When you are negotiating and drafting a contract with a supplier, it is imperative to include a well thought-out provision regarding how changes will be handled. The types of things you should address in the changes provision depends upon the product or service you are buying. Below are a few examples of the different issues you should consider addressing:
• When a change is necessary, the contract should require the supplier to provide a detailed estimate of the cost of the change.
• The contract should require that the supplier receive written approval from a designated department/ representative before proceeding with any change.
• The contract should provide that if the parties cannot agree on the cost of the change, the buyer can require the supplier to perform the work based upon a time and materials basis. Additionally, if a time and materials basis is implemented, the contract should set forth the rates that will be paid for the different categories of labor or processes.
• Language should be included that provides the basis for direct cost for any materials required as part of the change. It should also address what can be included as a direct expense and what must be provided for in their overhead rate.
• The changes provisions should detail the permitted percentages for contributions to the supplier’s overhead and profit, if allowed.
• The changes provision should outline the documentation that is necessary to substantiate the costs charged, including copies of invoices and timesheets, and the right to audit the documentation that is not required to be submitted.
• The contract should set forth the right to inspect the work in process to confirm any time, labor or material charges.
• The changes formula should address how deductions in the scope of work will be managed.
A buyer’s leverage in negotiating changes will vary throughout the business relationship. If you have conducted business with the supplier for a lengthy period of time, the supplier is more likely to treat you fairly in order to continue to receive your business. In contrast, if this is your first transaction, the supplier may require more oversight. The safest approach is to protect your interests regardless of the business relationship.
If you need assistance, providing for change orders in your contracts or you have questions regarding your company’s contractual needs, contact Leslie S. Marell for help. We serve as general counsel to clients who do not require, or choose not to employ, a full-time lawyer in-house. Call today to schedule your initial consultation.