After the signature of a contract inevitably will alter by contract amendments, contract renewals or extensions, option exercises, and other contract changes.
During the lifecycle of a contract, one or both parties may want to change one or more clauses of the contract that will impact parties’ rights and obligations in a contract in general but in particular, also contract value.
Contract amendments allow you to mutually agree on a change to an existing contract. Depending on your need and that of the other party, you can amend your contract in part or in whole.
A contract renewal or extension date can either already be agreed in the existing contract – often called ‘options’ – or take place in mutual agreement at the end of the duration of the existing contract.
Understanding contract amendments
An amendment can change, add or delete scope and/or terms and conditions to an existing contract, while the existing contract remains in place.
The contract change needs to be mutually agreed upon. But not always. There is an exception to this rule which I will discuss later.
Reasons to amend a contract
Often the reason to amend a contract will be related to the buyer wanting to change the scope (technical or service specification) of the contract:
- Your customer wants to order more or extend functionality in the existing scope.
- During the project, you find out that additional work is needed and the customer agrees that you can add that to the original statement of work.
In the case, the customer is asking to add a completely new service or product to be added and nothing changes in the original contract, you can also use an ‘addendum’ and add the terms related to the new service or product to such ‘addendum’ and add it to end of the original contract. Personally, I treat an ‘addendum’ also as a contract amendment.
Contract amendments are also needed when you and the other party after some time into the contract turn out to be managing matters differently from what was agreed in the contract. Both parties may agree to change terms of the contract such as the delivery of the product, acceptance, and receipt of a product and its payment, invoicing and other clauses.
In highly regulated industries, changes to the contract may be required due to new regulations or mandatory law.
Another reason is that you and your customer want to extend the duration of the contract. This can already have been part of the original contract (‘option to extend’). Or at the end of the duration of the original contract, both parties mutually agree to extend the duration.
How to create a contract amendments
There are several ways to amend a contract:
- You can use a contract amendment or agreement letter to list the changes to the original document and have both parties sign.
- You can add the changes to the existing contract and thus create a completely new version that will replace the original contract. Especially when you already have or expect multiple amendments (or amendments) in the future.
- You can add amendment pages to the end of the original signed contract.
Best Practices for Amending Contracts
When creating a contract amendment there are some best practices you should follow:
- Always have a provision in the original contract with instructions for how contract amendments will be implemented and agreed upon.
- Treat contract amendments as a normal contract, so always put the amendment in writing and make sure both parties sign and date it. Contract amendments are as legally binding as the original contract.
- Small changes, like typos can be done by hand – in such cases, both parties need to put their initials to the changes in the sideline next to where the changes have been made.
- The contract amendment has to contain references to the title of the original contract, the original parties, and the signing date of the original contract since it needs to be clear what contract you are amending.
- Always write out the entire section or paragraph of the contract with the changes (this is called: ‘restatement’).
- In the case of extensive changes, multiple amendments, or changes to amendments write a new contract that will supersede the original contract.
- Store the amendments together with the original contract (digital and in print).
Safeguarding contract value with contract amendments
Amending the contract automatically means that the contract value will change. So you need to know how the changes to the contract will affect the rights of both parties.
Before signing a contract amendment, do the same analysis and preparation as you did when drafting and negotiating the original contract. Amending a contract, especially when changes are material, will again be a negotiation!
Since you already have experience with the workings of this contract since signature , it is important that you create an overview of things which went wrong, issues which has eroded your margin and clauses that you regard to be unfair or biased. Make a list of all the contract changes that will be proper for you or your company and how you will negotiate this.
A contract amendment is an opportunity (for both parties) to improve the contract. If you note them in time, then you can have them changed to a better and more comfortable position for you.
When unilateral or having no contract amendments are allowed
There is one exception to the rule that contract amendments always require mutual agreement. Parties to contracts of capital goods or complex goods or services (software) often agree to the inclusion of a clause that certain parts or items in the technical specification or scope of work may be changed without the other party’s consent.
For example, in the aircraft industry – due often to the long lead times of delivery – often parts become obsolete and/or part numbers of small items change before the aircraft is delivered. The manufacturers of the aircraft and their customers often then agree that no agreement is needed for the supplier to change such parts and therefor the original specification of the aircraft.
In other cases the parties may want deviate from the contract but agree to have no contract changes. For example if you want to allow the other party to disclose specific information regardless of the non-disclosure clause in your contract. This can be done with consent letters or waivers in writing.
If, however, the disclosure, waiver or consent is structural and will also be a applicable to the remainder of the contract period you can better agree with the other party to use contract amendments.
How to create a contract amendment?
You may choose from several methods.
- The same principles apply for contract drafting: being concise and as specific as possible, etc. See more on this subject here.
- Writing a new contract, especially in the case of extensive changes or multiple amendments, superseding the original contract. This by far has my preference.
