December 2013 Edition
Claims and change: two imperatives for today's contracting
Tim Cummins, CEO IACCM
What lies behind these statistics? In part, they seem result from tough economic conditions. In the battle for business and margins, everyone is just a bit more adversarial. A growing number of suppliers, under severe pressure to compete on price, seek to win back lost margin through more aggressive approaches to claims and disputes.
Several companies have made this a strategic approach – bid low to win, then make it up through rigorous post-award contract management. But even highly principled suppliers have become more inclined to push their rights and reduce write-offs to 'goodwill'.
Buyers also are more likely to take actions that result in contract changes or claims. Many factors contribute – for example, a change in business conditions, a better offer from elsewhere, a shift in strategy or needs.
But these factors are just part of the answer, because the growing frequency of claims and contract changes is also caused by the pace of innovation. It is becoming increasingly difficult to accurately predict requirements or to define scope because change is now almost inevitable in any contract that is not for immediate delivery.
Therefore part of the secret of successful contracting is to recognize this fact and ensure that your contracts and contracting processes are designed to deal with change and claims.
In this edition of Contracting Excellence, we provide insight to these trends and also to some of the emerging practices through which organizations are handling them.
Optimizing both change and claim management
Christian Sandbeck, Head of Contract Management Consulting, Ramboll Management Consulting Denmark
René Franz Henschel, Department of Law, University of Aarhus, Denmark
Different processes, similar techniques. A claim is normally agreed in the contract whereas a change may or may not be. Although there are fundamental differences between claim and change management, both still require some of the same tools and techniques.
- Both are interconnected in the sense that disagreement on a change may end up in a claim.
- Both will always test the product or service's quality as well as contract and process quality. This opens the door for improvements.
We are not arguing that flaws in contracts, processes and/or product and services quality always trigger change and claim management events. Changes and claims are inevitable and, in fact, we should welcome them because they can facilitate evolution and improvements to the process.
We propose a constructive approach to both these topics to improve quality and reduce the causes of counterproductive events that can endanger business success and trustful relationships. Within that, our main proposals are for organizations to strive to accomplish these objectives:
- Establish a culture that creates a non-hostile and transparent process for managing changes and claims.
- Establish clear ownerships, accountability and responsibility for change and claim management.
- Design processes and activities that align with business, organizational and project management processes.
- Establish a single focal point for change and claim management.
- Establish a closed loop between change and claim management processes and the development of products, services, process and contract quality to reduce -- while not necessarily eliminating -- the sources of change and claim management events.
Recognize the differences?
Just as there are similarities in both processes, there are also differences. For the purpose of this article, the fundamental difference between change management and claim management is this:
- Change management is based on a voluntary agreement over whether or not a change can be agreed between the parties.
- Claim management is most often not a voluntary process, but instead is based on a legal, contractual claim accepted or rejected by the debtor. If the parties are obligated to make certain changes based on certain conditions, and one of the parties refuses, then it is a claim management process.
Change management process – a closer look
Contractual change management applies to either the customer or supplier wanting to modify the agreement between the parties3. Most contracts contain a defined and standardized process for handling changes that generally include the following steps:
- Request for change: either party can submit a request for change to the contract. The change request will normally be based on a form attached to the agreement. The form includes predefined fields that will be filled in by the party requesting change, such as the event leading to the desired change and contract provisions affected by the change.
- Offer: the receiver of the change request will fill out the form with an offer that includes financial impact of the requested change and other impacts, e.g. service delivery.
- Change Order: If the parties can reach an agreement, they will sign the change request, which then becomes a variation to the agreement.
The change process is, by design, voluntary - similar to the process defined by most law regimes: offer and acceptance. Normally, if the parties cannot reach an agreement, original terms and conditions will remain unchanged. However some requests for change, if not agreed upon, will either negatively impact the debtor´s ability to deliver under the agreement or otherwise impact the use of the agreement.
Consequently many agreements will include a process that demands describing and categorizing the impact of the change request. This categorization will help the parties deal with the changes in the right priority. If the parties cannot agree on changes that may jeopardize their ability to deliver under the agreement, the change request will be routed via dispute resolution, which should be connected to the claim management process.
Furthermore many agreements will include service levels requiring the supplier to reply to the customer's change requests. From a service delivery perspective, a very similar process exists within the ITIL framework3. ITIL demands from the requestor a categorization of “urgent”, “standard”, or “normal”. Categorization helps the service delivery staff to make the right prioritization.
The same methodology can be used for contract change requests.
In short, the following process and activities, which are reflected in IACCM best practices and ITIL standards1/2/4 could serve as inspiration for a contract change management process:
- Record the request for change (RFC): Who requests? What is requested? Why is it requested? Timeframes etc.
- Validate the change request: Is it an ordinary service request within the contractual framework or an actual change request? Are formal requirements adhered to?
- Assess the change request:
- What is the urgency (high/standard/low)?
- What is the operational Impact (high/standard/low)?
- What is the financial Impact (high/standard/low)?
- What is the contractual impact?
- Are contractual changes needed?
- Authorize (or reject) the change: Minor changes may be authorized through a fast track process (decentralized) while significant, major or urgent changes are authorized through the specific systems put in place e.g. senior management, project management, finance etc. (centralized)
- Coordinate the implementation of change or information that change is not accepted. Coordinate the different steps that have to be taken from the different internal and external parties, e.g. project management, finance, legal etc. (e.g. changes in the SOW or SLA).
- Review and close.
