The Holloway Consulting Group has been retained as a construction consultant or expert witness on numerous projects where a contractor has been terminated or is soon to be terminated, either for cause or for convenience, and where the contractor has abandoned the job, under unit price, fixed-price, GMP and Cost-plus contract forms.
It’s impractical if not impossible to describe all of our construction claims experiences in terminated contracts cases here. Circumstances vary widely and the termination process is different in AIA contracts versus custom agreements, and because the terms of general contractor/subcontractor agreements vary widely. Nevertheless, we have seen at least three formula applied to the quantification of contractor termination damages:
CONTRACT TERMINATION CLAIMS
QUANTIFICATION OF CONTRACTOR TERMINATION DAMAGES
Damages Claims Formula No. 1 – The contract price less the amount that it would cost the contractor to complete the work;
Damages Claims Formula No. 2 – The profit on the entire contract (total contract price less the contractor’s cost of completion) plus the cost of the work actually performed; and,
Damages Claims Formula No. 3 – For the work completed, that proportion or ratio of the contract price as the cost of the work performed bears to the total cost at completion, plus, the remaining profit on the uncompleted work.
Where adequate proof can be made as to the contractor’s cost of completing the work and where the entire job can be performed at a profit, the application of formulas two and three may produce similar, if not identical, results. If the contractor is unable to prove with reasonable certainty what it would cost to complete the remaining work, the first formula is not applicable, whereas under formulas two and three, she might recover for the work completed in compliance with the contract.
Termination for Convenience/ Wrongful Termination of Contract by Contractor
Only the owner can terminate, or suspend, the Contract for convenience. The contractor does not have this right. If a contractor wrongfully terminates the contract and abandons the job, he will likely be sued for the difference between the owner’s cost to complete and the earned value of the contract work completed. He may be required to pay extra costs associated with the delay, the hiring of a completion contractor(s), etc.
If it is shown that the contractor terminated the contract for cause, he may be entitled to claim to recover payments for work executed and earned, and for proven compensable loss with respect to materials, equipment, tools, and construction equipment and machinery, including reasonable overhead, profit and damages.
Prior to termination or abandonment, the contractor can elect to suspend the work if a material breach has occurred such as untimely payments by the owner of valid payment applications where proper notice has been given, and where the contractor is not in breach. This is a much safer course of action than termination, and it allows the owner a chance to cure. If the contractor must terminate for cause, he must comply the terms of the contract and provide proper formal written notice to the owner.
If both the owner and contractor are in material breach of contract at the time of termination, the above assessments and formula may change and the relative nature and degree of the breaches become relevant. Termination and damages will be examined in greater detail here in the future.
The Holloway Consulting Group, LLC
Construction Claims Experts – Construction Expert Witnesses
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Lakewood, CO 80228-2701
Denver Phone: (303) 984-1941
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