Subcontractor Default and Termination Factors

Posted by Caroline H. Beavers | Sep 16, 2020 | 0 Comments

While terminating for default may seem like a simple decision, it is a decision that should be made with great caution as it can have serious impacts on the current project and future projects. Construction projects are fluid, and each has its own surprises and challenges. It is in the best interest of the general contractor to use understanding and objectivity when working with underperforming subcontractors. Making a deal with the subcontractor and formulating a comprehensive and reasonable plan for the rest of the project will be better for both parties. However, if termination for default seems like the best option, various factors should be considered.

Ability to find a Replacement 

If a qualified replacement is not available to complete the project, terminating for default is a considerably riskier option. An under qualified replacement can lead you to the same situation you are in right now, or potential defective work. It is sometimes better to continue to work with the current subcontractor than take a risk with an unknown contractor that could lead to even more serious consequences down the road. If a qualified replacement is available, this is merely the first hurdle to overcome before terminating for default is a realistic option.

Impacts on Schedule and Cost

Demobilizing the current subcontractor and mobilizing a new subcontractor is no small undertaking, and it can have serious consequences for the timeline and cost of a project. A review of the owner contract may also be directive here. If bringing in a new subcontractor cannot be accomplished while still meeting important schedule milestones, terminating for default again may not be a realistic solution. If these milestones can still be met, the impact on the schedule will inevitably lead to increased costs, in addition to the costs of finding a new subcontractor and bringing the crew onto the project. Terminating the subcontractor and bringing in a new contractor may be so expensive that it is cost prohibitive and does not make financial sense.  This is assessed on a case by case basis and requires a thorough understanding of the facts and players. 

Your Reputation

People talk. Within the construction field, reputation is one of the most important factors considered when choosing contractors/subcontractors. Terminating for default can tarnish your reputation if other subcontractors view the termination as unfair or unreasonable, causing them to not want to work with you. This could lead to the inability to find subcontractors for your projects or to find subcontractors at a reasonable bid. Termination could also affect the way project owners view you. Owners may view you as unable to work with others or lacking objectivity when put in stressful situations. It is possible that others within the construction community will view the termination as unreasonable, and it is vital that the potential damage to your reputation is considered before terminating.

Terminating for default can lead to serious consequences for a contractor. Not only can termination have negative impacts on the current project, but termination can lead to difficulties for future projects. Termination for default should not be done without a plan, and finding solutions with the current subcontractor might be an option to consider. However, sometimes that is not a viable option. 

The information contained on this blog is intended to be general information only and not legal advice. This blog topic is not intended to be fully comprehensive. For these reasons, we suggest you seek a licensed attorney to help you review your agreements and your facts. If you have any questions about the contents of this blog or if you need legal advice regarding your project, please contact the Beavers O'Connell Group at (720)538-0363, [email protected]or fill out a form under our Contact page.

About the Author

Caroline H. Beavers

Having grown up working on a cattle and row crop farm in Arkansas, Caroline draws from those experiences to provide her clients with services that are replete with those values, including grit, tenacity, integrity and respect. Caroline also believes open and frequent communication is essential to the attorney-client relationship and works tirelessly to problem solve with and for her clients. Caroline learned early on you cannot predict the weather but you can put yourself in the best position to respond to it and Caroline strives to assist her clients when storms arise.

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