- Have changes been done according to the agreement (or rejected)?
- Have goals been reached?
- Are all parties satisfied?
- Surprising effects?
- Cost overrun or delay?
- What was the cause for the change request?
- Insufficient contract terms?
- Product or service quality? Process or communication quality?
- Room for improvement in change process (process, contract, communication etc.)?
- Can change be recorded as completed or do we need new change – or maybe a claim management process? (see below).
These processes and activities can serve as an inspiration for the claim management process as well.
Claim management – how does this compare?
A claim management process enforces contractual rights under the agreement, either from the customer or the supplier. In principle, there are always two sides of any claim process. Although a claim based on, for example, late or non-conforming delivery may seem one-sided, the flip side of the claim is the supplier expecting its claim to be paid.
Rules for dispute resolution within the contract will normally instruct the parties to resolve the issue at the level at which the event occurred. Example: the claim for financial compensation for project delay will be decided by the respective project managers who will decide whether or not a delay exists. (Dispute handling and resolution, Contract and Commercial Management – The Operational Guide (2012), Chapter 33)5. The consequence is that either a contractual claim will exist or it will not.
If first level management cannot resolve the issue within a specified timeframe, it should be escalated to senior management. Only as a last resort should the agreement instruct the parties to resolve the claim by involving a third party. This could be either a court, an arbitrator or alternative dispute resolution, e.g. mediation.
In the absence of regulations in the agreement, most countries will have laws that similarly protect the injured party by third-party resolution. Both by law and under the terms of the agreement, therefore, claim management is not a voluntary process.
In a simple one time transactional agreement the parties will often assess their respective legal positions under the agreement. They will also evaluate when a settlement is the best solution compared to a decision taken by a third party.
In a long-term complex agreement where the parties are expected to continue their relationship after the resolution, the parties will also assess their respective legal positions, but this will not bear as much weight as the parties' objectives of maintaining a long-term successful relationship.
In this context, it is worth noting that claim handling is often very time-and-resource-consuming and can negatively impact the parties' cooperation and progress of the project. Thus, we should consider removing claim handling from the day-to-day operations of the project so the momentum of service delivery is not endangered.
The following checklist is almost identical to the one above for the change management process. So that readers can compare the two, the differences are highlighted in [brackets - green text]:
- Record the claim [request for change-RFC]: Who requests? What is requested? Why is it requested? Timeframes etc.
- Validate the claim [change request]:
- Is it an ordinary service request within the contractual framework or an actual claim [change request]
- Formal requirements adhered to?
3. Access the claim [change request]:
- What is the urgency (high/standard/low)?
- What is the urgency (high/standard/low)?
- What is the operational impact (high/standard/low)?
- What is the financial impact (high/standard/low)?
- What is the contractual impact? Penalties? Damages? Other? [Are contractual changes needed?]
4. Authorize or reject the claim [change]: Minor claims may be authorized [or rejected] through a fast-track process (decentralized) while significant, major or urgent claims are authorized or rejected through the specific systems put in place, e.g. senior management, project management, finance etc. (centralized)
5. Coordinate the implementation or rejection of the claim [Coordinate the implementation of change or information that change is not accepted]. Coordinate the different steps needed from [that have to be taken by] the different internal and external parties, e.g. project management, finance, legal etc. [e.g. changes in the SOW or SLA]
6. Review and close:
- Has claim been implemented [change been done] or rejected according to the agreement?
- Have goals been reached?
- Are all parties satisfied?
- Surprising effects?
- Cost overrun or delay?
- What was the cause for the claim [change request]? Insufficient contract terms? Product or service quality? Process or communication quality?
- Room for improvement in claim [change] process? (process, contract, communication etc)?
- Can the claim be recorded as accepted or rejected finally [can change be recorded as completed] or do we need to adjust the claim process [do we need new change – maybe a claim management process?]
As an example, the agreement could contain provisions stating that a claim can only be considered as such if the injured party has categorized it within certain criteria that will be help the parties direct the claim to the most efficient resolution path. As examples:
- Unresolved claims that will jeopardize the services rendered under the agreement should be categorized within the ITIL framework as “urgent” and routed down a fast track.
- Claims with financial impact only, that do not otherwise jeopardize the services, should be handled through a “standard” or “low impact” process, as per ITIL standards and guidelines.
Finally, while it is usually necessary to involve line personnel directly in the change management process, this might not be a good idea in a claim management process, where issues should be removed from day-to-day operations to ensure project momentum and the maintenance of good working relationships.
In conclusion, both the claim and change order handling processes should be thoroughly considered from start to finish. We suggest that organizations refer to IACCM´s contracting body of knowledge and ITIL standards for designing an efficient claim management process.
1. IACCM'S body of knowledge is also most commonly recognized as our suite of Certification programs.
2. Information Technology Infrastructure Library (ITIL) is the association for standards in the UK known as ITIL.
3. Contract and Commercial Management – The Operational Guide (2012). Reference chapter 32.
4. UCISA represents the whole of higher education, and increasingly further education, in the provision and development of academic, management and administrative information systems, providing a network of contacts and a powerful lobbying voice.
5. Contract and Commercial Management – The Operational Guide (2012). Reference chapter 33.
TO CONTACT THE AUTHOR(S), please mail your question to Info IACCM or connect using the IACCM Member Search (login required).
