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Since early 2020, many contractors have struggled with delivering construction projects on time and on budget. Instances of increased construction costs and delayed project completion due to labor and material shortages and supply chain disruptions are, regrettably, becoming all too common. Some owners are delaying award of projects where contractor bids far exceed estimates due to anticipated increased costs and time.

But how are owners and contractors dealing with these significant impacts on ongoing projects? Better yet, how can owners and contractors address such impacts during project construction? The answer to these questions most likely lies in the parties’ contracting arrangement. Most fixed price, fixed duration contracts place the risk of performance, including provision of sufficient numbers of skilled labor and sufficient materials and equipment, on the contractor. Where the contractor takes on this performance risk, its failure to comply can give rise to a claim of breach triggering certain rights of the other contracting party.

Recognizing this risk, one drastic measure to address performance failures is the ability of the project owner to terminate the general contractor—or the general contractor to terminate a subcontractor—for failing to comply with contract obligations. A proper termination stops the applicable work and can allow the terminating party the ability to:

  1. exclude the terminated party from the jobsite;
  2. accept assignment of subcontracts;
  3. finish the covered work in a more expedient manner; and
  4. stop paying the terminated party until all work has been completed.

Virtually all of the construction industry form contracts contain provisions permitting an owner, in certain circumstances, to terminate a contract for default.

For example, the current version of AIA A201 – General Conditions of the Contract for Construction give the owner the right to terminate a contract for cause in six enumerated cases. These include: repeated refusal or failure to supply enough properly skilled workers or proper materials and failure to prosecute work to completion in a diligent and timely manner according to the Contract Documents. Similarly, FAR 52.249-10 Default (Fixed Price Construction) permits the federal government procuring agency the ability to terminate the contractor’s right to proceed with work due to delays for which the contractor is responsible.

A written construction contract should also identify specific steps necessary for an owner to terminate for default (or cause) the general contractor or for the general contractor to terminate a subcontractor for cause. First, a party seeking to terminate for cause must typically give notice of default, identifying specific events giving rise to a default declaration. Second, the alleged defaulting party must be given a reasonable amount of time to cure each event of default or show reasonable evidence that it has commenced curing the event of default. Third, in some instances, if the design professional has oversight responsibility for the project, including monitoring construction progress, that professional must verify such progress as part of the default process. Fourth, if the defaulting party is required to procure performance bonds, any attempt to properly terminate a bonded contract will also need to comply with notice and cure provisions in that written guaranty.

Threats of default and ensuing termination should always be taken seriously. A contractor faced with a default notice, or even a threat of default, should consult competent counsel and seek advice on proper responses and actions to take. The contractor also needs to keep open lines of communication with the owner, the surety (if bonded), subcontractors and all other project delivery team members that could be impacted by concerning performance issues (disputed and undisputed) throughout the process. The contractor faced with a default threat should also gather all project documentation and correspondence addressing specific allegations of default and cure (or failure to cure).

Although a default termination may be appropriate in certain limited circumstances, chances are high that the affected project will take longer to complete and cost more. More parties will necessarily be involved in completing the project. And, litigation or arbitration will very likely ensue after the dust settles on this drastic remedy. As such, before pulling the pin on the default termination grenade, contracting parties should seriously consider other less severe remedies.

For example, it may be prudent to consider supplementing workforces to increase labor on a project. Similarly, if work can be progressed in a sequence different than that originally planned based on labor availability, the parties may wish to consider resequencing the work. The parties may also consider ordering materials in advance of when needed and storing such materials, provided there is adequate on-site or off-site storage. Any or all of these remedies, while still impacting performance costs and/or time, may allow for successful project completion without the inherent harshness and stigma of a default termination.

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