Implementation Failure Disputes: Project Over Budget

In my prior KCS Insight, I noted that mediation of a software implementation failure dispute is more likely to be successful if the mediator has technology transaction experience. I explained that such a mediator is best positioned to help the parties consider the issues that are likely to be in controversy if the mediation is not successful. Finally, I identified issues that the mediator may need to address where the User Company claims that the Service Provider is in breach because the project is behind schedule. In this KCS Insight I identify issues that the mediator may need to address where the User Company claims that the Service Provider is in breach because project costs exceed the budget.

The Scenario

User Company retained Service Provider to implement an AI-based materials management system on a time and materials basis, but with a budget allocated among key milestones. Moreover, Service Provider agreed to use commercially reasonable efforts to complete the project for the budget. The Agreement contemplated the parties might have to revise the budget, but only by mutual agreement.

Upon completion of one-third of the key milestones, the work was running 35% over budget. However, Service Provider stated that it believed it could complete many of the subsequent milestones for less than the budgeted amount gradually reducing (but not eliminating) the overage and the parties agreed to increase the budget by 20%. However, upon completion of two-thirds of the key milestones, Service Provider was 50% over the revised budget and proposed the revised budget be increased by 50%. User Company promptly terminated Service Provider for cause.

User Company Claims

  • Service Provider committed to a budget and is exceeding it significantly.
  • Service Provider had the expertise to properly size the work and negotiate a realistic budget. We were relying on that expertise when we agreed to proceed on a time and materials basis with a budget and when we effectively agreed to a 20% increase in the budget.
  • Service Provider’s failure to work within or close to the budget is attributable to either its intentional or negligent negotiation of an unrealistic budget, or its mismanagement of the work, or both.

Service Provider’s Response

  • User Company understated the complexity of its existing IT environment causing us to agree to an insufficient budget.
  • User Company changed its requirements expanding the scope of the project to include work that was not included in the budget.
  • User Company failed to perform its retained responsibilities or to perform them on time giving rise to costly delays and forcing us to “backfill” at considerable expense.

Value of an Experienced Mediator

A mediator with technology transactions experience will be able to determine the relevance of, and where appropriate, raise critical issues the realistic assessment of which may facilitate the successful settlement of the dispute. Such issues may include:

  • Whether User Company understated the complexity of its IT environment and, if so, the impact on Service Provider;
  • Whether Service Provider performed sufficient due diligence to determine the complexity of the User Company’s IT environment and, if not, why not;
  • Whether User Company has changed its requirements and, if so, the impact on Service Provider;
  • Whether Service Provider performed the Services in a timely fashion and, if not, why not;
  • Whether User Company performed its retained responsibilities in a timely fashion and, if not, why not;
  • Whether Service Provider performed some of User Company’s retained responsibilities and, if so, the cost of such performance; and
  • Whether Service Provider managed the project in accordance with industry standards.

Moreover, if project delays contributed significantly to the overage, the mediator should be in a position to discuss with the parties the possible retention of an independent expert to perform a formal “schedule delay analysis” to determine the amount of the delay for which each Party is responsible.

KCS Mediation and Arbitration

At KCS Mediation and Arbitration (https://kcsmedarb.com), we have the expertise and experience to determine the relevance of, and help the parties address, these issues.