ABOUT THE AUTHORS
Christian Sandbeck has more than 15 years of practical experience within the contract and commercial field from two of the largest IT suppliers in the world. The experience ranges from multi country outsourcing contracts to complex system integration contracts. In the past Christian has held various management positions and is currently leading Ramboll Management Consulting delivery of contract and commercial management consulting services.
René Franz Henschel is a Professor at Department of Law, Business and Social Sciences, Aarhus University, Denmark. His area of research is Contract Law, Contract Management and Proactive Management and Proactive Law. He has contributed to chapters in The International Contract Manual (Thomson Westlaw) and the IACCM Contract and Commercial Management – The Operational Guide. He is consultant to companies and public procurement organizations on how to implement best practice Proactive Contract and Commercial Management and software systems to support the relevant processes and activities.
Claim management - who says you need a crystal ball?
Paul Mallory, VP Professional Development for IACCM
Know the warnings of claims or disputes.
Make sure your delivery teams, your project managers, and others who interact with customers or suppliers appreciate the most common causes of claims and disputes. IACCM's recent research on the most common claims or disputes is reflected in the figure below titled, The Costs of Misalignment. All such claims can be avoided.
Make sure your teams understand the importance of notifying you of an incident or a failure to comply with the contract, or process, or expected plan, which may lead to a claim arising, either incoming (a claim on your organization) or outgoing (a claim by your organization on another organization, customer or supplier).
Don't compromise contractual obligations
Educate your delivery teams, project managers and others on the key obligations and rights in the contract, both on your organization and on your customer/supplier. Ensure that they apply those rights and obligations and contact their commercial contract management specialist when the contract is not being applied.
For example, Sales organizations are often reluctant to enforce certain clauses in the contract for fear of upsetting a relationship with a customer. This commonly happens with, for instance, clauses that allow for price increases or variations, perhaps due to inflation of costs, or currency exchange rate fluctuations. We have to educate our teams that this was the agreement reached, that the customer was completely comfortable with it when the contract was signed, and that not enforcing our rights under the contract is giving money away without receiving any benefit in return. Ask your teams to treat the organization's money as though it were their own…
Control and record goodwill – a plus for you and customers
An account team may choose not to enforce a particular right under the contract, on the grounds of goodwill (i.e. doing a favour, for the relationship). This might sometimes be the correct decision, in context. A professional contract/claim manager will record such instances of goodwill, and ensure that such goodwill receives recognition by the customer/supplier concerned, and also that our register is up to date in case our customer/supplier produces their own register at some point and tries to make a contract claim against it! Goodwill has a value, and it should be recorded and treated as an asset/potential liability (as appropriate).
Treat the other side with respect – be professional
Claims are not emotional or vindictive. They are simply about seeking to obtain your rightful commercial position/redress for loss suffered. As such, we should always act calmly, professionally and with courtesy and consideration towards the customer/supplier we are seeking to make the claim on. We must strive to maintain a professional working relationship; it is likely we will want to continue to do business with this organization in the future. So be robust in making your case, but do it in a professional way.
Prove your legal case clearly when filing a claim
If you are going to make a contract claim on another organization, be thorough in your preparation, be clear in your statement of why you are legally entitled to the amount you are claiming, and provide full evidence to justify your position. Your aim should be to show beyond reasonable doubt that the other organization is legally obliged to pay your claim. This means that a lazily compiled claim is unlikely to succeed.
If you argue your case badly, or fail to provide convincing contract/legal references to justify your entitlement, or fail to substantiate your grounds for claiming or fail to provide evidence of the facts, your claim will be rejected, or you will find yourself in a never-ending round of questions asking for more detail.
Get it right first time, be thorough in your preparation, remove as much doubt and ambiguity as is possible, in a very clear, detailed written statement of your claim.
If you are dealing with an incoming claim from another organization, require that organization to be as professional in dealing with claims as you are! Ask for the same standard of information as set out above.
Prepare for negotiation
Most claims are settled by negotiation and do not make it into the courts. The outcome you achieve in a negotiated settlement will in large part depend on the quality of your preparation before the negotiation. Since negotiations are usually between two teams, ensure that team roles and strategy are worked out, role-play the negotiation, ask 'what-if's', decide tactics for meetings and team signals (take time-out's whenever you feel it would help), decide your desired outcome for the meeting, your best and worst case, your best alternative to a negotiated agreement, and work out what you think the other side's position on all these points will be.
Most negotiators agree that thorough preparation is key to the success of negotiations, and most negotiators agree that they do not prepare thoroughly enough…
TO CONTACT THE AUTHOR, please mail your question to Info IACCM or connect using the IACCM Member Search (login required).
ABOUT THE AUTHOR
Vice President of Professional Development for IACCM, Paul Mallory is responsible for designing and developing IACCM's global training, skills assessment and certification services, enabling contract and commercial managers to attain higher levels of professionalism. Educated in Business Studies and Management Studies, his background has been primarily focused in Commercial Management, training and business development.
Disarming forces of resistance
Julie Brignac, Principal, Vantage Partners
If you could prove that gaps exist in the process and you have a strategy for blending contracting with change management in a way that achieves a successful outcome, you could push entrenched attitudes out the door!
When driving change in the contracting arena, it can be even more challenging to work with processes and procedures that are valid but rigidly imposed. Furthermore, contracting processes must be thorough and properly address the business needs, but it is often challenging – sometimes impossible -- to convince stakeholders that contracting processes will benefit from any type of modification.
