The Complications of Late-Contract Terminations
A few months ago, the Texas Dept. of Transportation declared that a medium-size contractor working on a highway-widening project on the Woodlands Parkway had defaulted on its contract.
The work was 80% complete. It isn't clear if the issue involved is quality of work, failure to pay subs or suppliers or safety. But the default illustrates some of the complications of late-contract terminations, when contractors and owners sometimes reach an impasse on schedule and payment despite much of the work already being in place.
Late-stage terminations at 80% of a federal contract generally are uneconomical, suggests John G. Balch, a Colorado Springs-based contract management consultant, on his website. It would be economically wasteful, he wrote, “because the reprocurement costs would probably be excessive.” A federal contracting officer would have to show that he or she examined the cost and time impact, he added.
In theory, that type of analysis is done by state agencies, such as the Alabama Dept. of Transportation. It declared L&T Construction in default in 2012 for work involved in completing a section of the Veterans Memorial Parkway in Calhoun County. That project was 80% complete and a surety apparently stepped in to finish that project.
More recently in Texas, TexDOT says it is working with the surety for Menade, Inc., International Fidelity Insurance Company, to pick a new contractor to finish the Woodlands Parkway seciton.
Menade had submitted the low bid for what was a $2,836,771 contract to widen a .819-mile-long parkway section from four lanes to six with a completion date of December 2013. But by August 2014, the company was still only 82% completed on the job, says TxDOT. The contractor failed in several attempts to demonstrate progress on the schedules submitted and agreed to by TxDOT and, at the time, was being charged $785 per day in liquidated damages.
Progress on the project was slow since the beginning. When 50% of the time to complete had passed, TxDOT notified Menade that the contractor had only completed 20% of the work.
“Our local TxDOT Area Office worked diligently with the contractor well before the expiration of the December 2013 completion date and continued to work with Menade well after their failure to meet the original schedule," says a spokeswoman for the Houston office of TxDOT. "Menade repeatedly failed to meet the deliverables promised from month to month,”
Officials from Menade did not respond to a request for comment.
Timely Notice is Key
A key issue for the surety is whether the owner provided it timely notice of the contractor's default and failure to perform, says Joanne Brooks, vice president and counsel for the Surety & Fidelity Association of America, the trade association for sureties.
“Ultimately, the biggest issue is how long has this been a problem," says Brooks. "There are surety defenses for over-payment, so if the owner has been paying for defective work, the question becomes how much will it cost and why wasn’t the surety told sooner?”
There are three possible outcomes, says Christine Kirchner, a construction attorney and shareholder with the Houston office of law firm Chamberlain Hrdlicka.
According to Kirchner, the surety could choose to get a new contractor to finish the work. It could allow Menade to finish the job knowing the company would sustain more liquidated damages; or the surety could allow TXDOT to choose the contractor that will finish the project.
“I think it’s interesting that the government is willing to go out on a limb and stop this project,” Kirchner says. “There’s some issue that’s significant enough that they’re willing to stop the work and they’re willing to do so without the surety definitely taking over the project.