How to Extend a Contract

TRANSCRIPT OF THE VIDEO

Hello there today. I want to talk to you about the two main ways to extend a contract.

G'day, there. Simon Zarifeh here from Shrewd. We provide commercial support to the Commonwealth to help the Commonwealth successfully deliver value for money projects.

Okay. The two main ways you can extend a contract. The first way is by exercising an extension option that is already in the contract. And then the second way is to extend a contract through actually varying the terms of the contract itself.

2 Ways to Extend a Contract

1.Exercising an Extension Option

So let's go back and deal with the first one, exercising an option to extend. Now, usually that is very simple because there would be a clause in the contract that says something like, the agency may extend this contract, or may exercise an option to extend this contract by giving the supplier or contract notice in writing or notice in writing of not less than say 20 days or something like that.

So there'll be a clause in the contract that basically says what you need to do and, wait for it, in a truly surprising outcome, you need to do what the contract says to effectively exercise the option to extend it.

So, as I say, usually 95% of the time, it's in writing. So you'll have to exercise the option in writing. In fact, that's usually 100% of the time. And then what's not consistent amongst contracts is some options will have a time period where either you'll need to exercise the option, say no more than, or no less than 30 days before the contract ends.

Or it may say that you can only exercise the option in say the last 90 days before the contract expires. So basically you'll just need to look at the terms and conditions of the option clause that's in the relevant contract.

Now here is the Department of Finance breathing down your neck and making sure you do the right thing. So they shouldn't be used due to a failure to appropriately plan procurement needs or to continue a supplier relationship or with the intention of discriminating against the supplier or avoiding competition.

So in other words, the Department of Finance is saying you need to be bonafide when you exercise an option and you should do it for a proper purpose and not for one of these nefarious types of outcomes, which I'm sure is the case.

Just as an aside, most of the extension options we see are just because usually scope has changed, potentially slightly increased, or agencies have been a bit slow in approving certain things. So timeframes for projects have blown out a bit. And that is usually why we've seen extensions exercised.

Okay, so that was number one. You can exercise an extension option to extend the contract. Or number two is, you can extend a contract through variation.

2.Extending a Contract by Variation

So the contract may not have an option clause in it. It may just have a term. And so where you are running up or coming up to the end of the contract term, and there is no option to exercise clause, then what you can do is just deed, a variation to vary the contract to change the end date for the contract.

And that's usually pretty simple. Your legal area would help you do that. And then it's not a big deal.

So once again, according to the Department of Finance, contracts should only be extended for the length of time that allow for the procurement and/or implementation of subsequent arrangement or provision of all deliverables under the original contract. It's usually the latter.

You usually want to extend the contract because you haven't received all the deliverables under the contract. But sometimes it could just be a contract for a contractor and you just want to extend them and they don't have extension options in it, or the extension options have expired. And so you want to do a deed of variation just to extend it. And that's appropriate as well.

Now, as I said, a contract would normally be varied according with the process set out in the contract itself. Usually, and once again, probably 90% of the time, you need a document. So the variation needs to be in writing and agreed by the parties. And so the easiest way to do that is to use a deed of variation.

Some clauses will basically say that the variation can occur if it's in writing and agreed by the parties, not signed by the parties, which would give you the latitude to send an email, as in, you send an email to the other side saying, "Do you agree with varying the contract as follows," blah, blah, blah, blah, blah. And they respond back saying, "I agree." Well, that would create a binding variation.

But the safest way, and the most conservative way is that you do a deed of variation that reflects what the actual change is. And then both parties sign that deed. And then it's done and dusted. That's usually how these things go.

And in fact, that's what the next slide says, that the variation should be in writing and should be agreed by all parties for it to have legal effect.

Now, once again, if I can don my Department of Finance hat, not that I work for the Department of Finance, but I know that this is what they say on their website, is that you should only extend a contract where necessary, and entities, as in agencies and departments, are therefore encouraged to not rely upon the ability to extend a contract by variation. In other words, it should be the exception, not the norm.

And as I said, in my experience, the main reason an agency wants to extend a contract by variation is because obviously time has gone by and generally time has blown out because just certain things outside of either party's control have occurred, meaning that you need more time now to be able to deliver.

Now, just keeping my big boy Department of Finance hat on for a minute here, they also indicate that contracts should not be extended by variation due to a failure to appropriately plan the procurement, or to continue supplier relationships, or with the intention of discriminating against the supplier, or to avoid competition, or to avoid obligations under the CPRs.

So once again, they're basically saying, undertake the variation, but for a proper purpose. Don't be obtuse about what you're trying to do, as in, don't try and cut corners, because if the ANAO comes and audits you, they will work that out pretty quickly. So just do it all properly.

Recap

So just recapping, two main ways to extend a contract. One, you exercise the option clause that is in the contract. And if there is no option clause, then you can do a variation to the contract to change the end date.

And then that variation usually is in writing, signed by the parties, which means it's usually done by deed of variation, but it can be done via email as well, depending on the variation clause in the contract.

Alrighty. Well, I hope that was of some assistance. If you have any questions, feel free to get in touch at simon@shrewd.com.au or 1 800 SHREWD, which is 1800 747 393. Thanks very much.