Are Project Owners Misusing Convenience Terminations?

A project owner’s right to terminate a contract for the owner’s convenience is a vital tool. A termination without cause gives the owner flexibility to respond to contingencies such as lost project financing or changing market conditions. The contractor, who was not in default, is compensated for work performed prior to termination. The most common contractual formula is cost plus profit, along with settlement costs such as subcontractor termination, demobilization and other contract close-out costs.

While termination for the convenience of the owner is a legitimate contract right, it is sometimes misused by project owners. A partial termination may price out at less than a deductive change order. Owners may use convenience terminations to protect themselves against their own design errors or inaccurate quantity estimates. The use of these clauses for claim defense purposes is hardly unheard of.

In a recent case, a federal agency responded to a contractor’s request for an equitable price adjustment with a termination for the convenience of the government. The agency then attempted to subvert the contractual pay formula by compensating the contractor for a quantity overrun at cost plus profit, an amount that would have been considerably less than called for under the contract. The agency was unsuccessful in its effort, but it is a good example of the abuse of the termination for convenience clause.

Have you seen incidents where these clauses have been misused? From a project owner’s perspective, are there any circumstances in which the exercise of this contractual right would not be appropriate?  I invite your comments below.

Bruce Jervis, Editor
Construction Claims Advisor

Comments

[Daniel F. McLennon, Esq.]

Bruce:

Here is a link to a short article on my website about a recent Maryland high court case allowing a cause of action for misuse of the termination for convenience clause, along with authorities that would support such a claim in California: http://mclennonlaw.com/blog/?page_id=653.

Best, Dan

[Jay Dinielli]

The federal government delayed the notice to proceed on a construction contract it awarded to a contractor. The delay was longer than the 270 day duration the contractor had to perform the work. Eventually the government terminated the contract for convenience then wanted to deny the contractor its overhead costs during the delay period. Follow the link below to read how the contractor overcame this situation.
http://www.kendall-dinielli.com/unabsorbed-overhead.html

[John O'Neil]

Bruce:
I was consulted about an Owner who was demanding that the Contractor reduce the price for the second phase of the project, por they would termnate for convenience and go out for bids. Obviously thisis when the market was going donw, and some contractors were bidding loow just to get work.

[Bruce Jervis, Editor, Construction Claims Advisor]

John...Both the Questar Builders case discussed by Dan McLennon and the Nicon case discussed by Jay Dinielli suggest that the owner could not misuse the termination for convenience to renegotiate the contract price.

[Jim Scott]

In the case that the Owner terminates for convenience is there a case for the Contractor
legitimately claiming for loss of profit on the total work that was proposed under the contract