCI, and therefore, the plaintiff’s delay-related claims were barred by the Severin
doctrine. Since the ‘no-damages-for-delays’ clause excused the prime contractor from paying
damages for delays of any kind, the prime contractor could not assert the subcontractor’s delay
claim (Loulakis & McLaughlin, 2008).
Table 1 summarizes the cases that were discussed above, the legal issues addressed by the
cases, and the court decisions.

Table 1. Legal questions and precedents set in court cases.

Legal Question Court Case Decision
If the work to be subcontracted has been changed Affholder, Inc., v. Mitchell NO
substantially or deleted following a change order, Engineering, Inc
is the prime contractor required by law to
subcontract with the listed subcontractor?
Can a subcontractor who lacks contractual privity Shaw Constructors, Inc., v. ICF YES
with the owner recover damages caused by change Kaiser Engineers, Inc., and PCS
orders through third-party beneficiary arguments? Nitrogen Fertilizer, L.P. et al
Lundeen Coatings Corp. v. NO

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Department of Water and Power

Can the general contractor assert a claim against Interstate Contracting YES
the owner on the sub’s behalf? Corporation v. City of Dallas
Do exculpatory clauses in subcontracts undercut Harper/Nielsen-Dillingham, YES
the ability of federal contractors and Builders, Inc. v. United States
subcontractors to assert pass-through claims?
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DISCUSSION

Change orders or contract modifications have the effect of adding to the scope of work or
deleting some work items. They are common in construction projects and, as a result, effective
management of change orders is an important function in construction project management.
These modifications to the contract oftentimes generate disputes. When the contractor asks for
additional money or time for work that, according to him, is beyond that required by the
construction contract, and the owner or design professional does not agree with him, there is
potential for dispute. And while it is desirable to resolve these disputes without resorting to
litigation, that is not always the case. The discussion that follows addresses the legal questions
raised in the literature review and proposes approaches to managing these issues that are
resultant of change orders.
In public contracts, it is common practice that the general contractor submitting a bid be
required to list each subcontractor that will perform more than a predetermined percent of the
total bid. This is done with the aim of protecting the listed subcontractor. While the listing does
not create an ironclad obligation to contract with the subcontractor, once the general contractor’s
bid is accepted, the general contractor has a duty to use the listed subcontractor, unless there is a
hindering circumstance. The duty to use the listed subcontractor could be lifted in event of a
subcontractor’s bankruptcy after contract award, failure to execute a written contract for the
scope or price of work in a subcontractor’s bid, or if the awarding authority determines the
subcontractor is not responsible, satisfactory, or lacks appropriate contracting licenses (Rossetti
& McKeeman, 2007). As seen in Affholder, Inc., v. Mitchell Engineering, Inc (2007), a
subcontractor whose work has been deleted ceases to be listed and the general contractor is not
required by law to subcontract with the listed subcontractor. But subcontractors can protect
themselves from change orders that, essentially, deprive them of the opportunity to perform
work. If the subcontractor believes that the change order does not delete their portion of work,
and that the new work is not substantially different from the work specified in the original bid,
the subcontractor can challenge the substitution and avoid losing the contact.
It is important for subcontractors to know that they can, in given cases, recover damages
from a breach of contract through third-party beneficiary arguments. Under a third-party
beneficiary argument, the subcontractor will have to demonstrate that it is a direct beneficiary of
the contract between the owner and the prime contractor, and is, as a result, entitled to recover
damages for breach of contract. Courts usually determine whether a subcontractor is a third-party
beneficiary by examining the apparent intent of the contracting parties (Smith, Currie & Hancock
LLP, 2015). If the contract between the contracting parties explicitly confers third-party
beneficiary status upon the subcontractor, then the subcontractor may recover damages through
this avenue.
There are jurisdictions that accept third-party beneficiary arguments but not all jurisdictions
do. A subcontractor would do well to know which jurisdictions accept third-party beneficiary

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arguments and protect themselves by ensuring that they have an avenue for recovery. For
example, in Michigan, subcontractors, their employees, and material suppliers are generally not
considered as third-party beneficiaries of the contract between the general or prime contractor
and the project owner (Joshi, 2019).
A subcontractor cannot directly sue an owner for damages because there is no privity of
contract between them. However, the subcontractor can “pass through” the claim to the general
contractor who in turn passes it through to the owner. Pass-through claims require that the
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general contractor remain liable to the subcontractor. The Severin doctrine precludes the general
contractor from suing the owner on behalf of the subcontractor to recover damages unless the
general contractor has either paid the subcontractor for its damages or remains contractually
obligated to reimburse the subcontractor in the future. Once the general contractor’s liability has
been extinguished, the general contractor may not “revive liability by mutual agreement” to save
a pass-through claim (Rath, 2014). The owner bears the burden of proving that the pass-through
arrangement negates the general contractor’s responsibility for the costs incurred by the
subcontractor, if the owner disputes that the requirement has been met. A Severin defense would
bar a pass-through claim if the owner can show a release or other type of general contractor
immunization from subcontractor claims (Eyth, 2011).
General contractors usually remain liable unless there is an unconditional release or
contractual provision immunizing them completely from any liability to the subcontractors. It is
critical for subcontractors to make sure that they preserve their right to seek damages from the
owner using pass-through claims. They must scrutinize their contracts with the general
contractor and seek to avoid any clauses that may preclude this right, which includes the no-
damages-for-delays provision. Many states have laws that deem no-damages-for-delays clauses
unenforceable on public contracts. It is therefore expedient that the subcontractor inquires if the
laws that govern subcontracts in the respective state permit no-damages-for-delays clauses
before they sign contracts with this or similar provisions. Courts have also given little substance
to exculpatory clauses in situations where the owner may have taken years to accumulate site
data (which it disclaims responsibility for) while a contractor may only have weeks or days
before bids are submitted (Libor, 2001).

CONCLUSIONS AND RECOMMENDATIONS

In construction projects, changes are commonplace, hence the need for change orders. Most
of these changes are a result of design changes and owner-directed changes and may either add
to the scope of work or delete some work items. Either way, changes can be the genesis of
disputes among parties in the construction project. The cases reviewed in this paper indicated
that:
1. A subcontractor whose work has been deleted ceases to be listed and the prime contractor
is, in that case, not required by law to subcontract with that subcontractor.
2. A subcontractor can use the third-party beneficiary theory to recover damages from the
owner even in the absence of contractual privity.
3. A subcontractor, who is not in privity of contract with the owner, can also “pass through”
the claim to the general contractor who in turn passes it through to the owner.
4. A subcontractor must be wary of exculpatory clauses in the contract like the “no-
damages-for-delays” clause that may preclude the general contractor from suing the
owner on behalf of the subcontractor.

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It is important for trenchless subcontractors to carefully review their contracts with the prime
contractor and ensure that they have minimized their risks. They are advised to also study the
prime contract for that project to get a better understanding of the risks that they may be forced
to shoulder. This review of the contract documents should be coupled with a good solid
understanding of the legal protections afforded by the jurisdiction within which the work is being
done. A well-informed subcontractor is better positioned to minimize the potential for disputes in
the work.
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Morrow, B. J. (2012). “Pass-Through Claims” Against Federal and State Governments –

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