Contractor Terminations, The Rules Should Be Clear
 Tidemann |
The use of alternative project delivery methods is on the rise, as owners increasingly turn to them to help mitigate construction cost increases, risks and ever-changing construction schedules. Yet, the factors that usually give rise to a contractor termination can and will still occur regardless of the project delivery approach. And only subtle differences may arise regarding different project delivery approaches, such as design-build or construction manager at-risk.
Most contracts contain provisions addressing an owner’s right to terminate the contractor for miscellaneous or certain contractor breaches or actions/inactions, commonly referred to as a termination for default (T4D). Many contracts also contain provisions addressing a right often retained by the owner to terminate the contract merely at the owner’s wish and convenience, commonly known as a termination for convenience (T4C).
More from Progressive Project Delivery Special Report Although there are many common threads between T4C and T4D, the circumstances and the consequences of a T4D (an adversarial atmosphere by nature) are significantly different from those of a T4C (a generally cooperative atmosphere).
Contracts often contain T4C provisions designed to ensure the contractor or the design-builder team is left “whole” and recoups certain costs arising as a direct result of the owner exercising a convenience termination.
When the owner elects to terminate a design-build effort early, the pricing or costing of the team’s completed effort at that point can highly depend on the specific compensation provisions of the contract, if such provisions even exist in the contract, and even more subjective if they do not exist.
When there is early termination in CM-at-risk, the owner may be terminating its designer and contractor in parallel, with potential pricing problems for each.
When faced with opportunities to terminate or not, owners should fully identify and carefully evaluate the benefits and detriments of each option and consider options other than partial or full termination, such as a deductive change order.
Addressing Default
Terminations for default often evolve into very contentious, protracted affairs. At a minimum, contracts containing provisions addressing the termination of a contractor or design-build team for defaulting on its performance should be detailed and well-defined, and should include an opportunity and measurable criteria for the contractor to cure the contract breach or default issue.
Reasons for termination include, but are not necessarily limited to, real or anticipated failure to deliver contract-compliant product/services, absolute or anticipatory progress failure and contractor refusal or failure to comply with other contract provisions.
In T4D, it is always best if the contract documents expressly address the right to terminate and circumstances surrounding a termination. Prerequisites of termination actions include ensuring the contractor has been granted all price and time adjustments to which it is entitled, and a clear and unambiguous failure or breach of a material nature.
Owners must identify and fully evaluate all options other than T4D, weigh all benefits and detriments of such action. This must be performed expeditiously so as to not further impact the project due to indecision and inaction.
In a rapidly changing world an owner cannot consider itself progressive unless it is willing and able to implement a termination efficiently, expediently and with firm conviction to be able to do so from a position of strength.
With permissions, limitations and roles defined, complex termination disputes between owners and contractors may be lessened or even avoided with termination provisions inserted in the contract. In any case, an owner should utilize a construction management advisor to review the contract and a dispute advisor to help mitigate the risks inherent in termination disputes, if they do occur.