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Critical Construction Clauses: Termination for Convenience

Two people walking down the wedding aisle rarely think at the time about how to divide their assets in the event of a divorce. In some circumstances, however, the couple will have entered into a prenuptial agreement, outlining the property and financial rights of each spouse in such an event. Most construction contracts, however, do look ahead to a similar break-up between the owner and general contractor or between the general contractor and one of its subcontractors.

Although marriage may have additional personal entanglements to resolve as compared with the relationship between parties on a construction project, creating a framework to resolve financial disputes in the event of a termination of a construction project (and before any dispute appears) is advantageous to all concerned.

Contractors and subcontractors in Maryland must consider two types of construction clauses dealing with termination: 1) termination for convenience, and 2) termination for cause. While both deal with the termination of the construction contract, the financial implications will vary depending on the clause invoked. We deal here with terminations for convenience, saving termination for cause for a future discussion.

Termination for convenience clauses are standard in public and private construction projects, permitting a party to terminate a contract without actually breaching the contract itself. The provision will require that the non-terminating party be properly compensated for the work performed and materials furnished to date, but excluding compensation for profits and overhead for work not yet performed and materials not yet furnished. Typically, a termination for convenience clause contains a notice provision, outlines what the non-terminating party must do upon receipt of notice, and the further actions the non-terminating party must take to receive compensation as a result of the terminating party’s decision to terminate. 

In public projects, statutes provide the framework for terminations for convenience. On federal projects, the procedures are usually enumerated in the Federal Acquisition Regulations (FAR). The part dealing with termination for convenience by the federal government allows the contracting officer to terminate a construction project “when it is in the Government’s interest”, provided written notice is govern. Upon receipt of the notice, the contractor must stop all work and refrain from placing further orders in accordance with the notice. This starts the process in which the contractor must provide an inventory schedule within 120 days of the effective date of the termination and a final termination settlement proposal within one year from the effective date of the termination. Failure to do either may result in a waiver of any claim. The Government and contractor may work to amicably resolve the final termination settlement; but failing that, the FAR sets a payment schedule in which payment should be made and provides the contractor with a right to appeal the amount paid.

For contracts with the state of Maryland, the Maryland regulations create a mandatory termination for convenience provision in construction contracts, allowing for termination if the procurement officer determines that such termination is in the best interest of the state. Similar to the provisions outlined in FAR, if a construction contract is terminated by the state of Maryland, notice specifying whether the termination is partial or in its entirety will be given by the procurement officer. In that event, the contractor must stop work and refrain from ordering additional materials. A termination claim must be submitted by the terminated contractor within one year after the effective date of termination. Additionally, if a settlement amount cannot be reached, and if the contractor disagrees with the procurement officer’s determination, a right to appeal the procurement officer’s decision is given to the contractor. 

For private construction projects in Maryland, termination for convenience clauses are permissible and Maryland courts have allowed the contracting parties to fashion the methodology in which to complete a termination for convenience. This freedom to negotiate terms of termination for convenience permits, among other things, compensation for lost profits for the entire construction project, which is not permitted for federal or Maryland public projects. 

For more information please contact Michael Siri at 410-583-2400 or siri@bowie-jensen.com.

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