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ConstructionPro Week, Volume: 2 - Issue: 22 - 05/31/2013

Are Project Owners Abusing Termination-for-Convenience Clauses?

By Bruce Jervis

 

The function of a “termination for the convenience of the owner” clause is straightforward. The project owner, at its discretion, may terminate the project at any time without breaching the contract. The contractor is entitled to the reasonable cost of work performed prior to termination, as well as the cost of closing out the project. The owner is not liable for the contractor’s anticipated profit on the unperformed work.

 

This sounds like a balanced bargain, yet contractors have long complained about the process. Owners, it is said, use convenience terminations to shield themselves from legitimate claims for bad planning, faulty design, or project mismanagement. Contractors also contend owners allow them to perform unprofitable portions of the work and then terminate profitable portions. These complaints usually come up empty. Abuse of discretion is difficult to prove.

 

A recent case out of the District of Columbia does, however, indicate one limitation on the use of termination for convenience. The public project owner terminated the project. The contractor submitted a termination settlement proposal including two unpaid invoices for work performed prior to termination. The owner asserted a substantial offset for deficient work. The court ruled that once an owner has terminated a contract for convenience, the owner may not hold the contractor responsible for correcting deficiencies in the work performed prior to termination. The contractor was entitled to all reasonable performance costs.

 

What is your opinion about the use of termination-for-convenience clauses? Have you encountered project owners who abuse this contractual right? Or, have you seen the beneficial aspects of convenience terminations? I welcome your comments.

 

COMMENTS

Every once in a while you sign on a contractor and it just isn't working. The guy may be an out-and-out turkey. Maybe Owner and he don't speak the same language. Maybe the contractor can't stand you (the Architect) or the Owner, or both of you. It really doesn't matter, but it is demonstrable that the project is going to go down the pike if you keep on going with the guy. So the termination clause is the best out there is. Often, with no hard feelings either.
Posted by: Jon F Edelbaum AIA - Friday, May 31, 2013 10:47 AM


As the Owners Rep performing Agency PM Services on numerous public funded projects I have not once found it necessary to recommend it be enforce. The clause should not be used loosely as it becomes a no win situation for all involved. As an Owner's Rep, educating an uneducated Owner, implementing proper PM/CM practices and policies upfront, and maitaining proper and constant communication throughtout typically would avoid a thought of considering the need for termination-for-convenience.
Posted by: Mark Guleserian - Friday, May 31, 2013 10:58 AM


It is always not good for the subcontractor because the contractor holds all the cards even though the contract between each party appears to be a partnership.Contractors who are just managing a project have no skin in the game don't care if the subcontractor gets paid or not just as long as they get their management fee.Relationships,Quality and Professionalism are taken over by how low can you go.
Posted by: Carl De Nunzio - Friday, May 31, 2013 11:23 AM


Which court? Trial or appellate? Local or federal? Makes a difference to other jurisdictions that have up to now allowed offets for defective construction.
Posted by: Bill Broz - Friday, May 31, 2013 1:25 PM


I have this clause in my residential construction contracts, for at least 10 years, and I do 95% design/build nice remodeling. I know, in the background of my mind, that if a job is terminated- that I may lose substantial O&P markup- as most of my work is logistically more difficult on the front end, and the "easy" markup money on the latter part of the job covers the front portion. An owner can easily "have a sub" finish final work, while a contractor has to do real planning and detail work often on front end of job. I work very hard, which takes much time, to have good relationships with owners and I work to have good clarity with the subcontractors, and the overall specifications which accompany the building plans/general contract. Without good specs I would have much difficulty. Not a perfect world, is this clause good or bad, I don't know? My owners respect me greatly for having it in my contract- as it shows relationship is important. I do not put it in very small/short duration jobs. A con artist contractor or customer will always wrinkle everything if they are in the mix, I try to weed them (owners) out, but not a perfect world. There is risk management always- knowing my customers is so important. I would say the risk goes way up when customer is not "vetted" properly. Don't know if this helps, just my thoughts. It is scary the cost of litigation, versus the low profit margins out here.
Posted by: Tommy Blake - Friday, June 14, 2013 10:24 AM






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