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How To Manage A Contract Variation
What’s the problem?
For both the client and sales teams, tackling contract/Statement-of-Work (SoW) variations can be challenging. Often, SoW variations aren’t formally raised, the dreaded scope-creep starts, and both parties get frustrated.
The real problem here is three-fold:
- Both the client and supplier need to fully understand the contracted obligations in the SoW and associated Service Level Agreements (SLAs)
- The supplier needs a way of formally capturing variations to present to the client for discussion
- Both parties are trying to maintain the quality of the relationship as well as the focus on deliverables and targets
As you can see, it’s not only complex, but it can also be very stressful, particularly for the supplier PM/AM.
Creating a contract variation template, and associated governance, that the client (including procurement) and sales can use, will keep everyone on the same page and errors will be significantly reduced.
This guide will help you to create and implement your own contract variation template and process that you can use right away.
What does good look like for variation control?
In Shangri-La, everything is perfect. The client is clear about the need for a change, the service provider writes a clear variation and price, and the client agrees and signs. The reality is very different as we know.
So, a great target to aim for as a supplier, in our experience, is this:
- When you start delivery, or you’re newly appointed to an account, set-up a meeting with your client counterparty lead. In the session, review the SoW, any variations to the Ts&Cs, SLAs/targets and any unresolved issues. This ensures that there is a clear understanding about what is expected, what’s in-scope, and what’s out-of-scope. This will also flush-out what was intended, but nor contracted!
- Then, work with your client to ensure you have a clear, mutually agreed, template for variation control (you can download ours free here) and an associated governance model. For clarity, governance simply means the way something works overall (process) and the way it’s controlled.
- Then, set-up Quarterly Business Reviews (QBRs) if you haven’t already, to keep track of progress, variations, and targets. This would include reviewing Variations raised, approved and rejected in the quarter.
How Can I Vary A Contract (Ts&Cs) and/or the SoW?
Generally, in order to be able to vary a contract, there would need to be an agreement made by both parties to make these changes. Such changes should always be made in writing and this is where the use of a contract variation template would come into play, to ensure that all amendments are recorded accurately.
Imposing a unilateral variation (a change which can be made by just one of the parties) is usually only valid in very specific situations. When you’re negotiating contracts/SoWs, you need to ensure there are no unilateral variations allowed by the client – this can lead to significant problems in our experience.
Methods Of Varying A Contract
- Written Variation
A written variation is the most commonly accepted way of changing the terms and conditions of a contract. The original contract should include phrasing which states that the only accepted way of making changes to the contract is in writing. This is often known as a “no oral modification” clause, which plainly states that agreements or amendments to the contract cannot be made verbally once signed.
- Unilateral Variation
As a general rule, variations to contracts cannot be made unless both parties agree to this. However, an exception to this rule can occur if both parties agree in advance (contained within the original contract agreement) that either one or both sides can make a change to the contract unilaterally. Having clear guidelines within the original contract in regards to specifically which terms can be amended unilaterally, is critical. Our advice, hold firm on refuting these clauses be included.
- Variation By Conduct
This type of variation normally only applies to contracts where a contractor may have specific deadlines to meet. If one of the agreed parties either does, or doesn’t do something, which has an impact on the other party meeting that deadline, then a term can be created to extend this deadline by a reasonable period.
4. Variation by Oral Agreement
Most contracts include a No Oral Modification clause (NOM) to ensure that any variation has to be agreed in writing vai a formal variation.
Why is Formal Variation Control Essential?
Why has formal variation control become so important? Anecdotally, and based on lots of research (and court cases) because it prevents arguments, mis-interpretation and costs. It also makes good commercial sense.
Specifically, these are just some of the benefits:
- Improve Efficiency
Having a standard template for variations, an agreed process, and a document repository, makes life faster and less ambiguous.
- Mitigate Risk
Having a standardized approach to variations allows for better oversight across all agreements. Standardisation, checklists and risk assessments enable more robust variations to be put in place.
- Minimise Costs
A comprehensive template and process will minimise the impact of hidden/unexpected costs.
- Maintain and Grow Better Relationships
Although often counter-intuitive, formalising variations actually improves relationships. Done in the right way, they are a great way of opening a dialogue between both parties to reach a negotiated agreement.
- Maximise Value
Variations can be a way of creating value for both client and supplier. When opportunities arise to grow sales and/or increase profits, variations are a great way of refining the scope and associated costs/benefits. This can then be circulated around key stakeholders for comment prior to agreement.
Practical Points When Managing Variations
While it’s important to show clients and suppliers that your business is open to contract negotiations and amendments, there are some practical points that need to be considered when creating a future-proof contract variation template and process
- Standardise And Centralise Your Agreements
Having contracts, SoWs and variations stored in a central system is essential to strong governance. Making sure that key contractual documents are easily located and searchable ensures that accurate records are being kept, especially if the agreed contracts happen to come under scrutiny.
- Keep Track Of Obligations
While most of us will sign a contract and then forget about it until there may be an issue, service providers need to ensure they’re delivering what was contracted. As a supplier, you must keep track of the obligations that you’ve agreed to, both within the original contract and any contract variation that may have happened.
Solely relying on a team or individual employees to track obligations is both risky and too much of a burden to place on staff members. Human errors are inevitable when dealing with many different contract variations.
- Work out the thresholds for when a variation is required
Clearly, if the client has requested a minor change to a piece of copy you’ve written, it’s not a variation! You’ll need an experienced PM/AM to work out when it’s appropriate/essential to raise a variation – it requires commercial judgement.
- Is every variation chargeable?
The answer is no! When a variation is required, it doesn’t always mean you’re going to get paid for it. Sometimes, you’ll take a commercial view that the variation is agreed, but there won’t be an associated fee to the client. In our experience, the act of going through a formal review of the variation is often sufficient to make all parties realise the variation isn’t essential. Or, it is essential but in the interests of developing long term relationships and value, no fee will be charged. It’s also an excellent way of reviewing changes at the QBRs.
Having a robust, mutually agreed variation template and associated governance process is essential. It delivers better outcomes, builds longer term/stronger relationships and is simply better business.
See our free downloadable resource:
Download a contract variation template by Piscari here.
Stephen Cribbett, co-founder of Versiti, is a seasoned expert in business development and crafting winning business proposals. His background includes … Continue reading Crafting Top-Notch Business Proposals with Stephen CribbettREAD MORE