Managing change during contract delivery

During the delivery phase of almost every major project, issues will arise and it will become necessary to implement changes to ensure the successful delivery of the project. If changes are not properly managed, they can become a source of time and cost overruns (and potentially contractual disputes).

Managing change effectively using an appropriately structured change management process is therefore essential to the success of any major project.

To manage change efficiently and effectively, each party should:
1. Understand how their contract deals with change;
2. Ensure contract administration teams pro-actively manage changes that arise;
3. Properly document each change; and
4. Establish a clear methodology for assessing and pricing changes that arise.

UNDERSTANDING THE CONTRACT
Effective change management starts with negotiating and agreeing contractual terms that establish who can require and/or request a change (in contractual language, a variation) and the allocation of risk (and time and cost) if a variation occurs.

A fundamental question to consider at the outset is whether the apparent ‘change’ is, in fact, something outside of the contractor’s scope of work and/or contractual obligations. If it is not, it is not a
change’ and no variation should arise.

THE POWER TO DIRECT A CHANGE
It is important that a variation clause gives the principal the power to require a variation to the work as of right (rather than having to rely on the willingness of the contractor to agree to execute the varied work).

However, even if the clause gives an absolute or very wide discretion to the principal to direct changes, in general, variations must be reasonable and of a similar nature to the work that was contemplated at the time of entering into the contract.

The terms of the contract may also impose limits on the power of the principal to direct variations. For example, if the contract expressly identifies work that is excluded from the contractor’s scope of work, the principal may not have the power to subsequently issue a variation directing the contractor to perform such work (unless it expressly receives the right to do so in the contract).

Generally, variations may not be directed after the works have achieved practical
completion.

CHANGES NOT DIRECTED BY THE PRINCIPAL
Most contracts contain provisions allowing the contractor to request a variation if it believes that there has been a change to the work entitling it to a variation.

For example, a change may arise due to a need to address design errors, to comply with changes in law or to incorporate additional scope. Some contracts may also allow the contractor to request a variation for its own convenience (although whether such a request will be considered is typically a matter reserved for the principal’s discretion).

EFFECTIVE CONTRACT ADMINISTRATION
Most construction contracts require that a variation be directed in writing. However, sometimes urgency will require the principal to give a verbal direction to vary the work.

This should be followed by (and a contractor should insist upon) written confirmation as soon as reasonably practicable so that the scope of what is required, and any other conditions that may be relevant, are clearly understood by all parties.

For a contractor who considers that a variation has been directed, prompt notification of this to the principal or superintendent can be particularly important if the relevant contract includes a time bar clause (that is, a clause which provides that the contractor will ‘forfeit’ any entitlement if it fails to notify and/or lodge its substantive claim within the time period provided for under the contract).

Both parties should be aware of, and ensure personnel comply with, any time requirements.

DOCUMENTING THE CHANGE
Each party’s position on a variation should be carefully documented and should include as much detail as possible.

Keeping contemporaneous records of the progress of works (such as a site diary, daily reports, timesheets, quality control records, purchase records or photographs), saving copies of contractual correspondence onto a shared database and confirming any oral instructions in writing (or documenting in meeting minutes) promotes effective change management.

If contemporaneous records are not kept, it can be costly (and sometimes impossible) to subsequently compile or reconstruct the factual scenario necessary to determine (or refute) the cost and time impact of a variation.

Keeping a detailed register of variations with updates about their status, cost implications, schedule implications and root causes will also assist the principal in making timely decisions and retaining knowledge and key learnings arising from significant changes that have occurred.

Where appropriate, programming reports by an independent consultant can also be an effective way to measure the state of the project and can help identify any apparent problem areas enabling issues to be raised and addressed before they get ‘out of control’.

ASSESSING THE COST OF VARIATIONS
Insofar as is possible, the cost implications of a variation should be determined and agreed to by the parties before the variation is implemented.

Of course sometimes the principal’s decision to direct a variation to proceed may need to be made before the parties have agreed on the value of the contractor’s time and cost
entitlement arising from the change.

It is important that the contract specifies how variations are to be valued in the absence of agreement between the parties.

VARIATIONS AND DELAY
Variations may (but do not necessarily) cause delay to the project or some activities.

In such circumstances the contractor may be entitled to an extension of time (EOT) to the date for practical completion. The contract may also enable the contractor to claim time related costs in circumstances where the contractor is granted an EOT arising from a variation.

The contract should be drafted to ensure That a contractor is not entitled to ‘double recovery’ by claiming the costs of the delay as part of an EOT claim as well as a component of the cost of work for the variation itself.

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