Contract Change Management

Changes are expected to happen during project execution, such as when the project management team takes over the project.

Contract change management is a best practice among the best organizations. Such organizations have formal methods for recording and approving changes by a team normally known as the change control board, which comprises the project sponsor, project management office, and other competent authorities.

7.1 Definition of Change

Any deviation from the project plan is suitable to qualify as a change to the contracted work.

Project team members can argue that any change required to meet the end customer requirements is therefore suitable to qualify as a “change,” but this may not be the case with EPC organizations, as EPC organizations are based on scope, time, and cost, which have all been agreed upon with the customer before entering into project execution. However, the customer may be ready to pay for the changes by providing delivery extension and/or any additional payment to the EPC organization. Therefore, only changes that are agreed upon with customer will qualify as a “change.”

7.2 Change Management Process Flow

Figure 7.1 illustrates the general change management process flow and clarifies how changes should be handled and approved.

7.3 Classification of Changes

Every organization can have its own classification for changes; however, based on experience and academic knowledge acquired in the last decade, we can classify them as illustrated in Figure 7.2.

Some of the project changes may occur because of intrinsic or extrinsic reasons like price variance; sometimes they are driven by fluctuations in the market for the price of the commodity, for example, if your project involves copper or any other commodity with a dynamic price. If the contract with the vendor does not have a price variation clause—and is not agreed to on a back-to-back basis—then the company will have to bear the hit. Therefore, price variance can be an intrinsic factor for change or it can be extrinsic to the project.

7.4 Managing Intrinsic Changes

Dealing with intrinsic factors depends on the maturity of the organization. Therefore, intrinsic factors can be managed, as they are dependent on the business decision.

The best way to do this is to pass everything on a back-to-back basis, although this is not always possible, since the value of subcontracts will change from 1% of the project value to 30% of the total project value (for organizations that have evolved from product to project). This underscores the importance of the risk management team.

The risk management team should consider all such risks and prepare the appropriate risk responses. For example, if an organization has to meet the project owner requirements for the project by subcontracting small supplies to a third party, then the risk management team needs to be sure enough that such a supply should not become critical for the project irrespective of the subcontracting value. In case this becomes unavoidable, then such requirements should have been identified at project inception and then risk response would be ready with the help of project procurement. Critical requirements, either small or large in value, should be identified earlier on in the project and a plan B should always be ready, in case plan A does not work.

The way to deal with price fluctuations is to have currency hedging; that is, if the commodity and/or services pricing depends on international currency variations. Although the finance team can have its own limitations regarding what is to be hedged or not, since hedging US$100 for a project valuing 50 million rupees is not a viable option, as hedging also involves cost. If the dependency is more than the threshold decided by finance, then hedge the currency to account for currency fluctuations. Another way is to hedge against commodities; for example, if you have a great amount of steel structure in a project, then you need to hedge your commodities, too. The quantity of commodities to be hedged has to be decided based on the organization's assessment of factors like project duration and past trends on prices of raw materials.

For LSTK contracts agreed upon with the project owner, there must be enough buffers for quantities that might not be assessable during the bidding stage and/or have considerable uncertainty for volume of variances during project execution. This is the only way for LSTK contracts to reduce the risk of losing margins.

There can be project situations that can have a great impact on project deliverables, and one of those reasons could be the resources, including people, materials, and machines, that are needed for executing the project. The project management team and risk management team should identify the critical resources needed for the project and must have a written risk response plan to deal with recourse changes during project execution. There is nothing in the world that is indispensable or for which there is no alternative. There is only the need to spend good time doing proper risk assessment.

Changed customer requirements can always be controlled, and this depends entirely on the effectiveness of the project management team. Every customer tries to “gold plate” the project without any costs paid for getting the gold plating done. However, if the project organization has not assessed the exact requirements for the project—even though they might have written detailed specifications or scope for the project—the only way to deal with it is to execute the project as agreed. However, there can be attempts to recover from inaccurate anticipations in another part of the project. Government project owners are always under the scrutiny of their regulatory bodies. Changes during execution are almost impossible, since public money is involved for such projects, and government officials who award the projects will be answerable for additional drainage of public money. Hence, while bidding for the government organization, the bidding organization needs to consider additional buffers for unanticipated requirements. They might be written into the contract or may be imposed through some government notification.

7.5 Managing Extrinsic Changes

These factors are external to the project organization and cannot be controlled, since they are not going to change, regardless of any decision taken.

For example, if the government imposes higher rates on import duties on material that is not available in the country, the project organization cannot do anything about it. Similarly, there are situations that change from open-market to closed-market conditions, for example, an organization cannot bring expats in on projects, since country law requires the organization to hire labor from the local labor union market.

Another example of uncontrolled factors is imposition of stringent environmental conditions to safeguard against pollution. This is something that cannot be controlled while executing the project; the only solution to such situations is to comply with the law, since the project organization has no option except to withdraw such projects if this is for its own purpose. However, if this is being done for some project owner other than the organization, withdrawing from the project will not be an easy task. Why? Because the organization's credibility would be at stake, and this can have a long-term impact on repeat business as well as on business from potential customers within that market.

So, what can organizations do to handle such conditions? All of us can agree that the only solution to handle such a situation is to have better project planning. In other words, while deciding the go/no-go for the project, the organization needs to consider long-term factors that can affect the project. This is the only way to eliminate such situations. Nothing much can be done, until or unless the government decides upon further changes, which may be in favor of the project organization—a rare possibility, since such changes happen only with a change in the federal government.