VIEWPOINT FEATURE |
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The inevitability of change and how to manage it Carl Simms, Director and claims management specialist at HKA and Chris Jackson Senior Consultant at HKA ask if it is possible to develop a project from inception to completion without change?
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hilst there may be every intention to get all relevant parties engaged, for example, whilst feasibility studies are undertaken, again as concept designs are developed and once more prior to tender, this is not always realistic or achievable. Indeed, even with the input from a wide array of parties early into a project’s life cycle, the speed at which new technologies, processes and systems develop mean change can still readily occur. It could be suggested, therefore, that there is a need for flexibility; inherently though, that means there will need to be an acceptance of change. By turn, the impact on design and manufacture of such change will inevitably have to be managed by the contract. Within the contract, a variety of terms can be used to identify such changes: ‘compensation event’; ‘modifications’; ‘changes’; ‘variations’; ‘variation order’. The list goes on. It all usually depends on the contract form and the defined terms or simply the industry. Over time, contracts have evolved to include a set of procedures to manage change without the need for the parties to enter lengthy negotiations. So, what are the basic functions of the variation procedures, and how do they impact a project? What types of clauses exist? And what should you look out for in a variation clause? Typically, three types of variation clauses exist in a contract: i. Deemed. ii. Consensual. iii. Unilateral. It is unlikely the contract will state which type of clause it is, but the language used could indicate which of the three types it falls within. Provisions which use words such as ‘shall’, ‘must’ or ‘will’ are normally mandatory and are typically seen in unilateral clauses and words such as ‘may’,
‘can’ or ‘choose’ are typically found in consensual clauses. What is a deemed variation? Provisions on deemed variations are generally quite rigid and specific in nature providing a pre-agreed allocation of risk. Disputes rarely arise from these types of variation. That is, deemed variations are usually triggered by an event which is out of the control of both parties. The event will require an adjustment to the work that will need to be completed under the terms of the contract. Rather than this change being instructed by the customer, the variation is deemed to have been instructed, because of an event or arising from an inconsistency between documents. A typical example could arise as a result of a material price fluctuation. What is a consensual variation? Consensual variation procedures are merely amendments to the existing contract. They usually prescribe a method to reach an agreement and maintain a framework for agreeing the variation, which speeds up the entire change process. Some consensual clauses adopt a quotation and acceptance method to reach agreement. This method is prevalent in Maritime engineering contracts. Ultimately, neither party can insist on a variation for this type of clause. What is a unilateral variation? Unilateral variations are some of the most powerful clauses in any contract. They allow one party to instruct a change, to the product or even method, without the approval of the other party. Exercising this power should also lead to an automatic entitlement to be paid and an extension of time. Extensions of time are usually covered by different clauses in a contract as they apply to broader events than just variations. If there are methods of valuation specified in the contract these must be followed irrespective of actual cost for the additional work.
How should I read and interpret these clauses? When interpreting a variation clause, the following questions need to be raised: i. What changes can be made? ii. Can it affect method of manufacture? iii. Can it influence the sequence of the works / delivery? iv. When can the clause be used? During manufacture or only in design stage? v. How does the clause specify price and payment of the variation work? vi. Does the variation clause allow the client to remove unwanted scope or reduce the works (omission)? vii. Who can initiate the variation process? In addition to the above queries, the next two sections cover typical risks borne by each party. Manufacturer and supplier risk The following points highlight the main risks that the manufacturer faces when complying with a variation: i. The additional work can strain tightly run production lines. Even small variations can have a major impact on a project programme, which might not be fully understood when the variation is instructed. ii. The variation work may have to be undertaken out of sequence for some units, making the work uneconomical. iii. Variations, if great enough in number, can cause ‘death by a thousand’ cuts where time impacts are not correctly assessed across the manufacture programme and extra time is not awarded with the variations. iv. The manufacturer assumes the risk of their supply chain delivery and must replicate any clauses in the main contract back to back with the customer and the supply chain. v. The manufacturer maintains the same design and quality obligations for the variation works as they do for the contracted works. Indeed they are
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