Default termination is a serious sanction for construction contractors. Everyone has heard the tales of lost bonding capacity, inability to borrow operating capital, and disqualification from bidding. But default termination is also a serious – and frequently deleterious – step for a project owner.
The removal of a contractor from a project, which is almost guaranteed to prompt a dispute, is only the first step. The owner must then reprocure the remaining work on the project. The owner may or may not be working with the performance surety of the defaulted contractor. Delay is inevitable. Increased cost of completion is not unusual.
In a recent federal contract case, a defaulted contractor argued that it had been willing to complete the project, albeit late, and pay liquidated damages. The contractor contended this would have been less costly to the project owner than the default and reprocurement. The owner had been obligated, said the contractor, to perform a comparative cost evaluation prior to terminating the contract for default. The contractor lost this argument, but it does raise an interesting point.
Are project owners, particularly public project owners, too quick to elect default termination? Is serious consideration given to the comparative cost of a default and reprocurement as opposed to working with the contractor to achieve completion?
If a contractor affirms its obligation to complete and confesses liability for liquidated damages for late completion, isn’t an owner almost always better off staying with that contractor? I welcome your comments.
Featured in next week's Construction Claims Advisor:
- “Diligent Prosecution” Obligated Sub to Prime Contract Schedule
- Excavation Incidental to Construction Even without Building
- Contractor Allowed to Pursue Indemnification from Engineer