Out-Law Guide | 16 Jul 2020 | 5:06 pm | 4 min. read
This is part of a series of guides from the specialist infrastructure lawyers at Pinsent Masons. Other guides to follow will address the impact of Covid-19 on giving effective notices, managing delay, disruption claims, acceleration, varying the terms of agreement, the differences between civil and common law approaches to construction project claims, and termination and suspension.
Changes can take place at all stages of a project's lifecycle, including during project execution and in the operational phase. Changes may occur for a number of reasons, including as a result of changes in specification, changes in processes or technology or changes in law. Whatever the stage or reason, any change needs to be carefully managed so that all parties understand what it means for them, legally, practically and commercially. If change is not well managed, it can be a catalyst for disputes in due course, so there is incentive for everyone to manage change in the appropriate way.
A change is often formally defined in the contract and it usually means one of four things: an addition; an amendment; a substitution; or an omission. Given that changes can be of any nature, and can be in respect of any aspect of the contract, including the specification, the works, the manner in which the contractor undertakes its activities, or any term of the contract, it is important to identify them properly.
A good rule of thumb is: if it 'feels' like a change, then check the contract to work out whether or not it actually qualifies as a change.
After the change has been identified, the next step is to recognise the effect and impact of the change in question. The most important changes to manage are those that have an impact on time – for example a need for an extension of time; money – for example increasing or decreasing payment; or the quality of the works or performance regime under the contract.
Of course, understanding the scope of the parties' obligations in the first place is equally important. In the context of a change and particularly where there are time pressures, it is often a natural instinct for parties to want to "help out". However, ignoring the contract change mechanisms could cause unintended consequences, such as exposure to the risk of breaching the contract, taking on a duty that was never intended or not recovering additional costs. Where the contract is governed by public procurement regulations, another consideration will be whether, and on what basis, the change is exempt from the regulations.
The knock-on consequences of the change are equally important to consider. The change may not only trigger mechanisms related to time and money, but can also interact with other provisions of the contract, such as those related to insurance, liability caps, performance security and delegated functions. The contract, including the technical and financial schedules as well as the more 'legal' schedules, will need to be reviewed carefully for these types of interactions.
Under the most widely used standard form contracts, either the employer or the contractor may initiate a change. Broadly, the employer would normally instruct a change, subject to limited exceptions, whereas the contractor usually proposes a change for the employer's approval. The party responsible for meeting the cost of managing the change process will depend on the contract and on who initiates the change. In terms of cost of the actual implementation of changes, as opposed to the initial proposal of changes, there may also be relevant sharing mechanisms, in relation to, for instance, changes in law or changes resulting in cost savings.
Whatever the impact of the change, it is crucial to check the contract to understand and follow the relevant mechanisms for agreeing and implementing the change.
The contract will usually set out the process for commencing any change, such as early warnings, risk registers, and the corresponding notices that are required. Sometimes these notices may be provided in pro-forma with the contract, but if they aren't, it's a good idea to create one to make notification as easy as possible should it become necessary. Notification of a change is usually subject to a strict time periods, so check what has been specified in the contract and make sure you comply. Failure to do so could result in you being unable to seek recompense for any impact on time or money.
Correctly documenting the change is crucial to give it binding effect under the contract. Most contracts will require the change to be made in writing, signed and dated. If the change is significant, a form of amendment agreement may need to be appended to the contract, which should facilitate the process of documenting the change. Other requirements should also be checked, including internal governance processes and third party consents, such as from funders and guarantors.
There may be some less ideal circumstances where following the contract change mechanism strictly is not possible. Whilst not encouraged as the normal approach, if these situations arise, some minimum steps should be taken to document the change: this could be by exchange of letters.
Whilst contract change protocols can be complex, like in the context of PPP contracts, and an additional administrative task too, it is important to understand and comply with these processes. In general, these processes are set up to manage unplanned changes and with a view to dealing with the consequences of change in the way anticipated with a fair apportionment of risk. Failure to observe the requirements, including notices, relevant time periods, and documenting variations in writing, could result in a departure from the intended risk allocation and contractual protections.