Subcontract Termination: The right business decision?

November 07, 2014

construction

Sometimes the grounds for termination are absolutely clear. And sometimes several legal options are available. But when preparing to terminate a subcontract, there’s one more question to ask: Is this the right business decision? We turn to Burns Logan’s Southeast Construction Law Blog for the answer.

The following is an excerpt from a September 2014 post on the blog titled Subcontract Termination: Not for the Faint of Heart:

After a few weeks of poor performance by the stucco subcontractor, my client and I sat down to determine all the possible avenues to resolve the issues. The first thing we did was pull out the subcontract which controlled the stucco subcontractor’s work. We wanted to be sure that the subcontract included all the necessary provisions to allow my general contractor client to remedy the situation. Some of the common default provisions in subcontracts include:

  • failure to prosecute the work promptly and with due diligence;
  • failure to prosecute the work in a workmanlike and safe manner;
  • failure to supply proper supervision;
  • failure to properly staff the job;
  • failure to supply materials and equipment of proper quality and quantity;
  • failure to promptly correct defective or deficient work;
  • failure to pay sub-subcontractors or suppliers;
  • failure to maintain the project schedule as directed by the contractor; and
  • failure to submit proper progress and completion schedules.

We found that this subcontractor had violated many of the standard default provisions in my client’s subcontract. Therefore, we felt we had the proper authority to issue notices of default.

Next, we discussed what legal remedies were available under the subcontract. Those remedies included:

  • supplementing the subcontractor’s workforce;
  • having the second subcontractor take over a portion of the subcontractor’s work;
  • making direct payments to the subcontractor’s material suppliers, equipment suppliers, sub-subcontractors, and laborers; and
  • accelerating the subcontractor’s work.

In addition, we also looked at the contract provisions which controlled how to actually terminate the subcontractor. When termination is an option, the general contractor has to be sure they can adequately complete the work with as little disruption as possible. This means making sure the subcontract allows the contractor to take possession of the subcontractor’s drawings, materials, tools, and equipment as is necessary to complete the subcontractor’s work with the contractor’s own forces or with another subcontractor.

After we had all the options laid out for us, we talked about really what mattered in that situation: Was terminating this subcontractor the right business decision?

When considering termination, there are a lot of business factors to consider. First, what impact to the project time and quality will be felt by replacing the subcontractor? Is the subcontractor’s work and activities onsite so egregious that the inherent time and cost impacts will be overcome by terminating the subcontractor? Many times this is a very close call. Unless your subcontractor is acting particularly egregious, it is often better to try to cure the defects of the subcontractor rather than simply terminating the subcontractor. However, sometimes it just makes sense to get rid of the “bad apple” subcontractor on a job, especially if the job is expected to last an extended period of time.

On this particular job, we ultimately determined that it was not the best decision to terminate the subcontractor. My client brought in another subcontractor to supplement the stucco subcontractor’s work and to provide an independent quality control program. We also charged the subcontractor for this additional work. Ultimately, this motivated the stucco subcontractor to complete the work and to complete it properly. While it was not an ideal situation, the project got completed and potential disputes were resolved on the front end of the problems rather than a lawsuit at the end.

Read the full post on the Southeast Construction Law Blog and learn more about this important issue here.

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