The following article was prepared by Mike Taylor, C.P.M., for distribution to ISM affiliate newsletters


Negotiate Contract Changes
Before Creating the Contract!
July 2010

Negotiating the price of a contract change isn't easy. Unfortunately, no matter how well we plan, and how good the SOW, contract changes seem to arise more often than we would like.  When differing site conditions are discovered, the SOW turns out to be missing an important fact, the scope expands or the project manager has a change of mind; we are in the difficult  position of requesting and evaluating a contract change.  Trying to find a way to evaluate the price of a change is a challenge. There is an old joke in the contracting industry about contractors getting well on contract changes. That is, sly contractors, price the initial job low, expecting that there will be a lot of changes - which they can price high.

While there is no magic way for buyers to solve this problem , there are several things that can be done before awarding the original contract to make pricing changes easier.

  1. When initially preparing the solicitation, anticipate obvious changes and ask for options. No experienced procurement person in the world should be surprised that the original quantity estimate was too low. Nor should we forget the old management adage that “if it works, we probably want to do it again a few more times”.  Ask the contractor to provide pricing on foreseeable options, additional quantities and multiple locations.
  2. Of course the converse is also true. No experienced procurement person should ever be surprised when the initial estimate by the project turns out to be way too high. Thus we should always ask the contractor to provide a quote and an optional “what if we don’t buy that many”  price. In fact, most suppliers understand this fact and will often pad the pricing to allow for quantity changes. Instead of forcing the contractor to take the risk (and pad his price),  suggest writing quantity options into the contract. Options could result in more realistic and maybe even better pricing from the contractor.
  3. As part of the initial solicitation, ask for as many “what if” pricing variations as you can think of.  Sooner or later, everything that can go wrong in a contract;  will. We know things go wrong and the contractor prices contingencies into his proposal. Ask the roofing contractor to propose and reach an agreement on the impact of rain or wind delays. We should be able to identify and reach optional pricing agreement on many of those possible problems.
  4. Another obvious application of this principle is to ask for a priced spare parts list with each new piece of equipment or a replacement cost for rental equipment. Ask the contractor who is quoting on HVAC repairs to also provide a priced parts list as part of their initial proposal.
  5. Ask for price breakdowns as part of the initial proposal. What are the pricing components that make up the proposal? Freight, mobilization, delivery of building materials, stand-by time, cost of major components, specialized testing or inspection, documentation or certification, permits, bribes to border officials, {just checking to see if you are awake} and anything else that can be separated, should be.  Then when a change happens, it an be tied to a specific price component of the original proposal

In the suggestions above, we are basically identifying as many of the potential unknowns in the contract as we can. Thus we are  "negotiating"  a way to mitigate the risk-of-change in a contract by assigning a price tag to it.  These post-award negotiation risks can be predicted, included in the solicitation, proposed on by the contractor and should be negotiated into the contract.  From a bigger picture perspective, failure to consider all contracting risks before award gives the contractor considerable leverage in negotiating the inevitable change. 

Mike Taylor

 

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