Effective ways that change can succeed in a contracting environment
One of the first steps is to identify the critical elements of change management, so that you can formulate a plan accordingly. Although the identification of those critical elements must be specific to both a company's contracting processes and the company's culture, there are macro level change elements that can be considered when developing your strategy.
Example: experience with one utility company - One organization's recent experience with a major utility company should help clarify those elements. The utility was engaged to develop a strategy that would help the organization launch a centralized contracting function. The intent was to communicate to stakeholders about how processes and procedures would change as a result of centralization.
It would involve a unique approach designed to produce an effective and timely contracting function.
When outlining the approach, the critical elements became clear:
- Define the gaps – forecasting versus actual.
- Develop the communication strategy: Develop a roadmap that addresses short, medium and long term goal.
- Find your advocates: Identify the stakeholders for communication, support and training.
- Define current and future processes.
- Determine the right training program to achieve your goals.
- Establish clear contracting metrics, both tangible and intangible.
So what makes these elements uniquely successful for a contracting function? Let's explore key elements above, while discussing lessons learned and business impact.
- Define the gaps
The first place to start is to identify any gaps in understanding what needs to change or what is changing about the contracting function. Gaps can be uncovered through various methods - via interviews with key stakeholders as to what role the contracting function plays, discussions with internal clients about what they need from the contracting function, or analysis of the contracting team's daily work processes. It is also critical to explore how efficient those processes are in accomplishing the business's objectives.
In the case of the utility company, two primary gaps became apparent.
- First, although there was top down leadership support for centralization, it was sporadic and many senior executives did not understand the business value the contracting function would bring.
- Second, roles and responsibilities needed to be defined for the newly formed contracting team, and those responsibilities aligned with efficient contracting processes.
The lesson learned was to design contracting processes that aligned with the roles of each team member, assign goals and objectives to the team, and conduct a session in the executive staff meeting that clearly communicated the intent of the group.
- Develop the communication strategy
Developing material to communicate within the organization that provides information regarding processes, tools and techniques is important. However, it is equally important that a larger strategy and subsequent action plans accompany leadership expectations. It is also important to ensure that the contracting team knows what leadership expects them to do in driving culture change when they are formed as a function. The company can use tools such as the company internet and newsletters to communicate the function's charter and role in the organization.
In the case of the utility company, a documented communication strategy was published on their internal internet site under the Supply Chain/Contracting function that allowed anyone in the company to be informed about the changing face of contracting in the organization.
- Find your advocates
Identifying stakeholders for any effort is critical to success. Contracting organizations must be strict in their processes and strive to be flawless in their execution. A key component of driving change is to quickly identify which stakeholders are supportive from the start, and which are a bit slower to support the effort. Those who are quick to jump on board help influence the communication plan and as success begins to result, they influence other stakeholders who later realize that contracting change is for the better.
- Define current and future processes
The distinction between current and future processes for a contracting function undergoing change is the most critical element of all. The root of change lies in this distinction, and must be deeply embedded as the main focus of the organization's communication strategy. The organization is keenly aware of how the contracting processes work today, so if processes are changed, it is important to highlight what will be different in the future, how roles and responsibilities will change, and how this will impact specific stakeholders and/or functions.
In the utility company scenario, the contracting group was a new group, so their processes and roles were not yet known by the organization. The focus of the communication strategy was therefore to highlight how the company would be impacted by new contracting processes, who needed to interact with the new group, and the overall benefit to the company that the new contracting group would bring.
- Determine the right training program to achieve your goals
An important point to remember when developing a training program intended to communicate and educate is to get the right people in the room for the first session so they can be the forerunners for future training attendees. This concept ties closely to the point of finding your advocates – the stakeholders who are on board earlier in the change process will be able to influence other leaders who may be lagging in their support. A training program gives those stakeholders vital information to help communicate the change and ensure that the contracting effort is a success.
In the case of the utility company, it was clear that the culture was one where employees learned from leaders, and the leaders led by example. For the training development, the organizers chose the first session participants carefully based on who would make the biggest impact and set the best example for the organization.
It was also important in this case to choose an effective facilitator for their sessions. The facilitator had to demonstrate the ability to create dialog that brought into the discussion leaders and their experiences with a successful contracting function, so the delegates could clearly glean the value that the group would bring to the organization.
- Establish clear contracting metrics, both tangible and intangible
Metrics are a vital part of any organization, but are particularly useful for a contracting group to measure not only their performance, but also their impact on the business. Metrics ensure the organization does not lose focus on contracting compliance, forget the intent after training has occurred and/or measure savings that occur as a result of proper contracting processes. It is also important that a reporting system is developed and implemented so that again, it can become a vital part of the communication strategy. If the impact on the business is visible, it is easier to keep the organization on track for continuous improvement and hence, change.
For the utility company, two primary metrics that demonstrated success and drove change from the previous state before the contracting group was in place were:
- Cost savings – the group was very effective through the establishment of contracting processes and rigor of driving significant savings by leveraging key suppliers, rationalizing the supply base, and improving the skill sets of the organization through better negotiation tactics and consistent use of tools and templates.
- Compliance – utilizing the contracting group was a key element of success, as it minimized risk. This was reflected in a reduction of fines that the company had experienced the previous year because of engaging with suppliers who were not approved by certain regulatory entities. The company reached 87% compliance in year 1, with 100% compliance in year 2 after the group's implementation. As in many scenarios, reducing fines can be a strong motivator for driving change.
