Varying a Contract Guideline

A variation is a change to a contract. A variation to a contract could include, but not be limited to, a change to the service level or type, product, delivery, timeframe, personnel, contractor or price. As a contract constitutes a legal agreement between the parties, there are both legal and cost considerations to be considered prior to executing any change.

If you need to involve the Department of Finance, please find the correct contact on the Agency Procurement Services Contact List.

Contracts usually contain specific clauses that outline the variations or changes allowable under the contract. These clauses may also detail the process or procedure to follow, often specifying the need for variations to be executed in writing. Although it's best practice for any variation to be in writing, a change can inadvertently be made to a contract by verbal agreement or conduct even when there are clauses expressly stating variations are to be in writing.

When executing a variation, it's important that any agency specific policy, procedure and delegation is taken into consideration as there are usually only a limited number of people within an agency, who have the delegated authority to approve variations to contracts (refer to your agency’s Procurement Delegation Schedule). Being aware of agency and contractual requirements should help minimise the risk of informal contract variations.

Variation clauses are not always expressly called “variation clauses”. When considering any proposed variation, it's important to first review all of the documents that make up the contract. If it's still unclear whether or not there's a clause covering a particular variation, seek appropriate advice.

If a contract is varied based on a verbal agreement it can be difficult to determine exactly what was agreed, particularly if things go wrong. It's always best practice to ensure that any variations are well thought out, formally approved, and executed in writing. Reasons for variations to be executed in writing include that it:

• minimises the chance of misunderstanding as expectations and requirements are documented
• provides evidence referencing what was agreed and who is responsible for what
• minimises the risk of unwanted surprises associated with 'agreed changes'
• formalises the process by providing a mechanism for an official approval or sign off
• will be useful if planning future procurements.

Before considering any potential contract variation:

• ensure the variation is allowable under the contract (be familiar with all the contract documents and what the contract covers)
• consider any agency specific policies, procedures, templates or forms relating to variations
• determine who has the authority to negotiate and approve contract variations
• ensure the full impact of the proposed variation has been assessed (for example, budget, scope or risk)
• consider the total cumulative effect of all variations that have occurred since the commencement of the contract
• ensure appropriate stakeholders are consulted regarding the change (where applicable).

If you're unsure about any aspect of a variation, please seek appropriate advice, assistance or clarification.

Remember, any variation to a contract should be fully considered (including the impact and risks), appropriately documented, formally approved and filed with the contract documents.

Did you know you can vary a service agreement at any time with the agreement of both parties?

Most service agreements last for 5 years or more so it’s natural for aspects of the required service to change or evolve. Service reviews and extensions are great points at which to reassess the service agreement and identify any necessary changes, but a service agreement can be varied at any time.

Extending a service agreement beyond its original term (sometimes referred to as ‘rolling over’ contracts) requires a service variation, making it another good opportunity for contract managers and service providers to discuss the service agreement and consider which changes may need to be made.

Aspects of a service that can be considered for variation include:

• service specifications
• reporting requirements
• key performance indicators
• price.

As well as requiring the approval of both parties, variations should be relationship-based, focused on the needs of service users, and designed to enable innovation.

Contracts may be extended beyond their expiry date (‘beyond term’) provided the contract has not yet expired.

The Western Australian Procurement Rule C2.3 requires contracts to have a maximum term of 5 years – unless one of the exemptions in that rule is applicable. In some cases, during the contract management phase of a contract, it's recognised that agencies may need to extend the term of the contract beyond that specified in the contract.

The following list, which is not exhaustive, provides examples of situations in which it may be acceptable to extend a contract:

• a project is near completion and it's counterproductive to engage a new supplier to finish the job
• a tender process has begun but more time is required to conclude the process and establish a new contract
• the supply market is changing substantially (for example, through consolidation of suppliers, or new products or suppliers are on the horizon) and it's advantageous to wait for this to crystallise before approaching the market.

Although it may be administratively necessary to do so on occasions, reasonable grounds for extending contracts beyond their available terms and avoiding competitive requirements do not include inadequate planning or management, or lack of resources.

Like other variations, it's important to remember that prior to extending the term of a contract beyond term, both parties must agree to the extension before the expiration of the existing contract (including extension options stated in the contract).

Also, like other variations, the agreement to extend the contract must be documented and clearly agreed by both parties. The agreement must also reflect any renegotiated terms agreed by the parties.

In addition, agencies are reminded of their obligations with respect to variations included in Western Australian Procurement Rule E2.

Contracts cannot be extended indefinitely. As a guide, it's generally considered acceptable practice to extend contracts:

• when the total value of the extension does not exceed 20 per cent of the total contract value; and
• where the period of extension does not exceed 6 months.

Considerable justification needs to be demonstrated to exceed these parameters.

The contract cannot be extended if the existing contract term, inclusive of exercised extension options, has expired. If the contract has expired, then it no longer legally exists and therefore it follows that, if it doesn’t exist, it cannot be extended. Agencies continuing to receive goods or services under expired contracts are exposing themselves to contractual risks and are potentially in contravention of the Western Australian Procurement Rules (the Rules).

Often, a request to extend a contract that has already expired occurs because of an oversight or when an agency runs out of time to establish a replacement contract through delays in the evaluation process.

If a short-term arrangement is required to allow business to continue with the existing contractor, then a new contract needs to be established.

This is not a ‘variation’ under the Rules. In this scenario, the accountable authority is establishing a new contract. This new contract must comply with all other requirements of the Rules. For example, it must be registered on Tenders WA if the value is $50,000 or above.