International Roundup, Vol 18, No 2

Contractual changes, Control value and manage risks

Annette Kavaleff, Katja Koskelain and Marjaana Kousa

Paper presented at the 2004 NORDNET, Helsinki, Finland, September 2004.

Abstract

Changes during a project are more of a rule than an exception. This is why everyone involved in project business should realize the importance of change management. In the global contracting environment where emphasis is placed on minimizing costs and maximizing performance, poorly managed changes are hazardous.

Change management has to be considered already when planning and negotiating a contract. Proactive contracting will strengthen project performance and eliminate communication difficulties among contracting parties. For a project, it is crucial to carefully define the scope and the other key contractual provisions, which should include a workable dispute resolving mechanism before signing a contract.

Contractors and employers often rely on standard terms and conditions (STCs) to govern their relationship. No doubt, these are helpful instruments, but they should be used with awareness and care. When STCs constitute a part of a contract, it is essential for the contracting parties to truly understand how they allocate costs and risks between the parties and what requirements they set for variations and the communication of claims, notifications, etc.

In this paper, the variations clauses of two STCs, namely Orgalime turnkey General Conditions 2003 and FIDIC Silver Book for EPC/turnkey projects, are examined in respect of the following three questions: Who is entitled to initiate variations? When and how is the variation established? Who bears the costs for the variation? The STCs are evaluated from both the employer’s and the contractor’s point of view and their main differences are discussed. Not surprisingly, the Orgalime turnkey conditions seem to be more contractor friendly and the FIDIC Silver Book more employer friendly. Neither of them, unfortunately, seems to provide sufficient detailed change control procedures. Contracting parties should take this into account and address change control issues upfront in their negotiations.

An outline of change control procedure and issues to be addressed are presented in the last chapter. The task of such procedures is to provide efficient tools to agree on changes before they occur and to keep the project on track and within budgetary limits.

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