Bilateral Modification

A bilateral modification is a written contract change requiring signatures from both the contracting officer and the contractor, used when both parties must agree on the terms of the change, such as price adjustments, scope additions, or dispute settlements.

What is a Bilateral Modification?

Bilateral modifications are addressed in FAR 43.103(a). They require mutual agreement between the government and contractor and represent a negotiated change to the contract terms. Unlike unilateral modifications (which the government can impose through the Changes clause), bilateral modifications require the contractor's signature, reflecting that both parties agree to the changed terms.

Bilateral modifications are required for:

• Definitized price adjustments: when a previously issued change order has been priced and agreed upon
• Additions to scope: when the parties agree to add work not covered by the original contract or any change order authority
• Equitable adjustments: settlements of contractor requests for compensation related to government-caused changes or differing site conditions
• Claim settlements: resolution of disputes under the Contract Disputes Act
• Letter contract definitization: converting a preliminary letter contract to a definitive agreement
• Option price adjustments: when option year prices need to be revised by mutual agreement
• Negotiated termination for convenience settlements: agreeing on the amount of the termination settlement

The bilateral modification process:

1. Government and contractor negotiate the changed terms (scope, price, schedule)
2. Contracting officer prepares the modification document
3. Contractor reviews and signs
4. Contracting officer countersigns (or vice versa depending on agency practice)
5. Modification becomes part of the contract record

Why Bilateral Modifications matter for government contractors

Bilateral modifications are how contractors get paid for changed work. When the government issues a unilateral change order directing additional scope, the contractor performs the work and then negotiates a bilateral modification to definitize the price. Until the bilateral modification is signed, the price for changed work is not settled. Contractors with strong contract administration teams track every unilateral change order and pursue bilateral definitization promptly, delaying definitization allows time to erode cost data quality and gives the government more opportunity to question cost elements.

Example

The government issues a unilateral change order directing additional security requirements not in the original PWS. The contractor submits a Request for Equitable Adjustment documenting: 200 additional labor hours ($28,000), equipment purchases ($12,500), and indirect costs ($8,200), totaling $48,700. The contracting officer reviews the REA and proposes $42,000 in compensation. After two rounds of negotiation, the parties agree on $44,500. The contracting officer prepares a bilateral modification (P00008) reflecting the agreed $44,500 price increase and 30-day schedule extension. Both parties sign. The modification is incorporated into the contract.

Frequently Asked Questions

Can a contractor refuse to sign a bilateral modification?

Yes. Since bilateral modifications require mutual agreement, a contractor can refuse to sign if they believe the terms are unfair. However, refusing to sign a modification offered in good faith, particularly for option exercises or administrative changes, can create relationship issues. If disagreement is substantive, the contractor may pursue a claim under the Contract Disputes Act rather than simply refusing the modification.

How long does a bilateral modification negotiation typically take?

Simple modifications may be negotiated and signed in days. Complex modifications involving large price adjustments, multiple changed elements, or certified cost or pricing data requirements can take months. During this period, the contractor performs under the unilateral change order (if one was issued) while negotiating the final bilateral terms.

Is a bilateral modification needed to exercise an option?

No. Option exercises are unilateral modifications, the government exercises the option without the contractor's agreement because the contractor already agreed to option year terms when the base contract was signed. A bilateral modification is only needed if the option year price needs to change from the pre-negotiated amount.

What is "adequate price competition" in the context of bilateral modifications?

For bilateral modifications above the Truth in Negotiations Act threshold ($2 million in 2024), the contractor may need to certify the accuracy of cost or pricing data if price competition is not adequate. "Adequate price competition" in modification context is harder to establish than in original competitions. When in doubt, agencies request certified cost or pricing data for large bilateral modifications.