A project owner’s right to terminate a contract for the owner’s convenience is a vital tool. A termination without cause gives the owner flexibility to respond to contingencies such as lost project financing or changing market conditions. The contractor, who was not in default, is compensated for work performed prior to termination. The most common contractual formula is cost plus profit, along with settlement costs such as subcontractor termination, demobilization and other contract close-out costs.
While termination for the convenience of the owner is a legitimate contract right, it is sometimes misused by project owners. A partial termination may price out at less than a deductive change order. Owners may use convenience terminations to protect themselves against their own design errors or inaccurate quantity estimates. The use of these clauses for claim defense purposes is hardly unheard of.
In a recent case, a federal agency responded to a contractor’s request for an equitable price adjustment with a termination for the convenience of the government. The agency then attempted to subvert the contractual pay formula by compensating the contractor for a quantity overrun at cost plus profit, an amount that would have been considerably less than called for under the contract. The agency was unsuccessful in its effort, but it is a good example of the abuse of the termination for convenience clause.
Have you seen incidents where these clauses have been misused? From a project owner’s perspective, are there any circumstances in which the exercise of this contractual right would not be appropriate? I invite your comments below.
Bruce Jervis, Editor
Construction Claims Advisor
