Change Management – A Tool For
Success
Adam D. Vereshack
2006
Presentation Overview
Case Studies
h Background
h What went wrong
h What was the resolution
Lessons Learned
Practical Contract Considerations
h Contractual
h Behavioural
Theory vs. Reality
Summary of Legal Principles
2
Case Studies – A Tale of Two Contracts
Contract A – Background
h Large multi-jurisdictional Customer
h Issued RFP to replace approximately 30 legacy pay and benefits
systems with new integrated system (design/build contract)
h Fixed price bid was awarded ($67M) and the specifications
agreed to in the design phase
h After design phase complete, Customer requested almost 100
changes to the specifications during the first nine months of the
build phase
h Service Provider, in order to be responsive to Customer’s needs,
started to make requested changes
3
Case Studies – A Tale of Two Contracts
4
Contract B – Background
h Large Canada-wide business
h Issued RFI for proposals for an integrated system to streamline the
booking and purchase of travel and accommodation for its
employees (design/build/run contract)
h Fixed Price Bid was awarded ($275M)
h Prolonged negotiations during which parties worked out deliverables
and service levels
h Customer asked for more than 70 changes in the first year of the
build phase
h Service Provider started to make many of the requested changes as
they appeared to be necessary to the core build
The Fatal Errors
In Both Cases:
h The Customer requested changes
h The Service Provider made (or started to make) many of them
h Both parties ignored the change management process in the
contract
h As a result, additional costs and impact on implementation
schedule were not dealt with by the parties
h As a result, since Service Provider did not challenge the
requested changes as being out of scope, there was no issue to
escalate through the governance process in the contract
h As a result, key dates in the implementation schedule were
missed
5
Resolution
Contract A
h Contract was eventually terminated by Customer
(purportedly) for cause
h Customer claimed breach of contract for delays in
implementation schedule
h Service Provider claimed breach of contract for changes
that Customer refused to pay for
h Costly litigation ensued
h Dispute eventually settled after several years of hardfought litigation
6
Resolution
Contract B
h After lengthy negotiations (and delays), most outstanding
issues were resolved by amendments to the outsourcing
contract
h System has now been completed and rolled out to
Customer user community
h However, costly compromises made in getting to
settlement
• Services Provider not paid for all changes
• Customer missed key dates in implementation schedule
7
Lessons Learned
h For Customers – Use change management procedures
h For Service Provider – Use change management
procedures
h Properly drafted, they will address both impact on costs
and on implementation schedule
h If the change management procedure identifies a
“disconnect” between the parties’ expectations, it can be
addressed sooner rather than later
h Once used with regularity, parties become familiar with
the change management tool and are more likely to use it
8
Theory vs. Reality
h In fixed price contracts, there is often a defined “funding
envelope” that creates limits on the ability of Customer
to obtain Board or senior management approval of
additional funding
h Frequently, Customer doesn’t know exactly what it wants
(or needs)
h Customer’s specific needs evolve through the life of the
project, which naturally generates changes
h The Service Provider must walk a fine line between
appeasing the Customer’s evolving view of “What It
Wants” and ruining its margins on the project
9
Practical Considerations
Contractual
h Include clear language in the contract whereby:
• the parties recognize that changes will have an impact on
the implementation schedule
• the Service Provider is prohibited from commencing any
“new” work unless there is an agreed-upon Change Order
• “new” work is carefully defined/delimited
• if a sign-off is declined by either party’s Project Manager,
there is an immediate escalation (and resolution) using the
contract governance process
• there are liquidated damages for delays
10
Practical Considerations
Behavioural
h Recognize that clear functional requirements (what the system
does) and clear detailed design specifications (how the system
does it) are not enough
h Recognize that clear change management contract terms and
conditions are not enough
h Most importantly, recognize that the parties must use them
h Carefully monitor and sign off on any departure from
functional requirements or detailed design specifications
h Be aware of the any possible “domino” effect of functional or
technical changes
h Be aware of the cumulative effect of changes in terms of time
and money (Sometimes 1 + 1 + 1 does equal 5.)
11
Legal Principles
Extras
“Whether a particular item is part of the scope of work or an
“extra” is to be determined by reference to the terms of the
contract, the nature of the work and the surrounding
circumstances. Where the additional items are great in
number and magnitude, they are likely “extras” and not
included in the original contract price.”
Reference:
Cardinal Construction Ltd. v. Brockville
(Municipality) (1984), 4 C.L.R. 149
(Ont.H.C.J.) at 162.