In summary, a centralized contracting function takes time to implement, and often more time to achieve success. It is important to build a comprehensive infrastructure, incorporating the elements discussed, remembering to give it time as change does not come immediately. It is a challenge to shift an organization in a new direction, but with compliance, communication and measurement, it will be a success.
TO CONTACT THE AUTHOR, please mail your question to Info IACCM or connect using the IACCM Member Search (login required).
ABOUT THE AUTHOR
Julie Brignac is a Principal at Vantage Partners, and a member of the firm's sourcing and supply chain management practice. She has worked as a transformational leader in global organizations, with over 20 years of strategic and operational experience in supply chain management, international outsourcing, sales and operational planning, procurement transformations and business process improvement initiatives. Julie has held executive level positions with DuPont, Honeywell, Newell Rubbermaid and Australian-based Brambles Limited.
Julie's experience also includes launching and leading a boutique consultancy, Quantum Six Solutions, Inc. Her work there focused on the design and implementation of supply chain and business process improvement solutions to help companies sustain efficient operations and drive significant savings.
She is the inventor of The RoSS Model® an end-to-end project benefit financial validation process that helps organizations predict, report, and reconcile project benefits to financial statements, specifically in the supply chain arena. Julie is a graduate of the University of Virginia and University of Maryland University College, and holds certifications in Purchasing, Six Sigma and Lean.
You can help protect fair competition
The UK's Office of Fair Trading (OFT) – essentially the competition watchdog – is trying to understand the current state of competition, especially with regard to the public sector.
IACCM is supporting this study because we believe in the merits of competition, but we frequently observe actions by both buyers and sellers that are damaging to it. Opportunities to explore and promote 'good practices' are therefore important and we encourage your participation in the survey.
The OFT's questionnaires (below) cover off-the-shelf software and IT outsourcing. The agency wants to hear from both customers and suppliers in all countries with perspectives on this topic and they seek comments about the experiences of private sector buyers.
- Please send your written feedback to the OFT by December 20, 2013! Just click My response to OFT market study. Scroll down a bit, read abut the study performed in October and follow the prompts.
- Your voice counts.
To contact IACCM, please mail your question to Info IACCM or connect using the IACCM Member Search (login required).
Announcing new course for leaders in public sector
The scope of the Commercial Skills for Leaders training program spans many topics...
- Commercial skills development and use
- Commercial strategies
- Approaches to contracting culture
- Understanding suppliers
- ...and more
Get more details in the IACCM press release dated 18 December 2013.
TO CONTACT IACCM, please mail your question to Info IACCM or connect using the IACCM Member Search (login required).
Don't trip over those tricky terms!
Fayola Yeboah, Contracts Manager, Europe, Enterprise-Rent-a-Car
Change is often an inevitable part of the contract lifecycle. Change can occur early on in the tender process at the pre-contract signature stage, or during the performance of contractual obligations at the post-contract signature stage. 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. Whatever the ambit of the required change may be, it's important to understand how to use the change management tools available to you correctly.
The addendum – managing change pre-signature
An addendum is most commonly used during the proposal/tender stage and is purposed for changing an existing document without the requirement for mutual agreement (e.g. a request for bid or request for proposal). An addendum to an agreement is a document added to the agreement prior to signing.
Tip: There may be instances when an addendum to an agreement pre-signature is the most appropriate mechanism (e.g. in some public sector contracts you are not permitted to alter the main terms, instead there is often use of an addendum called 'special conditions'). However, to aid clarity of terms for both parties I would always suggest correcting the agreement at the pre-signature stage, rather than attaching an addendum.
The amendment – managing change post-signature
An amendment is a legal document that changes an existing agreement. A balanced agreement will state that any such amendment needs to be agreed by both parties. In less favourable circumstances, the agreement terms may state that a party has the right to make unilateral changes to the terms of the agreement.
Tip: Always ensure this provision is fair. It will be covered in the contract under the heading 'amendment' or 'variation' and should state that an amendment will not be valid unless it is agreed by both parties in writing.
The change order – effecting change unilaterally
A change order commonly refers to a unilateral right to order a change. The agreement must expressly provide such right and include provisions on how the cost of any changes will be established and allocated between the parties. True change orders are used in instances where the cost of any change can be determined by rates or formulas set out in the agreement terms.
It is important to make clear that it is uncommon for a party to have a unilateral right to make changes without the other party having reasonable rights of rejection.
Tip: 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. The allocation of responsibility for funding should be addressed and costs should be transparent and clearly stated.
The change request – effecting change through agreement
A change request is the first step in a formal change control procedure and may be initiated by either the supplier or by the customer depending on the terms of the agreement. If drafted properly, the agreement will set out the format and process that the change request should follow.
Although individuals (and some contracts) may call this a 'change order', technically this is not correct. There is a clear contrast to the format of a change order, as set out above; the other party's agreement is required before the change can be implemented. The other party may agree or reject the requested change.
A change request often contains more detail than an amendment, covering areas such as the scope of the change, costing, proposed financial responsibility and a plan for implementation. A change request will be deemed a "change order" at the point in which it is agreed in writing by both parties. This will be covered under a provision in the contract headed 'change management', 'change control' or such-like.
Tip: The right to accept or reject a change should be caveated by a requirement to 'act reasonably'. Under more complex contracts, assessing a change to the services can be expensive. It may therefore be prudent to set out within the terms of the contract how any costs will be allocated for the assessment of a change. 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.
What should a fair change management process look like?
- Each party should have the right to request a change.
- Where a party requests a change, they should include a justification and information on any impact which they foresee the change may have on the existing services and on the charges.
