Suspension & Termination
Suspension and termination on construction projects often results in litigation due to the contentious nature of taking such actions. Suspension occurs on a construction project when an owner instructs a contractor to temporarily stop work on all or a portion of the project. Termination occurs when an owner instructs a contractor to permanently stop the performance of work and leave the site. Construction contracts typically specify each party’s rights, obligations, and remedies for suspension and termination. When entering into litigation or considering doing so, careful consideration of the contractual requirements should be taken.
Common Issues Encountered Relative to Suspension and Termination Litigation and Arbitration
Contracts/projects may be suspended for a number of reasons. Contractors may submit suspension-related claims if the duration of the suspension is long enough to delay the project or impact progress. Therefore, suspension-related disputes often require a schedule delay analysis to evaluate the impact to the project’s critical path. Other contractor lawsuits may include, but are not limited to, the following claims:
- Standby or idle costs
- Demobilization/remobilization costs
- Other actual costs incurred due to the suspension
On longer suspensions, there may be a provision for compensation to the contractor for demobilizing from the site and later remobilizing to avoid the project owner having to continuously pay for labor and equipment that is not being used. In addition, if the owner's actions do not allow the work to proceed, but the suspension clause has not been invoked, the contractor may claim for constructive suspension. A suspension can also be implemented if there is a dispute between the contractor and the owner, and a termination is being considered. Additionally, some contracts contain provisions that terminate the contract if the suspension lasts longer than the specified duration.
There are two general types of termination typically addressed in construction contracts: termination for convenience and termination for cause, which is sometimes referred to as termination for default. In a termination for convenience, the owner may terminate the contract for whatever reason it wishes, such as economic/business reasons, or as the most expeditious way of eliminating a non-performing contractor with minimum risk of a legal dispute. Contractors’ remedies for termination for convenience vary from contract to contract, but may include the following:
- The reasonable cost of work performed prior to termination, including profit
- Anticipated profits on uncompleted work
- Justifiable and reasonable termination costs including project wind-down costs
- Other costs as may be mutually agreed upon
Termination for cause may occur when the owner believes the contractor has not performed according to its contractual obligations and thus has materially breached the agreement. Some of the more commonly cited reasons for terminating a contract for cause include the following:
- Failure to pay labor, subcontractors, vendors, or material suppliers
- Failure to meet the project schedule or diligently perform the work
- Defective or deficient performance
- Failure to follow applicable laws or regulations
- Failure to consistently follow safety requirements
It is important to read and follow the contract, as some construction contracts provide for excusable delays, such as force majeure. Thus, decisions to terminate for cause must also consider events which are excusable under the contract and prevent the contractor from performing as required.
Termination-for-cause contract clauses vary from contract to contract, but some may require the owner to provide proper notice to the contractor of its alleged breach or failure to perform and provide a reasonable period for the contractor to cure, or start to cure, the alleged breach.
To the extent that they are not waived by the contract, typical claims from owners under termination for cause include, but are not limited to, the following:
- Extended project duration and overhead costs (e.g., replacing one contractor with another almost invariably results in overall project delays)
- Loss of use
- Loss of profits or deferred production
- Liquidated damages or actual damages for delay
- Cost to complete the project if the final project costs exceed the value of the terminated contract less amounts paid to the terminated contractor
To the extent that they are not waived by contract, typical claims from contractors under termination for cause may include, but are not limited to, the following:
- Costs to bid the project
- Mobilization and demobilization costs
- Anticipated profit on the project
- Costs for work performed but not paid
- Home office overhead costs
- Winding-down costs
- Damages for loss of good will/loss of future business due to potential negative publicity following termination
- Betterment issues (changes or upgrades included in the owner’s cost-to-complete damage model that are above and beyond the contractor’s original scope of work)
Suspension and termination actions on complex construction projects are typically complicated and expensive to resolve and often result in litigation or other forms of dispute resolution. To facilitate accurate and persuasive construction claims preparation, owners and contractors are advised to maintain detailed records and documents, such as costs reports, progress reports, invoices, schedules, and other contemporaneous project documents.