Contract Extensions Explained: When and Why to Use Them

You’ve had a great partnership with a client but the contract is nearing its end date. However, more reason to celebrate arrives, as the client  wants to continue the contract. You’re ecstatic. You’re overjoyed.
But they don’t want to undertake the hassles of creating a new contract. They want to avoid lengthy negotiations.

So you set to prepare a contract that retains all the original conditions and contingencies with only the duration of engagement revised. You issue a contract extension letter as well. This process is called contract extension.

This article will cover the definition of contract extension, associated benefits, reasons for extending contracts, and a simple checklist to help you along the way.

What is a Contract Extension?

A contract extension extends the duration of an existing agreement between two or more parties. It happens when the concerned parties get the benefits of an existing contract without having to go through the entire contract creation process.

After approval, the extension agreement forms an addendum to an existing contract.

Here are example scenarios where contract extension makes sense:

• A software company provides a client with a one-year maintenance and support contract. As the contract nears its end, both parties agree to extend it for a year.
• As the three-year contract for a professional basketball player nears its end, the team and the player agree to negotiate a contract extension to ensure he remains with the team for the upcoming seasons.
• A large-scale infrastructure project experiences significant delays due to unforeseen weather conditions and supply chain disruptions. The construction company and the client agree to extend the contract duration to accommodate the new timeline and ensure the project is completed.

Benefits of Contract Extension

Contract extension agreements offer multiple benefits for all parties involved.

Save time and money by avoiding lengthy re-negotiations

Contract negotiations are lengthy and expensive:

• According to Abeerden Research, companies take 20-30 days on average to create, negotiate and finalize a contract.
• The International Association for Contract & Commercial Management (IACCM) reports that the average processing cost for a basic contract is $6,900

As contracts are created after lengthy negotiations, extending them, rather than renewing or creating new ones, saves significant time and money. Extending a contract is simple and efficient: 

1. The contracting parties agree to the extension 
2. One party revises the duration of the contract and sends it to the other party
3. Concerned stakeholders sign off the contract

Reduces risk of legal and compliance issues

Contracts are finalized after all clauses and terms are endorsed by a legal professional. The legal professional also ensures all terms and conditions comply with local regulations.

Since, when extending a contract, the original terms of the contract are not modified, there is less back and forth between parties.

Minimizes risk of disputes and conflicts with the other party

According to a report on business disputes published by the World Economic Forum (WEF), the global cost of dispute resolution is $870 billion, of which the liability costs in the United States are $306 billion.

When the original contract is successful i.e. both parties are satisfied with it, extending the contract minimizes disputes and conflicts.

When Should You Extend a Contract?

Besides client satisfaction, here are the times when contract extensions happen.

Increase in Project Scope

Project scope can increase for multiple reasons, such as client requests for additional features, changes in project specifications, or new requirements. 

Example: A software development contract gets extended to include the development of additional features and functionalities requested by the client.

Project Delays

Unforeseen or unexpected delays in a project's timeline can necessitate an extension. Several factors, such as supply chain issues, adverse weather, technical issues, or regulatory approvals can lead to project delays.

Example: A construction project, facing delays due to unexpected environmental assessments, requires a contract extension to complete the work.

Regulatory or Compliance Requirements

Changes in laws, regulations, or compliance standards can impact contract execution, leading to a requirement for its extension for fulfilling contractual obligations.

Example: A pharmaceutical company extends a contract to comply with new FDA regulations affecting drug trials.

Budget Constraints

A project with financial limitations due to budget cuts, funding delays, or financial planning adjustments can require an extension to secure the necessary funding.

Example: A government-funded project gets extended due to delays in the release of allocated funds.

Service Continuity

A need for uninterrupted delivery of services or products is another valid reason for extending contracts.

Example: A healthcare provider extends a contract with a medical supplier for essential medications.

Mutual Benefit

Contracting parties can agree to extend a contract for their mutual benefit accruing from a successful collaboration, ongoing needs, or strategic partnership considerations.

Example: A partnership between a marketing agency and a client extends to continue successful collaborative campaigns.

Contract Extension Checklist

Here is a simple checklist to help you during the contract extension process.

Review the original contract

When two parties working together want to extend a contract, either of them might want to make some changes before proceeding with the extension. 

Therefore, before extending a contract, it makes sense to go through the original one and identify the exact changes that are required. 

Either party might want to remove clauses or terms that are no longer relevant or add clauses or terms they now deem necessary. 

If required, discuss and agree on the new terms

Suppose two parties are discussing a contract extension and are reviewing the original contract. During the review, they decide to identify areas for improvement and assign additional resources. 

Before proceeding, the parties must sit down and discuss the exact details of the changes they want to make. 

Once discussions are complete and the parties are in agreement, the related terms and clauses can be added to the contract before extension. This will make the extended contract relevant and beneficial for all parties involved.

Create the extension letter

Once the parties agree to the terms of the extension, the next step is to create the extension letter. This is a legal document used to extend the duration of an existing contract. 

The letter serves as an agreement between the contracting parties to continue the terms and conditions of the original contract for an additional period. 

The letter identifies the parties involved and the original contract, the duration of the extension, reasons for the extension, details of amendments to contract terms (if any), and the signatures of the involved parties. 

Consult with legal

Since it is a legal document, the extension letter must be reviewed and approved by the legal department. This is required for a number of reasons:

• Legal can check if the document complies with relevant laws and regulations and address compliance issues, if any.
• The review can prevent disputes or misunderstandings by spotting legal pitfalls or ambiguities
• The review can identify and mitigate potential risks associated with extending the contract
• Legal can draft necessary amendments to the original contract to reflect the changes made in the extension 

Finalize and approve the extension

Once the extension letter is reviewed by legal, it must be approved by both parties. This requires signatures by designated representatives of the parties involved. 

After approval, the document becomes legally binding and can be added as an addendum to the original contract.

Implement the agreement

The final step is to implement the agreement: the original contract is now extended for the specified duration, and both parties can fulfill their obligations as laid out in the contract. 

Suggested read:

Essential Elements of Valid Contracts

Uncover the key components that make a contract legally binding, ensuring your agreements are enforceable and protect your interest

How to Create a Contract Extension Letter using Docupilot

Here is a step-by-step process you can follow to create contract extension letters with Docupilot.

Step #1: Log in to docupilot

Log in to Docupilot with your credentials.

Step #2: Create or upload a template

Click on the ‘Create Template’ button. 

Now, you have three options:

• Click on ‘Online Builder’ to create a template from scratch
• Click on ‘PDF’ or ‘DOCX’ to upload an existing template in the respective file format
• Click on ‘Pick From Gallery’ to use a template from the Docupilot library

Once your template is loaded, you can add static and dynamic content, and apply formatting. 

Static content includes text, images, and tables. 

Use merge fields to add dynamic content, which is content that is always changing in your document. The format for merge fields is {{company_name}}, {{client.name}}. To fill these fields, you must connect your template to the relevant data source(s). 

Step #3: Generate the Extension Letter

Once your template is ready, you can test it by clicking the ‘Test’ button.

A preview of your template will be rendered, which you can review and edit if required. 

Once you are satisfied with the template, you can generate the extension letter, deliver it to the client, or store it online. 

Streamline Contract Extension with Docupilot

A valid contract extension letter is all you need to extend a mutually beneficial contract. 

Docupilot offers a powerful document automation solution to streamline contract letter generation. It is affordable, packed with powerful features, and gives you unparalleled customization options for creating functional legal documents. 

‍Sign up today for a no-questions-asked free trial, and experience the power of this cutting-edge document automation platform.