Managing Contract Amendments

Changes in any contract are almost inevitable.  Managing that change requires a strict discipline by the whole project team.

The governing documents

A properly executed contract will be based on a contract document detailing the terms and conditions of the agreement between the purchaser and the seller.  The contract will reference various subordinate requirements documents such as a statement of work, an operation requirements document, a functional and performance specification, a delivery schedule, and other requirements sometimes referred to as Contract Data Requirements.  The latter may include test and acceptance requirements, logistics support requirements and other project deliverables. 

At contract signature these documents collectively define the deliverables the seller will deliver and that the purchaser has agreed to pay the seller for. 

The contract should also define the formal contract variation procedure to be followed before any change can be made effective in law and hence binding on both parties.  Any changes not implemented by this formal change procedure are null and void in law and unenforceable.

This paper suggests ways to properly handle contract changes and how to avoid some of the common pitfalls and traps.

Project team roles

A project team comprises a group of individuals each with specific roles and responsibilities.  Although the titles of the project team will vary according to the organizations involved, functionally there is some consistency in the roles usually allocated across the project team.

A typical project team will comprise (1) a project manager, (PM) (2) the contract administrator (CA), (3) an engineering manager (EM), (4) a project scheduler (PS), (5) a quality officer (QA), (6) a logistics manager (LM), and (7) other functional area managers and general project staff.

The PM is ultimately responsible for all project decisions made.  No contract amendments should be authorised without the PM approval and the CA endorsement and action.  All other project officers should adhere to the requirements of the latest, authorised contract requirements until a formal contract variation is duly executed and so advised by the PM.

Origin of contract changes

Contract amendment proposals may be originated by the purchaser or the seller.  Regardless of who originates the proposed change, normally the seller prepares the change proposal documentation.
The change proposal will describe the proposed change, the reasons for the change, and the impact on contract price, delivery schedule, logistics, and any other contract aspect.   It should include the proposed textual changes to any contract documents that are affected by this proposal.

Prior to submission of the change proposal to the Purchaser, it should be subjected to a rigorous review by all Seller project staff whose areas of discipline are affected and specific cost and schedule impacts submitted to the PM and the CA for developing any contract price and schedule amendments. 

A well run project team will have a duly organised Configuration Control Committee whose function is to ensure the contractual integrity and consistency of the deliverable product.  This group should consider all proposed changes before a formal change proposal is submitted, regardless of where it originates.

When both parties are satisfied and agreed on the proposed change, the Purchaser will initiate a Contract Amendment that will require the signature of both parties, and vary the baseline of the Contract.  The Contract Amendment will include the textual changes to all documentation associated with the main contract document.

Things to consider in developing change proposals

Contract amendments may range from trivial with little or no effects on contract price or schedule, while others may have far reaching impact for both Purchaser and Seller.  Usually the proposed change will affect Purchaser and Seller differently. 

The Purchaser needs to consider the impact on contract price, delivery schedule, product performance, maintenance and other logistics considerations.  For example, if the Purchaser needs to field a particular product by a certain date in order to commence a new revenue stream, then a change that affects delivery schedule may have greater significance than one that only affects contract price.  On the other hand, if the proposed change will mean the purchase of alternative maintenance equipment, then contract price will have greater meaning since there is more capital expenditure and possibly more maintenance training required.

The Seller also needs to consider the impact on contract price, delivery schedule, product performance, maintenance and other logistics considerations.  However the Seller’s perspective is focused on being able to deliver the product under the proposed contract conditions.  Usually such changes impact on the Seller’s human resources, product quality, materials, and significantly, the impact on existing subcontracts.

Other considerations for both parties may include, for example, cash flow, budget constraints, supply chains, warranties, liability, industrial action, performance and other risks, just to name a few.

Satisfying both parties

When a Purchaser or Seller seeks a variation to the Contract it is for the purpose of achieving some gain; otherwise, why expend effort.  
For example, a Purchaser may request a contract amendment to achieve a higher product performance, perhaps a shorter delivery schedule, or improved maintenance support.  A Seller may request a contract amendment to achieve a lower product performance, perhaps a longer delivery schedule, or more flexible maintenance support. 
Either way, the proposing party is seeking some benefit, and all benefit has a price.  The “price” may be a variation to the actual contract price or some other contract requirement (schedule, performance, etc).  The party seeking the contract amendment should be prepared to pay a “price” and
the party from whom the amendment is sought, should recognise they are in a position to extract a “price”.

Hence it comes down to how much “price” one party is prepared to pay, and how much “price” can the other extract without exceeding the other’s “price” boundary.

The issue of what “price” is one party prepared to pay, and what “price” can be extracted by the other, needs to be considered in any negotiation for a contract amendment.  The more one party understands the other's situation, the smoother the negotiation.

In essence, while achieving a win-win scenario more often than not results in a smoother project performance, sometimes one or both of the parties are not of this view and may strive for a win-lose result regardless of how destructive this approach may be.

What not to do

Assuming a contract is in place and it does contain a process for contract variation.  Situations that will eventually lead to problems include:

• Private understandings (“you scratch my back and I’ll scratch yours”)

• Friendship (not enforcing the contract because of personal friendship between persons in the two parties)

• Either side acting “as if” the amendment is a foregone conclusion but has not been formally executed

• Implementing any action before the contract is formaly amended

Minimising contractual conflict

Conflict between the parties can be minimized as follows:

• The best way to minimize contractual conflict is for both parties to adhere to the requirements of the contract.

• Ensure that there are witnesses to all contractual discussions and all discussions are minuted by both sides.  After a meeting, generally try to confirm in writing your understanding of what was discussed and the action agreed.

• The project managers of both parties should enforce the policy of no one working to an amended contract requirement until that contract variation has been formally signed off by authorised persons on both sides.

• Do nothing until a formal contract amendment is issued by the purchaser that reflects that agreed to by the seller

• Grease the passage of the amendment by ensuring all required documentation is accurate and available in a timely manner, and that all required responses are on time.

In summary

• Ensure all contracts have a clear process for contract variation that both parties can live with and understand.

• Clearly define what the project team member roles are regarding change proposals and change amendment approvals.

• When proposing or receiving a request for a contract amendment, be clear on what the full impact of the proposed change will be.

• Understand what the “price” is for the contract amendment.

• Search for a win-win scenario when proposing a contract amendment.

• Try to minimize conflict.

• Do nothing until the contract variation is formally executed.

• Be accurate and timely with all change proposal and contract amendment documentation. [Top]

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