It is true that business teams and legal professionals spend ample time painstakingly drafting contracts to establish a clear framework for business engagements. However, unforeseen circumstances, changing legal dynamics, evolving project requirements, and other external factors can sometimes arise, necessitating changes to the original agreement.
Yet, making changes to contracts is not exactly a cakewalk, even for top legal professionals. You have to deal with difficult stakeholders, who may be nonchalant about participating in the contract change process, convincing them of the need for the adjustment and its critical implications. You also get to contend with the risks associated with the modifications, combing through multiple lines to ensure you don't inadvertently introduce avenues for ambiguities, non-compliance, and conflicts.
In light of this, organizations ought to establish proactive processes that keep contracts flexible and adaptable in the face of changing circumstances, and that is what effective contract change management is all about.
In this guide, we’ve discussed all you need to know about contract change management and how you can get the best outcomes with it.
What is contract change management?
Contract change management refers to the process of identifying, planning, implementing, and managing modifications in a contract after its initial execution.
When a contract hits the execution phase, a legally binding transactional relationship gets established between the parties involved. This phase signifies the point at which all parties are obligated to fulfill their agreed-upon responsibilities as outlined in the contract. However, certain events may occur while fulfilling these contractual obligations, bringing about the need to make changes to the contract's content.
At this point, the overarching aim of contract change management will be to ensure that modifications are incorporated into the contract without elevating risk, disrupting established relationships, or violating regulatory standards.
“Regardless of when you see them coming, material changes will require that the team adjust the project plan and related documents to account for the change, and ensure that changes are communicated to all of the people who need to know and – most importantly – changes are approved in advance by the right people.”
~ Sterling Miller, CEO and Senior Counsel for Hilgers Graben PLLC
Ten Things: Legal Project Management for Beginners
What can necessitate a contract change?
Contract changes are a common occurrence in the world of modern business. As companies seek to establish and maintain legally binding corporate relationships in a constantly evolving business landscape, the need to modify and adapt contracts frequently arises.
These changes may stem from various factors, such as shifts in market conditions, technological advancements, and legal modifications, among others. In the same vein, contract changes are not only a response to evolving circumstances but also an opportunity for businesses to strengthen their partnerships and enhance the value they provide to one another.
Below, we get into the specifics of things that can necessitate a contract change.
#1 Changes in scope
One of the most common reasons for contract changes is a shift in project scope. As projects progress, stakeholders might realize that additional features, tasks, or services are needed. Similarly, they might find that certain elements initially deemed necessary are no longer relevant.
Adjusting the contract to reflect these scope changes helps ensure that both parties are on the same page and that the project can adapt to evolving needs.
#2 Shifts in market conditions
Market conditions encompass a wide range of external factors that can influence the way businesses operate and interact with each other. These factors include economic changes, industry trends, and supply chain disruptions. These can sometimes be unpredictable and significantly impact the terms of a contract.
For instance, a supplier might need to alter the terms of a supply contract to account for shortages or price changes in raw materials.
#3 Performance issues
If one party fails or struggles to meet its obligations outlined in the contract, parties may decide to go back to the drawing board and adjust specific areas to ensure that objectives and responsibilities are seamlessly delivered.
Performance issues could encompass a wide range of problems, from missed deadlines and quality deficiencies to incomplete tasks or inadequate services. To rectify the situation and salvage the business relationship, both parties might agree to modify the contract terms, such as adjusting timelines or quality standards.
Sometimes performance issues could even result from events beyond the control of either party, like natural disasters, strikes, or global pandemics. In such cases, contract modifications might be necessary to accommodate delays, adjust deadlines, or even suspend certain obligations until conditions improve.
#4 Change in the legal or regulatory environment
Jurisdictional regulations and industry standards governing a specific subject matter of a contract may evolve over time. These changes can impact the validity, enforceability, or practicality of terms contained in the agreement.
Imagine a contract between a technology company and a data storage provider. If new data protection regulations requiring stricter security measures for handling customer data are enacted, the original contract might need to be modified to ensure that the data storage provider complies with these new regulations.
This could involve updating the security protocols, revising the data breach response procedures, or implementing additional safeguards. Failure to make such adjustments could result in legal non-compliance and potential liabilities for both parties.
Changes in the legal or regulatory environment can impact the risk landscape associated with a contract. Parties may need to negotiate new terms to allocate risks appropriately, ensuring that both sides are protected from any new legal exposures.
#5 Changes in organizational goals or ownership structure
Over time, a company's goals, strategies, or even ownership structure may change. These shifts can impact existing contracts.
For instance, if a company goes through a merger or acquisition, the newly formed entity might seek to streamline its operations and consolidate relationships. This could lead to renegotiating contracts with suppliers, service providers, or customers to reflect the new combined organization's priorities and strategies.
Similarly, if a supplier or service provider experiences significant changes, they might seek to modify existing agreements to align with their new direction.
Key steps for contract change management
As already established, contract changes can occur for a wide variety of reasons, and the overarching goal of effective contract change management is to ensure that changes are incorporated without elevating risks, disrupting core processes, or souring relationships.
