CDR.04 You’re Fired! - calveyconsulting.com

1 What seemed to be a good idea at the time is nolonger. The owner has chosen to stop construc-tion and terminate the contractor. Most con-struction contracts have termination for con-venience and default termination clauses which have differentrights and have all heard about disputes over a wrongful termina-tion, but what makes a termination righteous and when does thesurety get involved? Further, we have all read contract clausessimilar to the following: In such event, the contractor shall be paidfor work executed and reasonable expenses sustained, plus a rea-sonable profit. But what is reasonable and what is work executed?According to Webster's Dictionary, termination means a com-ing to an end of a contract period; or the act of ending something;such as the termination of the agreement. In construction con-tracting there are three types of by owner for by owner for by the Federal Acquisition Regulation (FAR) part 49 contains thefollowing termination termination (Cost-RReimbursement) (SSep 1996)(a) The Government may terminate performance of workunder this contract in whole or, from time to time, in part, if thecontracting officer determines that a termination is in the govern-ment's interest, or the contractor defaults in performing this con-tract and fails to cure the default within 10 days (unless extendedby the contracting officer) after receiving a notice specifying thedefault.

2 Default includes failure to make progress in the work soas to endanger performance.(b) The contracting officer shall terminate by delivering tothe contractor a Notice of termination specifying whether termi-nation is for default of the contractor or for convenience of thegovernment, the extent of termination , and the effective date. If,after termination for default, it is determined that the contractorwas not in default or that the contractor's failure to perform or tomake progress in performance is due to causes beyond the controland without the fault or negligence of the contractor as set forthin the Excusable Delays clause, the rights and obligations of theparties will be the same as if the termination was for the conven-ience of the government" [2].Similar termination clauses have been incorporated into theAmerican Institute of Architects General Conditions of Contractand often are the basis for state and local public BY OWNER FOR CONVENIENCEIf a contractor is not terminated for default he is terminatedfor convenience.

3 Reasons for termination for convenience are: Project is no longer financially viable. Permit delays unable to obtain proper building or environ-mental permitting. Changes of conditions subsoil conditions require a changein foundation design which makes the project impossible tobuild. Buyer's remorse just don't want to proceed any reason that is not a default reason and is for theowner's convenience. Under a default termination , federal caselaw indicates that the government or the owner must prove thatthe termination for default was BY OWNER FOR CAUSEP ublic construction contracts typically state that a Contractormay be terminated for default for the following: Anticipatory breach by contract; , the contractor threatensto abandon work if a change order is not appropriate. Failure to comply with contractual provisions. Lack of construction progress; refusal or failure to prosecutethe work.

4 Performing substandard, defective or nonconforming work. Failure to reimburse subcontractors and suppliers. Violation of laws or aace international re Fired! Mr. Timothy T. Calvey, PEThe government or owner is required to fulfill all contractu-al notice provisions prior to terminating the contractor for includes giving the contractor the opportunity to cure thealleged material breach. The government or owner's failure tosupply the proper default notification and opportunity to cure mayrender a valid default termination into a termination for conven-ience. FAR regulations also require that the contracting officermust permit the contractor an opportunity to present his case as towhy the contract should not be burden of proof is on the government or owner todemonstrate and document that the contractor was in default atthe time of the termination , and the contracting officer used rea-sonable judgment in his decision to terminate.

5 The veracity of theproof is often the issue of a wrongful termination contracting officer must determine that the contractor isin technical default and material breach. The contractor may beexcused from the consequences of such default as a result of thegovernment or the owner's action if the contractor's constructionprogress is significantly delayed and the delay was the result of thedesign provided by the government or owner being incompleteand erroneous. The contractor's delay is excusable and notgrounds for default. The standard government delay clause pro-vides that a delay is excusable and does not provide a valid termi-nation for default if the delay is "beyond the control and withoutfault or negligence" of the contractor. The contract disputes overtime and money issues are not resolved by default a multi-prime state, such as Ohio, the general contractor'sdelays may be caused by one or more of the other multi-primecontractors who are beyond his control.

6 In addition to excusableactions, a contractor's defense against default is alleging that theirwork is in general compliance or fulfills substantial performanceof the contract and is not a material breach of the work such as incomplete punch lists or otherincomplete items are not generally grounds for default termina-tion of the contractor's performance in most public constructionprojects is "assured" by a surety bond. "Assured" is a guarantee orpledge "to make secure on contract". The 1935 Miller Act, 270a-270f, established that all federal construction con-tracts performed in the United States must require the contractorto furnish a performance bond in an amount satisfactory to thecontracting officer; a payment bond in a penal sum of up to $ , and bid the US Federal Acquisition Streamlining Act of 1994,Congress made the Miller Act inapplicable to contracts under$100,000.

7 The Construction Industry Payment Protection Act of1999 requires that the bond be equal to the performance bondamount, usually the total amount due under the contract, afford-ing more protection to subcontractors and suppliers. Further, theAct prohibits prime contractors from requiring their subcontrac-tors to waive their payment bond rights in the subcontract docu-ments. These statutory requirements are implemented in FARpart 28, bonds and insurance. [2]After the owner terminates the contractor for cause, he looksfor the surety to complete the project. To understand the conse-quences of default, let us first review the role of a surety in a con-struction project. There are three parties to a surety bond: The surety, which may be an insurance company but is hope-fully a company with sufficient financial assets, insures thatthe contractor will complete its performance.

8 The suretycompany must be certified as a qualified surety by the USDepartment of Treasury. A current list of certified companiescan be found at In addi-tion, most states require sureties to be licensed by the state. The obligee is the owner or the government and is assured bythe surety. The principal is the contractor who submits the contract bond normally assures the obligee of two poten-tial risks: If the contractor fails to execute the contract, the surety willpay the owner the difference between the contractor's bid andthe next lowest bid up to a limit of usually 10 percent of thecontractor's bid amount. This assures the owner of the bidprocess. After the execution of the contract, if the contractor defaultsin the performance of the contract with the owner, the sure-ty will be liable up to the amount of the bond for the com-pletion of the amount of the bond is referred to as the penal sum orpenalty amount.

9 Usually it is the upward limit of liability on thebond. The surety is also obligated to pay suppliers and subcon-tractors of the contractor for furnished material, labor and equip-ment on the project. The surety is paid a premium or fee by thecontractor which is usually a percentage of the contract percentage varies based on the surety's evaluation of the con-tractor's previous history and financial strength. One commonmisconception is that a surety works like an insurance policy. Themistaken belief is that if the contract goes bad, the surety pays thecontractor and the premiums are increased on subsequent proj-ects. If the surety is required to pay any claim from the owner orsubcontractors, the surety will look to the Contractor or the con-tractor's assets for an owner terminates the contractor for cause, it will eitherpursue a claim against the surety to complete the work under thecontract or pay the owner for the cost of completion including hisadministration or construction management costs.

10 When the sure-ty promised to insure the contractor's performance, it acquiredsubrogation rights. Subrogation means the right to collect a legaldept that was originally owed to someone else. When the suretyoffers to take over the contract for its contractor it rightfully wantsto be paid all monies to which the principal is required to , this is the balance owed under the contract at the timeof termination , less offsets for delays and other damages caused bythe aace international TransactionsALTERNATIVES TO DEFAULT TERMINATIONIn general, a default termination adds costs to both the ownerand the contractor and payment of those cost will be work stoppage, remobilization and relet process add costs tothe project. It is very important for both the owners and contrac-tors to view default termination in the most serious manner due tothe magnitude of the damage to either organization.