- Amending the contract by replacing the entire clause with the new one and stating that the original clause was replaced. This is also called ‘restating’. For smaller or singular changes this is the method I also use.
- You can also just describe the changes. The advantage is that it is shorter, the disadvantage is that it requires both parties and their stakeholders to look at the original contract (and other contract amendments) as well. Personally, I am not in favor of this method.
- Strikethroughs and redlining. The advantage of this method is that all changes, additions, and deletions are visible. I avoid this methodology for the contract amendment to be signed but do use it to draft and agree to the contract management with the other party prior to the contract amendment signature.
- It is also necessary (and best practice) to describe in the contract amendment which methodology you are using amending the contract.
- Also, make sure all cross-references in the amended contract are still valid.
- All of the above is much easier when you can use Contract Lifecycle Management (CLM) software. All changes during the lifecycle of the contract in general and variations when creating the contract amendment, in particular, are tracked. You can set CLM up in such a way with templates that contract amendments are generated automatically in whatever style you require (completely new contract, clause changes, strikethrough, and redlining, etc.).
What is Contract Renewal?
Your contracts should be valid only for a definite time you and the other part agreed upon. If it was the on-time delivery of a good or services, it ‘automatically’ ends after delivery and payment thereof. (Note: in another post on contract close-out I will explain why I write ‘automatically’ between brackets).
A renewal is “an official increase in the period of time for which it (the contract) remains valid”.Collins Dictionary
Especially in our high-value, high-tech companies many contracts are long-term and need to be renewed every now and again at the end of the contract duration period and brought up-to-date. In fact a contract renewal is a special from of contract amendment.
With or without CLM you have kept track of the contract expiration date and monitored the successful delivery of goods and services and payments done by the customer and you are aware of the issues and opportunities and other areas of improvement to be addressed and incorporated in the renewed contract.
You also have made sure you have enough time to negotiate the contract renewal. Unfortunately, most companies I work for neither have contract monitoring, nor expiration date tracking in place. Which is one of the biggest causes of contract value erosion in the contract lifecycle!
They often still have manual contract management processes involving Excel, emails, fragmented invoicing systems, and Outlook calendar reminders. This causes errors, overseeing of essential dates inefficiencies. It is reactive and increases the risk while decreasing the opportunity to continue revue streams, or even cross- and upsell.
Missing a contract renewal is easily done.
Overseeing the renewal of a contract can happen because of:
- Poor implementation of contract management or unskilled contract managers or unclear accountability for contract management or a combination of all three
- A poor handover from the original team handling the contract negotiations to the delivery team.
- Personnel changes during the contract period or original key contacts having left the company.
- No central repository of all contracts and contacts leading to a fragmented view of the business with a customer.
If you miss a contract renewal you may be lucky if the other party has a renewal date warning system in place and wants to continue taking delivery of your products and services. But your negotiation position just became weaker and you have close to no time left to agree to renewal conditions.
And on the other end of the spectrum you could lose the customer without you being able to do something about it.
How should your contract renewal process look like?
The best idea is to have a contract lifecycle management (CLM) system in place to ensure not to miss any contract renewal date. If not you have to fall back on Excel or other spreadsheets which traditionally are very much error-prove and which will lead to further margin erosion.
Here the three steps you should be looking at:
- Whether you have a CLM or are using spreadsheets you should record all contract renewal dates centrally. You should anyway be doing that for milestones and other obligations.
- Before the renewal date do a contract review to assess the contract value and issues or problems occurred during contract implementation
- Set up a negotiation strategy based on your understanding of the state of the existing contract, its value to your business, and the history of issues and disputes. Also, decide what are the criteria to renew or not.
Extending the Contract Life with a Contract Extension or Option Exercise
When you need to extend the terms of your contract, a contract extension agreement is often the best option. It is different from renewing which generally means you are replacing the existing contract with a new contract.
Extending a contract means that you and the other party are effectively agreeing to extend the terms of your existing contract for a set period of time. The main condition you and the other party have to agree on is how long you want to extend your contract.
All the existing terms will remain intact. The only subject to discuss and negotiate is the time needed for the extension of the contract.
Reasons to extend your contract
There are a number of reasons to consider contract extension:
- The parties need more time to fulfill their obligations.
- There was an option exercise clause in the contract under which the other party can purchase more of the same goods or services under the same conditions.
- Or both parties are so satisfied that they want to continue working under the terms of the original contract.
Drafting a contract extension or option clause
Your contract should have a contract extension or option clause to extend the term of the contract and which is not difficult to draft.
The most important part of the clause will be the date the extension will be effective, and the date on which it will end.
You can also set up a separate contract extension agreement or addendum in which it is best practice to attach the original contract as an appendix or annex to the contract extension agreement.