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Dealing with change

December 13, 2011

An IACCM member commented recently on the ‘top ten negotiated terms’, saying that while the areas of liabilities, indemnities etc feature large on the agenda, he is finding that negotiation of change clauses is proving increasingly contentious and time-consuming, especially in technology contracts.

My observations with regard to that comment were as follows:

Our research shows that issues related to change clauses are the #2 cause of claims and disputes (beaten only by disagreements over scope). Hence your focus is addressing a critical area.

We find that often the contention is driven by a couple of factors:

1)      There may be genuine uncertainty about future needs or capabilities, for example because of new technologies that may become available or difficulty in predicting future business requirements.

2)      Change is a regular battleground over price, with the customer anxious to remain within original budgets and the supplier wishing to ensure recovery of costs, or perhaps raise margin.

Several factors can make this situation especially contentious. One, of course, is the underlying risk associated with commitments in an uncertain environment. In this case, it may be wise to think about the contract structure and to enable more fundamental renegotiation at particular milestones. This also implies that the extent of customer commitment is reduced and that there may even be a joint work team to ensure close alignment between requirement and capability.

A second cause could be a lack of trust between the parties. For example, if the supplier feels disadvantaged in negotiation due to a lack of ‘fairness’ in risk allocation, or perhaps the price negotiation has been especially severe, then they will naturally be nervous about their ability to charge for subsequent changes. It may even be that they have priced low with the specific intent of then recovering margin during the change process. (I came across this blog that makes a very similar point.)

On the second point, it should be possible to discover whether this is an issue of trust or of policy. For example, is the supplier significantly cheaper than competition? Do they have a market reputation for being difficult to do business with, especially in the post-award phase?

The situation you describe is not uncommon and to address it, we may need to think carefully about our own behaviours and the extent to which we are building cooperative, rather than adversarial, relationships. We may need to change the conversation and also to see the link between this clause and the way that other elements of the contract have been negotiated. One approach might even be to raise the points I have outlined above and make them part of the discussion.

What have your experiences been on this topic? How do you address the challenge of change in your contracts and negotiations|?

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