4 Tricky Contract Management Terms
In a previous article, we explored how to improve SOW change management and how this process benefits the overall contract management lifecycle. Within that discussion, we touched on how important it is to develop a transparent process for managing changes and claims.
A common barrier to truly developing a transparent process for change management is failing to understand the differences in changes. As Fayola Yeboah, a Contracts Manager in Europe for Enterprise-Rent-a-Car points out, “change may come in the form of a small change to the tender requirements, a simple extension to the contract term, or a significant overhaul to the contract scope”. In this article, we will take a look at four tricky terms that need to be better understood in order to manage contracts effectively.
Addendum
This type of change usually takes place during the negotiation stage before a contract is signed. An addendum doesn’t need to be created due to mutual agreement, but it will not become part of the agreement until it’s signed by both parties.
Given the nature of an addendum, it is a good idea to use them as much as possible before reaching the final agreement. However, avoid inserting a last-minute addendum right before the time of signature. An addendum should be discussed with your client to maintain an amicable relationship.
Also, keep in mind that some government contracts may limit your organization’s ability to alter main clauses and may use the term ‘special conditions’.
Amendment
Unlike an addendum, an amendment implements a change post-signature and requires mutual agreement. Since the contract has already been signed in this case, amendments need to be mutually favorable to have a higher chance of being approved by both parties in the shortest amount of time.
A good industry practice is to state that an amendment will not be valid unless approved by both parties in writing.
Change Order
Certain projects require a party to have the right to make unilateral changes so they can keep the project within budget and schedule. When enabling a party to submit change orders, you should establish a pre-approved schedule of rates or cost formulas to make costs more predictable.
Yeboah recommends, “where possible, you should avoid the right for the other party to make unilateral changes. If the inclusion of such a right cannot be avoided, the change order provision in the contract should expressly set out specific instances where this right can be exercised and a clear implementation process with clearly defined responsibilities and timescales.” This reinforces the importance of having clear clauses for any change order.
Change Request
Often referred to as a “change order”, a change request requires agreement. A “change order” implies that a party can implement the change unilaterally. This is not the case of a change request, however, which requires approval from both parties. A change request is a formal change process after a contract is signed.
This formal procedure would ideally be detailed within the contract. There are examples you can use to create a change request, including a useful sample change request process developed based on the body of work from the IACCM. Yeboah points out that “complex change requests can sometimes amount to feasibility studies; if you are the supplier, it may not always be appropriate or reasonable to commit to provide these without cost.”
Takeaway
Learning the differences between contract changes so that you can process them appropriately is critical to managing your contracts properly. You should also make sure to keep all of the history of changes within the library of your contract management system for better tracking and compliance.
