5.10. NEGOTIATE CONTRACT VARIATIONS

Provisions to allow and regulate contract variations46 should be a standard feature of all contracts. The ability to vary the contract should be directed or controlled by the acquiring entity and should only occur in defined circumstances. It is accepted practice for the variation mechanism to provide for variations to be agreed between the acquiring entity and the contractor in writing through a formal amendment of the contract. In some circumstances it is possible to inadvertently amend a contract by oral agreement or conduct, even where there is a contract provision expressly requiring a formal process to be followed. It is therefore important that those involved in managing and administering the contract do not agree to informal contract amendments.

Any proposed variations should be assessed to ensure that they do not breach Australian Government legislation or policy. Variations should be undertaken in line with the procedures set out in the contract or specific entity procedures. These procedures may cover explicit authorisation and reporting arrangements for contract variations, particularly for large, complex contracts of long duration.

The reasons for the variation should be clearly documented. Variations should not be used to mask poor performance or serious underlying problems and the effect on original timeframes, deliverables and value for money should be assessed. If the effects are significant, senior management and other stakeholders may need to be consulted and/or advised.

Changes to contractual arrangements have the potential to affect the scope and viability of the contract for either or both parties and making substantive variations to a contract will require some of the actions and issues involved in developing the original contract. They should therefore be planned accordingly. Acquiring entities should be alert to the risk that multiple changes made to a contract over a period of time may shift the overall allocation of contract risk or transfer particular risks to the acquiring entity. It is important to analyse all consequences of a proposed contract amendment and make sure there are no unintended effects of the change.

Contract managers also need to ensure that the contract variations are not of such a level that they significantly change the contract requirement and/or substantial parts of the original transaction. If this is the case, it may be necessary to undertake another procurement process because the revised arrangements are substantially different to those selected through the original procurement. The determination of when the contract has been so substantially changed so that it becomes a new contract can be a difficult matter of judgement. It is fundamentally a procurement decision that may require specialist advice. To assist contract managers in making judgements on this matter some entities set a dollar threshold, for example, 25 per cent of the original contract value, as a guide in determining whether or not a new procurement must be undertaken.

It is possible to inadvertently amend a contract by oral agreement or conduct.

Changes to contractual arrangements have the potential to affect the scope and viability of the contract for either or both parties

Contract variations checklist

Key issues to consider in managing contract variations include:

  assessing the reasons for the proposed variation and whether these may indicate an emerging or actual performance problem

  assessing the impact of the proposed variation on the contract deliverables, particularly whether the variation or the work it represents is actually required and whether it was part of the original contract deliverables

  determining the effect the proposed amendment will have on contract price

  considering the authority for making the variation

  properly documenting details of the variation and its impact, and

  meeting any reporting requirements such as updating the entity's contract register and including details in AusTender, where appropriate.

Contract managers need to ensure that contract variations are not of such a level that they significantly change the contract requirement.