12
Legal Principles
Extras
“By requesting extra work and by omitting to perform certain
obligations, an owner necessarily increases the time for
completing a construction contract, and is thereby precluded
from claiming penalties for non-completion provided by the
contract.”
Reference:
Ottawa Northern and Western Railway Co. v.
Dominion Bridge Co. (1905), S.C.R. 347 at 359.
Culina v. Guiliani [1972] S.C.R. 343 at 357.
Lafferty v. Ontario Chiropractic Association (1988),
61 O.R. (2d) 754 (H.C.J. at 756-757, aff’d 70 O.R.
(2d) 383 (C.A.).
S.M.K. Cabinets v. Hili Modern Electrics Pty. Ltd.,
[1984] V.R. 391 (Full.Ct.) at 394-96.
13
Legal Principles
14
Standards
“Where a contract, either expressly or by implication, contains
a particular standard or quality for the work to be done, a party
is not entitled to insist on work of a different or higher standard
or quality.”
Reference: Hulshan v. Nickling, [1957] O.W.N. 587
(C.A.) at 590.
Legal Principles
15
Payment for Variations
“Where the work is greatly in excess of that provided for in the
contract, as a result of variations made by the owner, and if at
the time of contracting such increased amount of work is not
contemplated by the contract, the contractor is entitled to be
paid a reasonable profit thereon. If there is no express term in
the contract requiring such payment, the Court will imply it.”
Reference: Sir Lindsay Parkinson & Co. Ltd. v.
Commissioners of Works and Public Buildings,
[1950] 1 All.E.R. 208 (C.A. at 227).
Cana Construction Co. Ltd. v. The Queen, [1974]
S.C.R. 1159 at 1172-75.
Legal Principles
Payment for Variations
“If the scope of the work is significantly changed by the owner
during construction, the contractor will be entitled to the
increased cost as damages. If no price is fixed for the
performance of extra work, the Court will imply a promise to
pay reasonable amount on a quantum meruit basis. If the
change is by agreement between the owner and the contractor
which results in the completion of the contract under totally
different conditions, or if the contract has been wrongfully
terminated as a result of the owner’s conduct, the contractor
may recover the extra costs on a quantum meruit basis. ”
Reference: Colautti Construction Ltd. v. Ottawa (City) (1984),
7 C.L.R. 264 (Ont.C.A.) at 272-273.
Re: Bailey Construction Co. and The Township of
Etobicoke, [1949] O.R. 352 (C.A.) at 358.
16
Legal Principles
17
Delays
“Mere delay in completion is not a breach of a fundamental
term, even where there is a “time is of the essence” clause, and
particularly where there is a liquidated damages clause. ”
Reference:
G.L.C. v. Cleveland Bridge & Engineering (1984)
34 B.L.R. 50 (C.A.) at 53.
J.M. Hill and Sons Ltd. v. London Borough of
Camden (1980), 18 B.L.R. 31 (C.A.) at 38ff.
Abenstein v. Canada (1990), 34 F.T.R. 116
(T.D.) at p.125-26.
Legal Principles
18
Delays
“It has been held that an owner waives the right to claim for
delay where the delay was occasioned by a request for extra
work, unless the agreement expressly gives the owner the right
to request alterations while still requiring completion by a
specific time. ”
Reference: Canada Foundry Co. Ltd. v. Edmonton Portland
Cement Co., [1918] 3 W.W.R. 866 (P.C.) at 872;
affirming [1917] 1 W.W.R. 382 (C.A.).
Legal Principles
Delays
In Maglario v. Simon, the Court allowed the contractor’s action
for damages for breach of contract because the delay was
caused unreasonably and, in part, by changes and alterations
requested by the owner during the court of the contract.
Reference: Maglario v. Simon (1978), 27 N.S.R. (2d) 674
(T.D.) at 680-681.
19
Legal Principles
20
Delays
In H.G.D. Enterprises Ltd. v. Leone Industries Inc., the delays
by the developer during the course of the contract were not
significant enough to warrant termination. The delays
attributable to the developer were acquiesced to by the owner,
and were the result of modifications to the project requested by
the owner. The owner’s constant interventions were, in large
part, responsible for the delay.
Reference:
H.G.D. Enterprises Ltd., v. Leone Industries
Inc. (1985), 9 C.P.R. (3d) 553 (B.C.S.C.) at
55ff.