Termination of the Construction Contract: What to Do When a Project Goes Bad
Common Reasons for Termination of a Construction Contract
There are many reasons for terminating a construction contract. Some of the most common are nonpayment by the owner or contractor, nonperformance by the contractor or subcontractors, timeliness of performance, lack of communication or simply an inability to get along. These issues should be addressed in a construction contract.
Consequences of Breaking a Contract
Because termination ends one or both parties’ rights or contractual obligations prior to the completion of the project, careful consideration should be given to the consequences. The timeliness of project completion and potential added costs, not to mention exposure to damages, require that termination be approached by both parties with extreme caution and after thorough analysis by legal counsel, construction experts, accountants, architects and other pertinent industry experts.
Most construction contract issues can be resolved and every effort should be made to do so through negotiations and, if necessary, compromise before termination. Finding a resolution can help parties avoid the risks of additional delays and costs in the aftermath of termination, exposure to damages, and the uncertainty of legal outcomes when facts are judged and conclusions reached by third-party judges or arbitrators.
“For cause” termination may result when an owner, contractor or subcontractor does not fulfill obligations within the contract.
- owner failing to pay the contractor or the contractor to pay its subcontractors or suppliers;
- owner failing to properly coordinate a work schedule where separate contracts exist for discrete parts of the construction project;
- work stoppage by court order through no fault of the contractor (e.g., work stopped by a court or government order due to failure of an architect to issue a certificate of payment that is proper and due, or reasons other than acts of God or force majeure);
- contractor failing to perform in a timely manner or properly coordinating its subcontractors or suppliers;
- contractor failing to perform in terms of the quality or quantity of the work and materials furnished in accordance with the construction contract, the plans and/or the specifications.
Even in these extreme situations, a notice of default and an opportunity to cure the default is generally provided for in the contract and, if not, still should be given in most circumstances. The objective is to give the parties one last chance to avoid termination and the risks associated with it.
Two Considerations for an Owner Before Issuing a Termination Notice to a Contractor
When termination is necessary, there are some practical considerations for the owner prior to issuing the termination notice.
First, if the project has performance bond coverage, notice should be provided to the surety in order to utilize the surety as another avenue of approach in an effort to encourage the contractor to cure the default. A surety may take over the project, pay the owner for any liability incurred, find a replacement contractor or deny the claim. The owner should carefully review the terms of the performance bond in order to ensure that all conditions precedent to claiming performance bond coverage have been met.
Second, prior to issuing a termination notice, the owner should consider engaging a qualified construction expert to evaluate the status of the project and to memorialize the existing condition of the project for litigation purposes. A qualified construction expert can advise the owner on the probable cost of completion and the likelihood that the contractor could accelerate or otherwise cure the default. The expert also can provide effective assistance in securing completion of the project.
Based upon the analysis and advice of a qualified construction expert, the owner may find it far preferable to maintain the current contractor and accept a later completion date rather than to terminate under default and suffer even more in terms of completion costs, delays and exposure to litigation.
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