But what are the steps involved in this mission-critical process? We will describe these using an illustration.
Company X, a software development firm, has been contracted by Client A to build a customized e-commerce platform. The project is expected to last 12 months and involves a team of developers, designers, and project managers. The initial contract outlines the scope, deliverables, timeline, and payment terms for this engagement.
#1 Identification of change requirement
Three months into the project, Client A contacts Company X with a change request. The project scope has evolved, and they want to integrate a new payment gateway that was not included in the original scope.
The change request is documented in detail, outlining the reason for the change, the expected benefits, and any potential impacts on the project's timeline and budget.
#2 Change request evaluation
The project manager at Company X reviews the change request and assesses its feasibility. They analyze the technical requirements, evaluate the potential impact on the project's timeline, budget, and resources, and consider the compatibility of the new payment gateway with the existing system.
The project manager also consults with the development and design teams to gather their input.
#3 Assessment of impact
Based on the evaluation, the project manager presents the findings to both the internal team and Client A. They outline the potential impacts of integrating the new payment gateway, including the need for additional development hours, potential delays, and any adjustments required in the project plan.
Client A's representatives express their urgency in implementing the new payment gateway due to market demands.
#4 Negotiation and approval of the change request
Client A and Company X engage in a discussion about the change request. They negotiate the revised terms, which include an extension of the project timeline by two weeks and an increase in the budget by 15% to cover the extra development hours. Both parties agree to the new terms and formally approve the change request.
#5 Formalization and documentation by the legal team
A formal contract change document is drafted by Company X's legal team. This document outlines the agreed-upon changes, including the new scope, timeline, budget, and any adjustments to deliverables. Both parties review and sign the document, indicating their consent to the changes.
#6 Implementation of changes
The development team at Company X begins working on integrating the new payment gateway. The project manager closely monitors progress to ensure the project remains on track despite the extended timeline.
Regular communication is maintained with Client A to keep them informed of the updated development process.
#7 Post-change evaluation
After a defined period, Company X and Client A hold a post-implementation review. They assess the effectiveness of the change, whether it has met its intended goals, and whether any unforeseen issues have arisen.
Lessons learned from this change management process are documented and shared with relevant stakeholders to improve future change management endeavors.
Pain points associated with contract change management
Making changes to a contract might seem easy on paper, but this is not usually the case. Contracts are very delicate documents capable of impacting organizations in significant ways. Yet, even the most experienced professionals run into roadblocks sometimes when trying to manage changes throughout a contract’s lifecycle.
Below are some common pain points you may face during contract change management.
#1 New risk potential
“If you're at a start-up, for every 3 projects you plan for Legal, 2.5 come at you by surprise. No matter how well prepared, how big your legal team, or how mature the company, there will be things that you can't anticipate. Because on that risk matrix, there are 100 different risks, from employment to data privacy to contractual to bank system collapse. As a legal team, budgeting for the surprises as well as for the day-to-day is a really delicate balance.”
~ Megan Niedermeyer, Apollo.io
Aligning Legal's Limitless Potential to Business Goals
Making changes to a contract can potentially introduce new risks that were not initially present. These risks might stem from altered obligations, changed timelines, or modified deliverables.
New terms or conditions may conflict with existing laws, industry regulations, or contractual obligations, exposing the parties to legal liabilities and potential fines. Additionally, contract changes come with risks of misinterpretation and disputes by stakeholders, especially when the atmosphere around the project is already tense.
Furthermore, stakeholders have to worry about the impact of the change on the overall outcome of the business engagement.
#2 Dealing with stakeholders
Contract changes often involve multiple stakeholders, including the contracting parties, legal teams, project managers, and possibly external consultants. Each stakeholder may have differing opinions, interests, objectives, and concerns related to the proposed changes.
Managing these varied perspectives and ensuring effective communication among stakeholders can be challenging, as some of them could be resistant, hesitant, or nonchalant about their role in the entire process.
“My advice is to understand which stakeholders you’ll have maximum friction with and then adjust and lean in. Try to align the legal roadmap with their goals. In case of conflicts, make sure you’re both seeing it as a partnership. Help them understand and navigate legal risks. Also, make sure they feel educated and comfortable in making decisions (or, if they’re not the decision maker, help them resolve and get to YES).”
~ Ryan Nier, General Counsel, Pinwheel
Putting Legal on the Map in a Hypergrowth Startup
#3 Consumption of time and resources
The process of evaluating, negotiating, and implementing contract changes can consume a substantial amount of time, effort, and resources. This challenge arises due to the various steps and processes required to assess, negotiate, document, and execute the changes.
First, the team will need to evaluate the potential impact of the proposed changes on the project scope, timeline, budget, resources, and other relevant aspects. Once the assessment is complete, negotiations between the parties will ensue. This negotiation process can take a long time, particularly if multiple stakeholders are involved or if disagreements arise.
Afterward, you’ll deal with revisions, legal documentation, and approval processes. These individual processes can be time-consuming, resource-intensive, and operationally disruptive.
#4 Scope creep
This refers to the gradual expansion of project requirements beyond what was initially agreed upon. Scope creep can occur when changes to a contract lead to unintended additional requirements, tasks, or responsibilities.
