Termination for Convenience: Can a Construction Contractor Be Terminated Without Cause?
Termination for convenience.
Your construction business hasn’t encountered it yet, but you know that at some point, it's inevitable.
Should you be concerned?
In this guide we’ll:
- Take a close-up look at termination for convenience.
- Explain how it applies to a construction contract.
- Let you know what termination for convenience means for your construction business.
Flexbase: Stay On Top of Your Progress Billing and Avoid a Costly Backlog if Your Contract Is Terminated for Convenience
At Flexbase, we have the know-how it takes to help construction companies like yours manage progress billing and improve their cash flow.
And being cash flow positive means you have one less thing to worry about should a contract be terminated for convenience.
With Flexbase’s innovative software, you’ll be able to easily:
- Generate compliance paperwork, such as:
- Lien waivers
- Insurance documents
- Notarization
- Schedule of values
- Create and generate invoices and payment applications for every client
- Request payments and send late payment reminders
- Track projects, materials used, and receipts
- Communicate directly with your clients through our app
- Manage your cash flow
- Integrate with other construction scheduling software
And the best part is, with the Flexbase app:
- There are no licenses or subscriptions needed.
- Our entire platform is available for use immediately after getting started.
- You don’t pay until you receive payment.
At Flexbase, our automated systems take care of the hard work for you, so you can focus all your energy on building your construction business.
What Does Terminate for Convenience Mean?
Termination for convenience is a legal term that allows either party in a contract to end the contract if they believe it’s in their best interest to do so.
To be implemented, a termination for convenience clause must be included in the contract.
What Is a Termination for Convenience Clause?
Termination for cause contracts, which give the owner the right to end the contract if the contractor defaults in some way, are a part of nearly all construction contracts.
A termination for convenience clause, on the other hand, enables one or both parties to end the agreement for any reason.
Simply put, either party may terminate for convenience:
- At any time
- Regardless of the contractor’s performance
- Without having a specific reason for doing so, such as breach of contract or default
In the past, a termination for convenience clause was mainly seen only in government construction contracts.
But in recent years, termination for convenience has become increasingly common in the private sector, as well.
The main purposes of a termination for convenience clause are to:
- Clearly define the amount of compensation a contractor would be entitled to should a termination for convenience occur; and
- Allow the owner to avoid having to pay the contractor the profit they would have earned on the balance of the contract since a normal contract provides that the contractor gets paid for work performed, as well as any profit they would have gotten from uncompleted work
In short, a termination for convenience clause allows both parties to end the business relationship in a friendly and peaceable way while avoiding the need for costly litigation.
If a termination for convenience clause is not present, the only way to terminate a contract would be due to a breach or default.
A Termination for Convenience Sample: What to Look for in a Construction Contract
It is essential to be able to identify a termination for convenience clause in your construction contract.
As a general rule, if there is a section in the contract that makes it sound as though one party can simply walk away from the deal without having to justify their actions, it is probable that a termination for convenience clause may be in effect.
What might this look like?
A commonly used example of a termination for convenience clause comes from The American Institute of Architects or AIA.
Section 14.4.1 of the AIA A201 contract reads:
“The owner may, at any time, terminate the Contract for the owner’s convenience and without cause.”
The contract then goes on to describe exactly how to go about terminating the agreement.
Notably, it states that upon receiving notice of termination from the owner, the contractor must:
- Cease operations
- Take whatever action is needed to preserve and protect the completed work
- Terminate remaining subcontracts and purchase orders
Should Contractors Agree to a Termination for Convenience Clause?
The fact of the matter is contractors don't usually have a choice.
A contractor who says no to a job due to a termination for convenience clause may quickly find the job has been offered to their competition.
Before agreeing to a contract, you'll want to be sure to review the termination for convenience clause, if there is one.
You should probably object to a contract that has the following wording:
“If termination is later determined to be ‘for cause,’ the termination will automatically convert to a termination for convenience.”
What Does FAR (Federal Acquisition Regulations) Have to do With Termination for Convenience Clauses in Construction Contracts?
Termination for convenience started with the federal government.
It was originally introduced to give the government the ability to terminate a contract when they felt it was in their best interest to do so.
For example, if the government no longer needed the goods or services laid out in a contract, it would no longer be in their best interest, nor in the best interest of the taxpayers, to see the contract through to fruition.
Termination for convenience has since gained popularity in private works projects.
