Construction contracts can be terminated by either party under certain circumstances. Let’s take a look at it from the Contractor’s point of view.
Federal contracts make it easy for the government to end a project. The “termination for convenience” clause spells out how the project can be ended (with no fault on the part of the contractor) and provides a method of payment for the work in place. Other public and private contracts may also contain this clause.
Sometimes it is the contractor who is motivated to end the project early. In these situations, it is important to know how and when to proceed.
The Disputes Clause
“The Contractor shall proceed diligently with performance of this contract, pending final resolution of any request for relief, claim, appeal, or action arising under the contract, and comply with any decision of the Contracting Officer.”
Found in federal contracts, this clause means you must continue to work when facing a dispute. This assures that the contractor doesn’t hold the project hostage while the dispute is under review.
Other public and private contracts may include language regarding unresolvable disagreements, so it is important to…
Read the Contract
Contractors should only quit a project when they have a legal right to do so. You need to read the contract and, with the help of your attorney, choose a course of action.
An Unresolvable Disagreements clause may allow the contractor to stop work. An example could be engineering issues that make it impossible to proceed.
Stop Work for Nonpayment
In these cases, the contractor should send written notification of the overdue payment and allow a time period to collect the funds. Some contracts require that a second notification be sent before work may be suspended.
Because nonpayment may be a material breach of the contract, it can be justify stopping work. However, state laws vary on this subject. An attorney can help determine if such action is advisable.
If a Performance and Payment Bond covers the contract, it can play an important role.
General Contractors should alert their surety regarding any disputes. Stopping work can result in a Performance Bond claim. This can hamper the availability of bonds for other projects. The surety will want to understand the dispute and may offer guidance to the contractor and attorney.
Subcontractors have these same issues if they have bonded their subcontract. In addition, contracts with “pay when paid” wording may justify the GCs nonpayment – another reason to read the contract.
An advantage for subcontractors may be a P&P bond above them, filed by the general contractor. The Payment Bond is available for claim by subs and suppliers. It can be a powerful tool to protect subcontractors. Even a letter to the GC threatening to file a payment claim can shake the money loose in many cases.
Stopping work can be an important remedy for the contractor, provided the action is legally permitted. When a contractor considers suspending work they must remember they may ultimately be found in breach of contract themselves. They should also take into account the larger situation of the nonpaying party, such as an impending bankruptcy.
The best approach is to review contracts in advance and negotiate the addition of langue that allows work stoppage under certain circumstances. The goal is to acquire the contract while limiting the risks.