Construction Termination Part 2: How to handle construction administration when the contractor is getting fired

chameleonIf you’ve been working as a design professional for any length of time, you know that you must be a chameleon on the construction project.  You need to “step into the skin” of both  the Owner and the Contractor to determine who is at fault, and who should pay.

You are usually the Initial Decision Maker (IDM), and so you have a duty under the AIA documents to act fairly and impartially in making those decisions.  See AIA B101§

Even if you are not under an AIA contract, you still have that duty if you are the IDM or handling construction administration for the project.  More often than not, however, it will be the owner asking you to support its termination of the contractor “for cause”.

Should you do so?

Before making any decisions, see what the contract says about when a contractor can be fired.  There is usually one set of specific facts that supports this.  In A201§14.2.1, the Owner may terminate the Contractor if the Contractor:

  1. repeatedly refuses or fails to supply enough properly skilled workers or proper materials;
  2. fails to make payment to Subcontractors or Suppliers in accordance with the respective agreements between the Contractor and the Subcontractors or Suppliers;
  3. repeatedly disregards applicable laws, statutes, ordinances, codes, rules, and regulations, or lawful orders of a public authority; or
  4. otherwise is guilty of a substantial breach of a provision of the Contract Documents.

You may have noticed that these are not set formulas.  If job staffing varies from day to day, when does the lack of manpower rise to a justifiable reason to terminate a Contractor for cause?  What if the lack of proper, sufficient material for the jobsite is due to outside forces like lack of manpower in the community due to post-pandemic shortages?  And what is meant by the nebulous phrase “otherwise is guilty of a substantial breach?”

The Owner will be looking to the design professional to certify that one of these “causes” exists.

If you make an independent investigation and decide the Owner does not have “cause”, you can remind the Owner of its ability to terminate “for convenience” at any time.   The difference between “cause” and “convenience” has to do with how much, if any, money the contractor is entitled to from the owner.  Simply put, if it is for convenience of the owner, the contractor will get money for lost profit and opportunity; if he is fired with reason, he may end up owing the Owner money.

When terminating a Contractor for cause, the Owner risks a later finding that its action in terminating the contract was without just cause.  If this happens and you assisted in making the determination that the Owner’s termination was justified, you will be sued.  Almost as sure as the sun sets in the West—if there is a wrongful termination lawsuit, you will be part of it.

So, make the decision carefully, and document, document, document the reasons for it.

First, are there any less drastic steps could be taken?  For example, the Owner could elect to stop further work until a contractor corrects bad construction.  (See AIA A201 §2.4).  Or, the Owner can carry out work itself, with proper notice and a 10 day opportunity to cure.  (See A201 §2.5).  The Owner may not be aware of these options—so point them about if they could stop the nuclear termination option.

Second,  review the contracts to ensure all proper notices are being given.  Prior to termination, the Owner must give a 7 day written notice to the Contractor and, depending on the contract used, an opportunity to cure.  See A201 §14.2.2.   The notice should be given to both the Contractor and any relevant surety. If the Contractor does not begin work to correct the deficiencies within 7 days, then the Owner can terminate the agreement and complete the work through alternative Contractors.  While the notice requirement is the Owners and not yours, tell the owner, in writing, what they must do.

Next week, how to handle construction administration when the contractor is the one doing the firing.

In the meantime, have you ever had to make the convenience v for cause analysis?  How did you do it?  What actions or inactions of the contractor were important to your decision?  Share below.

Photo © Krahulic from Pixabay via Creative Commons License

2 thoughts on “Construction Termination Part 2: How to handle construction administration when the contractor is getting fired

  1. Joel Niemi says:

    Once upon a time, ~25 years ago, my firm was responsible for design of an addition to a local high school. Low bidder was quite low, feedback on them from other owners was not the best, so the district hired us to do daily visits to monitor progress. I got the short straw. I hadn’t been involved with the project design, so I was a somewhat neutral choice.
    They finally got to a critical point in the connection and clearly could not figure out how to do it. It wasn’t the first thing that had been a puzzle to them, and we didn’t want to get into even making “what if” suggestions about means and methods. I suggested to our direct client at the district that they might want to read the part of the contract about termination.
    About a week later there was a conference meeting between owner, contractor, surety, and us. When surety asked contractor “can you finish the job?” and the answer was “yes, if there are no more changes”, owner understood that any RFI answer, etc. would be labeled a “change”. Owner’s person, who had worked in construction and later in an architect’s office, made the decision to terminate quickly. District higher-ups supported him.
    Next step was to have the surety’s representative on-site; this was during the “we will give you some time to speed up” interval. Ruffled contractor feathers when he made it clear to them that the bond agreement allowed him to look into anything going on at the site, including records in their computers.
    Then, contractor was terminated “for cause”. Just before they left, there was a mysterious burglary and the general’s better power tools and computers were stolen. No subcontractor’s items were touched. “Disgruntled ex-employee” was suggested as the perpetrator. Hmmm.
    Surety’s replacement contractor spent about a month finding things to fix, completed the job, and were night/day to deal with.

    • Melissa Dewey Brumback says:

      Joel: Thanks for sharing your story. I’m actually pleasantly surprised to see that the Surety hired a different contractor. I’ve seen situations where the Surety “hires” the contractor that defaulted, which can result in ongoing issues as you can imagine. Although, once the Surety does step in, they monitor tightly, which alone seems to help the contractor work better/faster.

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