- General improvements in performance standards by the supplier should not be deemed to necessitate an increase in the charges nor be deemed to otherwise give rise to a change request, unless this was the express intent of the parties.
- Neither party to the agreement should be obligated to agree a change request; however each party should be obligated to act reasonably. Inability to reasonably agree a change should be linked to an appropriate dispute resolution provision.
- The parties should expressly agree how the costs of implementing a change order will be met.
The scope, level of complexity and the value of an agreement should dictate whether an agreement requires a detailed change management process, or simply an amendment provision.
What should you take away from this article?
The need for significant change during the post-award stage of the contract lifecycle, through the use of change requests, is certainly the most critical of all of the change management tools. Change requests should be the exception rather than the rule in a well-drafted deal, and their use can be mitigated through meaningful pre-contractual discussions on risk.
Questions including but not limited to the following should be considered:
- Is the scope of the services required unusual in nature, or is there any uncertainty in the method of delivery?
- How complex is the provision of goods or services? Is this complexity likely to increase or decrease during the contract term?
- Are there any known obstacles in meeting the delivery requirements or in providing the services in general?
- Are sub-contractors involved and if so, how critical is there performance to meeting the obligations in the contract?
In light of the risks you have identified, you should then revisit the proposed terms of contract in context and decide:
- Can any of the identified risks be mitigated through re-negotiation of the contractual requirements?
- Do the contractual terms leave my business in a position to propose, or where necessary insist on, changes to the contract through the use of change management tools?
As this article has demonstrated, there are various change management tools available for different stages and purposes in the contract lifecycle. By understanding the available tools and using them correctly, you can better manage change. However, keep in mind that prevention is better than cure. Know what tools are available to effect change and remember to use them correctly, but remember that a well drafted deal which adequately considers risk should require minimal change.
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ABOUT THE AUTHOR
Fayola-Maria Yeboah is Contracts Manager for European Sales Operations at Enterprise Rent-A-Car, based at their European Headquarters in the UK. She has worked as a contracts professional for market leaders in defence, pharmaceuticals and oil & gas. She has a solid legal educational background and holds membership with the Chartered Institute of Legal Executives. She states, "My current career is exciting for all the right reasons. I have the privilege of working with outstanding leadership and I am enjoying an entrepreneurial spirit among my coworkers."
When building trust makes the biggest difference
Guillaume Bernard, Senior Contract & Claim Manager at Schneider
Whether your claims process is positive or negative depends highly on your approach, both within your own organization and with stakeholders. Weak contract and claim management could be costing your company the equivalent of 92% of annual revenue on average through additional costs, loss of revenue opportunities and missed cost savings, as indicated by a survey IACCM conducted in 2012.
Recent feedback from a major customer acting as a global leader in engineering, procurement, construction and project management confirms that a professional approach to claim management based on good faith can build trust and strengthen your business relationships – as well as improve the 'bottom line'. My presentation (The Added Value of Claim Management) will give further insight that tracks with what follows…
What puts the negative spin on claim management?
In my many years serving as a Contract and Claim Manager, I have seen negativity in attitude and approach of the contracting parties. Too often a one-page letter or an Excel spreadsheet will arrive claiming compensation, without contractual reasoning or factual evidence.
This implies that the claim is designed to make money by any means to the detriment of business relationships with stakeholders. When numerous emails arrive requesting money, but without justification or evidence, it is obvious that the process is a thinly disguised and systemic financial weapon.
In every case this negative behaviour, intentional or not, will probably cause harm and conflict.
Enforce your contractual rights!
A claim is a specific written request made by one of the contracting parties following a specific event in the execution of the contract. Examples include:
- disagreement over its scope,
- quality issue,
- suspension of a contractual obligation,
- whole or partial termination of a contract or
- force majeure event.
The objective is generally to obtain from the other contracting party:
- Compensation for additional costs incurred. Claim could be submitted for damages based on the “liability” legal concept.
- Payment of a sum of money defined in the contract to compensate for prejudice/damage incurred due to delay or non-performance (e.g. the performance ratio within photovoltaic markets). Claim could be submitted for liquidated damages.
- Payment for additional works executed and/or additional equipment delivered at the customer's request but not considered subsequently to be a deviation from contractual scope. Claim could be submitted for additional payment.
- Time adjustment when an event -- whether listed in the contract or not -- leads to claiming a time extension. This will modify the contractual schedule.
In other words, a claim tries to enforce contractual rights based on actual facts, contractual provisions and on contract and claim management processes to be implemented in a professional manner. Expertise in both claim and contract management serves the customer's interests and the project profit and loss account.
Build trust in the process – it reassures customers
First, building a claim or a counter-claim requires an in-depth knowledge of the contractual obligations of both parties, depending on the context, and those of all other stakeholders involved. This tells the customer that you intend to manage the process responsibly and you will comply with key commitments such as the project schedule.
For example, you cannot submit a successful claim for liquidated damages until you are perfectly familiar with three types of information:
- The contract clause that deals with the claim (contractual conditions of application: the formula defined by the contracting parties, the agreed grace period and maximum limit to be considered).
- Legal rules applicable (liquidated damages versus penalties. (Example: both concepts are enforceable in Civil Law but not in Common Law).
- Contractual milestones of the schedule subject to liquidated damages.
How customers view your company depends on your approach
You could define the three approaches to claim management as, the good, the bad, and the ugly.
- Good – you act in good faith and honesty through a systematic contractual and factual approach.