Why Would a Project Owner Terminate a Contract for Convenience?
Project owners may want to initiate termination for convenience for a number of reasons.
- Many owners will use a termination for convenience clause as a safety net if they aren’t certain there are sufficient grounds to terminate a contract for cause.
- It's not uncommon for developers to terminate or postpone a project if the market isn't looking favorable.
- When the owner realizes they may run out of cash, their safest and cheapest option may be to terminate the agreement before it is too late.
Terminations based on convenience have a tendency to be a much less messy process than a termination for default.
And, while a project owner will still have to pay for work performed and possibly pay a penalty of some type, these costs will pale in comparison to the court costs of battling a termination for default.
Can a Contractor Terminate for Convenience at Any Time?
The short answer is yes.
By definition, a termination for convenience allows either party to terminate the contract at any time.
There are however some limitations when it comes to using termination for convenience.
Primarily, termination must be done in good faith and fair dealing.
If termination is executed in bad faith, the terminating party may not be entitled to exercise the termination for convenience clause.
Money Owed When a Contract Is Terminated for Convenience
While a termination for convenience clause can serve to simplify the termination of a project, it doesn't simply enable a quick “parting of the ways.”
Typically, there are costs the owner will incur if the contract is terminated.
- For starters, the customer will have to pay for all the work performed prior to the termination.
- They may also be required to pay for the cost of wrapping up any subcontractor or vendor agreements that would be affected by the termination.
- A liquidated damages clause, setting forth a penalty for termination for convenience, may also have been added to the contract.
- And finally, some termination for convenience clauses may entitle the terminated contractor to be paid for profits they would have acquired upon completion of the job had they not been terminated.
If you're concerned about potential loss of income or having to fight for the money you’re owed should a contract be terminated for convenience, Flexbase can help.
We maximize your cash flow and help you stay on top of your payment requests by sending your construction invoices, along with friendly, automated reminders to resolve any late payments.
A claim for lost profits alleges that, as a result of the action or inaction of the other party, monies were lost and should be recouped by the party who lost them.
The bottom line is that lost profits can be extremely difficult to prove.
In order to prove a claim for lost profits, a contractor must establish:
- Reasonable Certainty - The lost profit damages can be proven with reasonable certainty.
- Proximate Cause - The conduct on which the claim is based actually caused the lost profit damages.
- Foreseeability - The party causing the lost profits could have reasonably foreseen the potential damage that could result from their actions.
Are There Any Limitations to a Termination for Convenience Clause in a Contract?
Yes, there are limitations to a termination for convenience clause.
Namely, both parties in the contract must enter the agreement in good faith and with the full intention of fair dealing.
Failure to display either of these could result in liability, should one of the parties try to terminate the contract for convenience.
For instance…
Say the owner decides to terminate the contractor when 95% of the work is complete, in an attempt to avoid making a final payment.
Or maybe the owner wants to terminate a contract for convenience in order to give the remaining work to a less-expensive contractor.
Each of these scenarios would be considered to have been done in bad-faith.
What Is Tortious Interference With a Construction Contract?
Tortious law is designed to protect the contract parties against personal wrongs being committed by parties outside their contract.
Specifically, it comes into play when a third party intentionally damages or attempts to damage, the contract between two parties.
For example, if a third-party contractor is attempting to undercut the current contractor, tortious interference might come into play.
If it is determined that a party has suffered damages, compensation will be based on losses suffered and may also include punitive damages.
What Is the Difference Between Termination for Convenience and Deductive Change Orders?
A deductive change order may be presented when a customer wants to reduce the amount of work that was agreed upon in the original contract.
This may be a cancellation of a large portion of the work or may refer to one or more small reductions.
Sometimes, termination for convenience can be done in a partial manner, meaning if it’s stipulated in the contract, the customer may choose to cancel only part of the work.
In this case, the contractor would continue to perform a specified portion of the remaining work.
In the event a contract doesn't allow for termination for convenience, a deductive change order could conceivably be utilized to accomplish the same purpose.
How Flexbase Can Streamline Your Entire Payment Process to Get Paid Faster After Termination for Convenience
Let's be honest.
Every contractor worries, at least a little, about losing income in a termination for convenience.
That's the beauty of Flexbase.
Our automated system fully manages your progress billing for you, meaning you’ll have less money owed should a termination for convenience come into play.
What are you waiting for? Contact Flexbase today to get started.
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