Contract Termination – A Risk Management Strategy :: The Construction Management Pro

Contract Termination – A Risk Management Strategy

Owners are often scared to terminate a contract. They believe that it may cost more to have another contractor finish the work. The new contractor may not approve and/or take responsibility for the work done by the previous contract. Contractors are aware of these issues and often use them to their advantage.  However, to paraphrase our Declaration of Independence, “… after a long train of abuses and usurpations, pursuing invariably the same object…” it is your duty to remove the contractor and hire a new contractor.

All projects have risks. Construction contracts are no different. Identify the risks and develop a strategy to mitigate them. The contract documents should include the process and procedures you have adopted to mitigate the contract risks. Handling risks should be about implementation of your risk mitigation strategy, not emotions. Don’t let the fear of the potential cost stop you from doing what you know must be done. After all, you have “suffered as long as the evil is sufferable…”

The two biggest risks are time of performance and quality of work. Every contract must have a time of performance. If the contract work is not concluded by the end date of the contract, do not grant an extension of time. The contract is over; pay the contractor for work completed to date and move on.  If you don’t want to wait until the end of the contract period, then your contract must have a provision to terminate the contract prior to that time. I always have the contractor develop a schedule that is appended to the contract and considered a part of it. Therefore, failure to comply with the approved schedule is a breach of contract and the contact can be terminated. In addition, every contract should have a liquidated damages clause. This clause penalizes the contractor for every day the contact work is not concluded.

With respect to the quality of work, most contacts contain a clause regarding how defective work is treated. A notice must be given and a time to cure the defect needs to be specified. If corrective action is not taken, a second notice is given. Failure to correct the work then allows the owner several options. One is for the owner to correct the work. Second is to dismiss the contractor.

These are hammers you hold over the contractor’s head. However, a hammer is only useful if the contractor believes you will use it. I have often stated that project management relies on the three C’s: Communication, Coordination and Confirmation.  You need to communicate with the contractor about the breach of contract and the consequences of that breach, coordinate your process to ensure that you have a replacement contactor upon termination and then execute that process of termination to confirm your intent to terminate your relationship.

Owners often believe that it is less expensive to try to get the contractor to comply with the terms of the contract rather than to terminate it. But how much money is lost in failure to get the project completed, time and aggravation in chasing the contractor and loss of your reputation when the project is not completed on time, in budget or meets the quality consistent with your brand? These costs must be considered as tangible as the expense of replacing the contractor.

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