Contract Termination Your Way

Earlier this month I got a question from a construction contractor negotiating a deal with the owner’s attorney. The attorney wanted a termination clause in the agreement. The contractor wanted the job but didn’t want to give his client the right to back out of the deal once work started.

“Why even have a contract if the owner can terminate the job any time he wants?”

Good question. But there’s a good answer. First, a few basics.

There are two types of termination in construction contracts. Type one is termination for cause. For example, repeated failure to correct defects could be grounds to terminate for cause. That’s not what the attorney in this case wanted. He wanted the right to terminate at any time for “convenience of the owner.” That means for any reason at all – or even no reason at all. I know that sounds horrible to most contractors. But stay with me.

Termination for convenience clauses are very common on larger jobs. Public works contracts usually give government the right to terminate for convenience. After all, governments are political organizations supported by taxpayers. Politicians come and go. Taxpayers can be fickle. A new mayor or governor or agency head may have different priorities. Governments need some legal way to revoke commitments made by deposed politicians.

Even contracts for larger private projects commonly give owners the right to terminate at will. For example, Section 14.4 of A.I.A. contract form 101 allows an owner “terminate the contract for convenience and without cause.” Again, you can think of many reasons why an owner might have to terminate. Maybe a lender defaulted on a loan commitment. Or maybe rock discovered on site makes the cost of work prohibitive.

Make Termination Work for You
So, let’s assume your contract will include a clause allowing termination for convenience of the owner. Now what? That’s easy. It’s time to do some contract drafting. On termination, you collect:

  • For all work completed, including labor, material, overhead and profit.
  • Overhead and profit on the portion of the job not yet completed.
  • For all charges imposed by subs, suppliers and others that result from termination.

Then, be sure your contract includes protective language. Termination for convenience:

  • Must be in writing and must show an effective date.
  • Constitutes a waiver of any breach by the contractor.
  • Is acceptance of work done to that date.
  • Relieves the contractor of further responsibility under the agreement.
  • Requires payment in full within 30 days after contractor submits an invoice.
  • Any partial termination must describe the work being terminated.
  • Changes in the job require a change order, not a partial termination.

With those clauses in your agreement, what contractor wouldn’t be willing to turn the job over to others? I’m not suggesting that, of course. Contractors thrive on building a reputation for professional work and a list of satisfied clients. But if the job turns sour, it’s better to walk away with a good financial settlement.

Where can you get help with contract drafting like this? That’s easy. Construction Contract Writer covers all the bases: Have a look at the trial version. It’s free. Then you decide what fits best in your agreements. Termination by either the owner or the contractor and either for cause or for convenience. It’s your call.