- Bad – you use all possible aggressive means to exert unfair pressure for the sole purpose of obtaining money from stakeholders.
- Ugly – you act dishonestly, with no contractual and factual approach
Naturally, I recommend the good approach, but this does not mean accepting everything at your own expense to avoid upsetting your customer! The good approach means following key principles and actions. It is important to share them within your organization and apply them with your stakeholders:
1. Anticipate and address sources of conflict
As a priority, anticipate all possible sources of conflict between the contracting parties at the outset and identify ways of avoiding misunderstandings and disagreements. Defining and validating a change order management process prior to the execution phase secures payment to the seller for any deviations from contractual scope and mitigates any risk of delay for the customer. This action also…
- Creates a constructive environment demonstrating professionalism and credibility in the way the project is being managed.
- Enables the contracting parties to agree on all the operational aspects in advance e.g. customer requests for quotation or modification and change requests by either party including standard documents, deadlines to be met and communication flowcharts.
2. Put contractual rights first
Make sure all claim actions are governed by a willingness to enforce contractual rights. Determining the contractual and factual justification of a claim must prevail over its financial extent. An opposite approach leads to non-constructive negotiations and unsuccessful outcomes as a result.
3. Maintain healthy relationships with stakeholders
Ensure that the way the claim is built and submitted imperatively leads to maintaining healthy relationships with stakeholders. Everyone involved (e.g. project manager, purchaser, contract manager) must be perfectly familiar with the claim method. This will ensure that all the key responses and behaviours are followed when facing a claim or a counter-claim.
4. Ensure the team has specific expertise
Anticipate all possible claim situations. This requires specific expertise that can prevent the improvisations or amateurish actions that can occur when writing a claim or a counter-claim strategy, or preparing for and conducting claim negotiations and contractual settlement of a claim.
Prove it to your stakeholders
It is essential to prove credibility and professionalism in the eyes of our stakeholders. Professional claim management anticipates and manages sudden surprises before and throughout contract execution.
If you understand and act on the above, you can measurably help your organisation limit internal disruptive behaviour that can jeopardize the smooth functioning of projects and relationships with external stakeholders.
However, gaining the added value of claim management is not cost free! It requires recruiting contract and claim managers whose primary role is to spread positive messages about claim management. Isn't that a worthwhile investment? The good news: we can share our best practice thanks to the IACCM network.
ABOUT THE AUTHOR
Guillaume Bernard, currently serves as a Contract & Claim Manager in the Energy sector, with particular experience in the execution of turnkey projects. He has a legal background with a strong contractual culture (Common Law and Civil Law), and has developed specific expertise in the setting-up of Contract Management functions within Tender and Execution organizations.
Know the change order process or risk loss
Anumoni Joshi, Patent Attorney, India
Internal stakeholders will ask about the sustainability and workflow; however; end-to-end approach and robust gap analysis will lead to a streamlined process and generate additional revenues through the CO.
Maybe it's time to first, review the basics of the CO process. Change means adding, modifying, or removing an agreed service, or service component, and/or its associated elements. The process of closing such changes with the customer is called change order. It contractually amends the original contract to reflect the change(s).
Even seasoned professionals can fail to anticipate the following pitfalls. Many could exist when the original contractor CO plan is written. These include:
- Project plan is defective
- Costs were not anticipated
- Technological developments like software changes occurred
- Design modification or project plan changed
- Environment or conditions changed
- Scope of work (SOW) changed
- Errors and omissions were made by the parties
Change in any project across industries is inevitable, even if you have a perfect project plan. Managing the change efficiently is key to the success of change order management. Any change to the original project plan is always carried out by a change order request. Therefore it is imperative to get the change order request approved in writing before acting on the Change Order.
Study the contract
Let's say a project manager or stakeholder knows that a CO requirement exists. This person must first look carefully at the terms and conditions of the contract and determine if the contract…
- Provides a change order provision and also the process to initiate the change order;
- Adequately provides the rights to invoke a CO to only one party;
- Defines a CO procedure to be complied with (eg deadline to submit a CO request / a quotation, specific documentation to be used).
The CO can be formal or informal, depending on the industry practices and size of the industry, and accordingly, projects are managed differently. Regardless, the CO should…
- Identify the change: Completely understand the nature of change and when it will occur. Understand and identify the core problem that obstructs project completion. Read the contract signed by parties involved and become familiar with how 'change' is defined. Usually, this is defined as extra work, deficient specification or estimate etc.
- Clearly state why the change is required and substantiate it with sufficient reasoning, whether it is mandatory or optional for the project to succeed. Include details such as cost estimate, timelines and any other impacts on the project.
- Plan how to mitigate the change by defining the objective and specific ways to leverage the change. Eliminate disruptions as much as possible to limit cost and time lost.
- Notify the parties of changes with valid justification and reasoning with an adequate timeline to respond.
- Accept the plan and its terms and conditions to resolve the change. Normally this would include cost estimate, timelines etc. It's important to identify the effect of changes, while not losing sight of those elements of the project that are unaffected by the change.
Get approval first!
In a perfect world, CO management brings order to the otherwise chaotic world of managing change requests. But in the real world, stakeholders of the project too often overlook established procedures and a project manager starts acting on the change request before it is approved. At times, stakeholders fail to take seriously the CO requests and act hastily to carry out the changes to satisfy the end customer. This can cause disagreement between the parties.