This can result in increased costs, delays, and potential conflicts if the parties disagree on whether the new scope should be accommodated within the existing contract or treated as a separate arrangement.
“As circumstances change or facts become known, good LPM must plan for and have a process to capture changes and to avoid/contain “scope creep” (i.e., unapproved/un-vetted deviation from the project plan).”
~ Sterling Miller, CEO and Senior Counsel for Hilgers Graben PLLC
Ten Things: Legal Project Management for Beginners
Best practices for effective contract change management
Contract change management is a pivotal process that can significantly impact an organization on all fronts—legal, financial, operational, and reputational.
To ensure that contract change processes are managed productively, certain measures must be put in place. We discuss them below.
#1 Establish a clear contract change management policy
A well-structured contract change management policy provides a standardized approach to handling contract changes. It enhances the organization's transparency, accountability, and consistency, leading to more effective and productive contract change management processes.
Establish a clear and well-defined policy outlining the procedures, roles, responsibilities, and approval levels for managing contract changes. This policy should be communicated to all relevant stakeholders, including legal, procurement, finance, and project teams.
#2 Maintain thorough documentation of every change-related activity
Keep a comprehensive record of all activities related to the contract change procedure, including change requests, approvals, negotiations, correspondence, and updated contract terms. This level of documentation fosters transparency, mitigates risks, and ensures that the organization is well-prepared to address inquiries, audits, and legal matters related to contract changes.
For this purpose, we strongly recommend using SpotDraft’s cloud repository system, which is specifically built to help you store your contracts in a secure, organized, and searchable manner.
Alongside offering centralized documentation, SpotDraft also has version control capabilities that show you a comprehensive history of all changes the contract has undergone throughout its lifecycle, including timestamps, amendments, and details of stakeholders involved in each change process.
It includes powerful search functionalities that allow you to search for files using full text or filter documents by last modification time, document type, ownership, etc.
Furthermore, SpotDraft safeguards sensitive contract information through end-to-end encryption and stores your documents in compliance with the highest security standards. You can also leverage features like access control to ensure that stakeholders can only access the data they need to play their roles throughout the contract lifecycle.
#3 Automate routine processes
Contract change management processes can get more efficient when you leverage automation to streamline routine processes like document generation, notifications, escalations, approval workflows, and tracking, among others.
Automation increases scalability and productivity while reducing risks, costs, and errors.
You can utilize separate tools to automate these processes individually. However, we recommend leveraging a robust platform that consolidates multiple automation functionalities to cater to your automation needs from one interface.
SpotDraft is an all-in-one CLM that helps you streamline every aspect of your contract management. To do this, it comes packed with a wide range of automation functionalities.
For instance, you can utilize SpotDraft’s automated approval workflow to get contract changes “okayed” by relevant stakeholders after negotiations. SpotDraft will send automated notifications and reminders to ensure the stakeholders are followed up adequately.
Also, SpotDraft’s AI review tool will automatically scan your updated contract to flag any potential risks associated with contract changes, alerting stakeholders to potential legal, financial, or operational concerns.
Other processes you can automate with SpotDraft include reporting and analytics for post-change evaluation, clause integration for formal documentation, audit trailing for tracking contract changes, etc.
#4 Maintain communication and transparency
Maintain open and transparent communication with all parties involved in the contract. Keep them informed about the proposed changes, reasons for the changes, and the expected outcomes.
Let them understand the potential impact of proposed changes on various aspects, including legal compliance, financial implications, project timelines, and operational processes. Also, ensure that relevant stakeholders are carried along throughout the change management process, including legal experts, finance professionals, project managers, and senior management.
#5 Establish a schedule for reviewing your contract change management process
“If you think that you're doing everything perfectly, you're not going to grow. There's always an opportunity for self-improvement.”
~ Doug Luftman, ex-DGC, DocuSign
The Key to Success as an In-House Legal Counsel & Leader
After implementing changes, conduct a post-implementation review to evaluate their effectiveness. Use lessons from the process to continuously improve your change management strategies for future projects.
Continuous improvement is the cornerstone of effective contract change management. By consistently refining your contract change management strategy, you will ensure that your contracts remain aligned with your organization's objectives, foster efficiency, and seamlessly adapt to changing circumstances.
Change is fairly common in a wide variety of contracts. This is why there's usually a change management clause in many contracts. The goal of contract change management is to ensure that organizations are proactively prepared for potential contractual modifications and that any initiated adjustments are carried out with minimal risks on all fronts.
SpotDraft is your great ally in all this, helping you overcome common bottlenecks in every area of contract management, from the initial drafting and execution to future renegotiation and modification processes.
We're happy to give you access to a personalized demo if you’re curious about how SpotDraft fits into your organization's contract change management strategy. Click here to connect with us!
“I have seen a demo of SpotDraft’s CLM technology and they should be on your short list of vendors to talk to about a contract management system.”
~ Sterling Miller, CEO and Senior Counsel for Hilgers Graben PLLC
Ten Things: “Cool Tech” For In-House Counsel