Willie Nelson supposedly quipped the following about divorce: “Why is divorce so expensive? Because it’s worth it!” The same can be true of an owner looking to “divorce” a prime contractor or a prime contractor looking to part ways with a subcontractor on a construction project.
But much like divorce, the termination of a contractor should only be considered where all faith has been lost in a contractor to perform its obligations under the parties’ contract. This is because terminating a contractor has been said to be the most drastic of sanctions.
If an owner decides to terminate a prime contractor or a prime wants to terminate one of its subcontractors, there are several things the terminating party should know before exercising the right to terminate:
1. The project will cost more than the terminated contractor’s original price: The bad news is that when an owner terminates a contractor, it will almost always cost more to hire a replacement contractor to complete the work. The good news is that if the termination was proper, the owner should be able to recoup the extra cost to complete the work from the terminated contractor. The same is true when a contractor terminates a subcontractor.
2. The project might take longer to complete: In addition to costing more, the project will likely take longer to complete. This is because it will take time for a replacement contractor to be brought on board, get familiar with the remaining work to be completed, and mobilize to the project. The key here is to get a clear understanding of whether the original contractor can properly perform its work faster than any replacement contractor.
3. You will have a lawsuit: More times than not, if a contractor or subcontractor has been terminated, litigation will follow. This is because the owner or prime contractor terminating will want to recoup the excess cost to complete the work, and the terminated contractor or subcontractor will believe that the termination was improper.
4. You may wish you had terminated sooner: Given the above points, many owners or prime contractors wait until the last possible moment to terminate. This is not necessarily a bad idea because termination is about as serious as it gets on a construction project. The problem is that 9 times out of 10, the party who terminates wishes they had done it sooner because the terminating party feels like it wasted a lot of time trying to work with a contractor that had no intention of properly performing the work. Hindsight is 20/20, so many times it is difficult to judge if the terminating party should have pulled the trigger sooner.
Bottom Line: If you are an owner or prime contractor considering terminating a construction contract, you should seek the advice of experienced construction counsel before dropping the axe. That will allow you to make sure the termination is done right and increase the chances of obtaining the extra costs and other damages associated with completing the terminated party’s work.
As always, if you have any questions, please send me an e-mail.
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