Most organizations have an established procedure to approve the CO. The process can get complicated and time consuming. Many times the CO request can be very informal – but it is unwise for the project manager to act upon it impromptu. Informal change requests should be routed to the appropriate people in the project or organization who are authorized to approve the change.
It is also not advisable to initiate change on verbal authorization, even if it is coming from a very senior person in the organization. It is far better to complete the change request formalities according to the procedure set out in the contract. If the procedure has not been codified (formalized) in writing in the contract, then the contract can be amended.
Once the CO request is mutually approved between the parties, it is essential to consider the following aspects:
- Define a CO Management Process with Customers prior to the execution phase to agree on all the operational aspects. This will govern the issue of requests by the customer or the seller for quotation or for change.
- Make sure a written CO request is in place before starting work on the CO.
- Anticipate change, as it is bound to occur and plan for it. Almost every project goes through minimum one or two change requests but it is important to carry out the changes successfully with minimal impact on the project. Once the Change Order request is approved a second stage of planning is required to execute the change within the project to achieve the desired results as anticipated by the change.
- Evaluate all risks assessed due to the change. Have the risk management plan in place before initiating the change order request. Many organizations use a risk matrix such as high, medium or low priority to ensure the changes are carried in accordance with matrix priorities and its impacts.
- Efficiently test and implement all changes made according to the CO plan within the specific timeline.
- Approval / Authority Matrix and financial impact of CO to be in place through pre-approved workflow.
- Have a process improvement program in place to continuously improve the change management process.
- Determine all the generic factors or conditions that keep recurring in the project. These factors should not be considered for change.
Beware of pitfalls
My experience has several times awakened me to the pitfalls of inappropriately managed change requests. In one case, a loosely-drafted contract became the culprit. The parties relied on their good relationship and faith more than the paper work. The contract was only two pages, thus failing to satisfy basic terms and conditions. Within six months a situation arose that prompted the customer to demand a change request. The parties could not negotiate the terms for the change request, and even the contract was lacking any agreed provisions for the same.
The project stagnated for another eight months, because the parties failed to agree the terms for change. Almost two years had elapsed from the start of the project but with no progress, and the customer demanded damages from the vendor.
Ultimately, the parties settled without cost to each other; however the vendor lost the high value customer and it affected the vendor's quarterly revenue. After this incident, the company streamlined the contract management process within their organization. In many similar situations, claims and legal battles are not unheard of.
The point is we cannot afford to underestimate the importance of a well-written contract!
Scope creep can cause chaos. Another situation I sometimes encounter is the client requesting changes to the change requests themselves. These might be minor alterations or additions. It is a common practice but sometimes, due to flawed design and poor analysis by the project team, the client keeps coming back with changes and asks them to be incorporated, not realizing that such a practice can lead to bigger problems like scope creep (i.e. uncontrolled changes or continuous growth in the scope of the project). If the scope is not defined, documented, or controlled properly, the result can undermine the process.
It's time consuming but worth it
To summarize, it's worth it to do the right thing no matter what. Many organizations are strict in abiding by the process governing the contract as well as policies, and management carries out the entire CO request in accordance with correct procedure. However, at times, doing the right thing dissatisfies customers and the project team, who become impatient that the CO request must pass through different stages of validation and confirmation. It also has to go through different hierarchical levels in the organization depending upon the value of the change order.
To be honest, doing it correctly the first time gets time consuming. It can even delay the project timeline. And yet, improving the administrative process of the CO reduces the overall cost and risk associated with the project. It also encourages a more trustful relationship among the project participants.
And in the long run, trust is better for keeping customer relationships going.
Impact and the way ahead
Industries globally benefit from an agreed change order process. It is now almost a critical aspect of any contract process and it has become more apparent to many that the CO not only can generate additional revenues for projects but can also produce greater opportunities and generate better relationships.
A CO can monetize all support services rendered to customers – Reporting, Training, Program Management, Small projects, Technology support, and Transition services. Contracting parties are increasingly eager to develop and agree on a robust CO mechanism. In fact, companies are outsourcing various CO tools to raise the process visibility and make it friendlier to both employees and customers.
1. Adding Value to Change Order Management Process using simulation approach: A case study. Jing Due and Mohmmad El-Gret PhD. Amine Ghanem PhD 2012.
2. Construction change order process guide WSDOT- Oct 2012
3. Change Management - best practices; white paper -Cisco 2008
4. Change Order Management, by Matthew Stevens
ABOUT THE AUTHOR
Anumoni Joshi spent 10 years as an in-house counsel. Her career path spans many industries including IT, manufacturing and law firms. Her credentials: Management and law graduate from Symbiosis Institute of Management and Pune University; MDP-IPR & Strategy from Indian Institute of Management Ahmadabad; and Diploma in Special Corporate Laws and Consumer Protection Laws. A Patent attorney (India) and recipient of Patent Expert Scholarship by Govt. of Japan, she is currently self-employed, pursuing higher interests in life, and is an aspiring writer/columnist.
Announcing IACCM Board of Directors election results
Congratulations to our successful candidates:
- Arne Byberg, Hewlett-Packard
- Barbara Chomicka, EC Harris
- Andy Kerstan, Rio Tinto
- M.C. McBain, IBM
- Nick Nayak, Department of Homeland Security
- Gianmaria Riccardi, Cisco
This was a strong and diverse group of candidates with Construction, Government and Mining industries represented for the first time. We also have an exact balance with five representatives each from Legal, Procurement and Sales Contracting. See IACCM Board and Officers for the complete list of board members.
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