Termination: A Recipe For Disaster

A construction contract termination can be a disaster for everyone involved; the subcontractor, the general contractor and the owner. Often a contractor terminates a subcontractor without appreciating both the benefits and the risks.

Timeliness
Too frequently contractors act too quickly, terminating impulsively. But delaying termination may also cause problems. Excessive delay gives the impression that the work or pace of the project may actually have been acceptable. Any decision to terminate must be timely, well considered and appropriately enacted.

If you decide terminating a subcontractor is the best solution, read and follow the procedures set forth in your contract. Involve your company CEO in the decision. The CEO should assess the potential costs and the necessity for legal advice. Be sure the benefits outweigh the costs.

Documentation
Statistics show every contractor, eventually, will face a subcontractor termination. Because of this, all projects need crucial documentation to protect the contractor's resources. Always, document the condition of the project as it progresses, not just when you are faced with a need to terminate. Prior to terminating, document the justification for the termination.

	Follow the contractual termination procedures,
	Take meeting and conversation notes,
	Give written notice, in strict compliance with the subcontract,
	Take pictures and videos of the conditions constituting acts of default,
	Keep written documentation that you gave the subcontractor opportunities to present its side of the issues, and
	Document in writing the subcontractor opportunities to cure its default.

The Costs
Termination is not cost free. In addition to the cost of completing the work, the contractor may face other costs of termination, such as:

	Securing work and materials
	Demobilization
	Cancellation costs of purchase order and subcontracts cost of material fabricated but not used
	Some recognition of earned profit, and possibly
	Cost of idle personnel

Indirect costs may be even more extensive. How will this termination affect your relationship with your customer or project owner? Will it impact potential business?

The Pitfalls
Do not simply hide behind the subcontract. Under Texas law, if a general contractor is found to be in breach of the subcontract, the contractor cannot rely on favorable procedural and exculpatory provisions.

Terminating a subcontractor prior to substation completion gives the subcontractor the opportunity to sue for breach. If breach is proven, the subcontractor can recover damages on a total cost basis. That is, the subcontractor could receive compensation for all costs incurred, not limited to the value of the work.

Also, consider the consequences to a subcontractor's business when they are obligated to reveal terminations to future customers that may look unfavorably on all terminations. Wrongfully terminating a subcontractor exposes the contractor to consequential damages, such as lost opportunity cost or liability for the subcontractor's business failure. Finally, a contractor found to have wrongfully terminated a subcontractor will have to reimburse the subcontractor for its legal fees.

The Alternatives
Is termination worthwhile in view of the legal and job risks? There are times termination is the only answer; such as when the subcontractor abandons the project the project and/or is insolvent.

Think about how third parties may view the termination. Juries and arbitrators will want to know what the general contractor did to avoid the termination. They will ask, "What did you do to help the subcontractor in trouble?" You need to be able to say, "A Whole lot." Then, you must give specific and detailed evidence.

Consider all the alternatives to termination:

	Supplementing the subcontractor's management, labor or equipment resources
	Providing administrative assistance
	Reducing the contractual scope of work
	Providing financial controls or financing to completion

[By the way, don't let the existence of a performance bond give you a false sense of security and color decision making. The bond is a financial guarantee that assures the subcontractor's obligations will be performed. Depending on the form of the bond used, some sureties in a termination situation will investigate without regard to project schedule. Often the general contractor has to complete the work and only then settle with the bond company.]

Why work with a struggling subcontractor?
The benefits of working with a struggling subcontractor are many. They include avoiding:

	Lawsuits,
	Claim against bond,
	Angry owner,
	Mechanic's liens,
	Massive disruption,
	Termination costs, and
	Potential damage to a hard-earned business reputation

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The following article appeared in the Texas Contractor.

by Mary Jo Poindexter, P.E., President of Engineered Construction Specialists, Inc., a construction management firm in Houston, and William K. Andrews, a shareholder with the law firm of Anders Myers and Donaldson, P.C., with offices in Houston and Beaumont