Contracts Should Also Cover 'Change Control'

BOSTON (05/15/2000) - If you change something in a deal with an existing supplier,you could have a challenge on your hands. Unfortunately, many IT customers don't anticipate these changes very well, if at all. And when they don't anticipate and manage changes, vendors' profits skyrocket.

Interestingly, vendors are known to lowball customers who are perceived to be contractually naive. The vendors know they'll be able to maximize profits later by taking advantage of dependent customers when changes occur.

Change today is rapid and certain. New products and capabilities are being pitched in record numbers by vendors to customers; projects change dramatically to incorporate new ideas and technology; service and software deals need to be adjusted for new types of users, volumes and service levels.

Speed and change are driving today's marketplace. Since no one can predict all potential changes, customers and vendors should at least agree ahead of time on a rational process for handling changes when they occur.

The underlying premise of a good change-control process is that the customer must be able to assume there will be no changes in the vendor's quality, timeliness or cost unless the vendor includes suggested changes in a contract amendment that the customer can accept. The customer must ensure that these proposed changes don't undercut the original contract's benefits or inject ambiguity and uncertainty into the relationship - which would be certain to increase the likelihood of disputes and mistrust between the parties.

Your change-control process should cover five areas:

-- A method for either party to suggest a change, along with the information to be included in a request (a "change form" is a good idea).

-- The parties to whom the change should be submitted.

-- The time period for reviewing the change request.

-- The process and deadlines for revising the change request.

-- The process for approving and implementing the change, such as through a change order or a new or revised statement of work.

There's no single approach to these types of problems. Customers need to take into account each deal's unique characteristics to determine the right approach. But whatever methodology you choose, it must be based on the premise that the change-in-the-deal provision was designed to keep the project moving toward a successful conclusion.

Just in case the vendor and customer can't agree on the need for a suggested change or its impact on the project's timetable, price or performance standards, the contract should include a mechanism for resolving differences.

Depending on the state of the project and how critical the proposed change is, an interim mediation or arbitration mechanism can be used. If this isn't practical, then the customer usually should have the right to tell the vendor to proceed with the changes but should reserve the right to challenge the vendor's proposed changes to the timetable, price or performance standards later.

In many instances, the only dispute relates to price. As long as the vendor's interests are adequately protected - such as by providing payment for the changes under the same mechanism that applies to the original contract, but under protest - it's often possible to defer resolution of the payment dispute until the project has been completed.

But sometimes, the changes may be so significant that an earlier resolution is required. In that case, include provisions that might require interim mediation or arbitration, like the following:

-- Disputed changes that have more than a moderate impact on the project timetable (that is, they prompt a delay of several days in the completion of one or more milestones).

-- An increase in the project's price exceeding a specified percentage or dollar amount.

-- A significant drop in performance standards based on selected elements.

While a solid contract and a program to manage it are keys to a successful deal and a customer/vendor relationship, they aren't enough if they don't contain processes for change control. Change is inevitable - and both parties must prepare for it by developing and following ways to deal with it.

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