Termination Of Construction Contracts

By: Lance T. Denha, Esq.

The majority of construction projects proceed from start to finish as originally planned, but occasionally a situation arises that ends with either the client, the contractor or both parties refusing to continue. In nearly all cases, ending a contract before completion results in added costs to both parties, but sometimes it’s the only viable solution. Before cutting ties, read your contract carefully. Below are items to consider termination of completion of a construction project.

Termination Clauses

Some construction contracts include termination clauses that allow either the contractor or the client to withdraw from the contract. Typically, this is when a breach of contract occurs, such as the client not making a payment as agreed upon or a contractor not fulfilling his end of the bargain. In some cases, a termination clause might offer the option to renegotiate the contract if construction material costs have increased substantially, if the client fails to secure financing or if other unforeseen costs arise. Termination clauses vary. Because a standard termination clause cannot foresee every potential situation, some contract termination disagreements end up in court.

Financial Considerations

If a contract terminates before construction begins, which can happen in the case of a building authority or zoning board refusing to issue a permit, both parties can usually go their ways with minimal financial damage. When the project ends mid-contract, additional financial considerations come into play. Materials might be on order or already paid for but not installed, or the contractor might be due partial payment for services rendered. The client should immediately notify his lending company not to release any more funds from a construction escrow account until the matter is settled.

Minimizing Fallout

When one contractor leaves, another contractor must take his place, and this can be a bumpy ride for everyone involved. Construction practices can vary, and the new contractor might not be willing to proceed in the same manner as the original contractor. On large construction projects, a mediator can work with all parties to make the transition as smooth as possible. It never helps either party to become obnoxious. The outgoing contractor doesn’t want a blight on his business reputation, and the client doesn’t want to be known as being impossible to work for.

Lien Releases and Mechanic’s Liens

When a client does not pay a contractor for services rendered, the contractor can file a mechanic’s lien on the deed to the property, forcing the property owner to settle the account before she can sell the property. This also holds true for subcontractors and suppliers who did not receive full payment for their materials or services. The property owner bears this unenviable burden. During the dissolution of the contract, the client should get signed lien releases from every subcontractor or supplier as proof they received payment before the client gives the general contractor the final payment. The bank financing the project often helps obtain the lien releases.

Before cutting ties, read your contract carefully. Some termination issues might be addressed in the contract, while others might be outside the scope of the wording.