In a perfect world, contracts are the perfect resource of responsibility – all details, regardless of significance, would be squared away and everyone would have a perfect understanding of what exactly is expected in their role. Unfortunately, this is not the case, and modifications are frequent. Modifications, technically known as change orders, are a common occurrence in the contract world, especially when things are being built. Despite going over all the details before signing, there will be at least one specification that needs to be added or modified.
The fact is that change orders happen regularly, and often represent a cost variation of at least 10 percent. They can result from someone forgetting a piece of information, undesired/unexpected results, or from new decisions made after the project has started. Most contract managers don’t try to avoid these issues; instead they plan for them and build in contingencies, where possible, to limit their negative effects on the completion of a project.
Particularly in construction projects there are going to be what are known as concealed situations. These situations involve factors that were not known at the time of the contract drafting, but have to be dealt with to allow the project to finish. These items aren’t any particular party’s fault; they exist and adjustments have to be made. To anticipate these problems, many smart contract writers will build in a clause for dealing with unforeseen issues that could occur. This provides a pre-determined plan on approaching these concealed situations, should they occur.
Detailing alternatives for solution approaches can be another form of contingency planning. Rather than waiting for a problem to occur and then trying to figure out a plan, a contract with proactive options could have a detailed alternative approach already built in. When the catalyst occurs, the parties know how to respond and the costs are already agreed to.
Allowances to budget contract costs and expectations provide a third method of contingency planning. Under this approach no specific details are planned ahead of time. Instead, the contract deadlines, funding and deliverables are adjusted to allow for changes to occur and still stay within the scope of the contract. Some contracts assume issues will happen and instead provide bonuses if the agreement is completed earlier than anticipated. This approach is common in municipal projects, such as bridge or highway building.
Change orders can also be controlled by improved accounting systems that track overruns under project control monitoring. This approach, combined with allowances, can help avoid formal change orders and keep a project within overall scope and delivery.