I’d like to say that the answer is clearly yes, but that’s rarely the case with construction contracts. Ultimately, it will come down to the facts of your situation and whether the construction contract specifically allows you to pull off the job.
Not Getting Paid
Not getting paid is probably the most popular reason contractors terminate a construction contract. The difficulty arises when we look closely at the circumstances leading up to the owner’s decision not to pay. Often times, the owner will claim that the pay applications were not properly completed. The owner may also claim that lien waivers must be submitted by you and your material suppliers before payment will be made. Knowing whether you have complied with all provisions of the construction contract is crucial when making the decision to terminate the construction contract.
The Construction Contract
Another item to consider, before the job starts, is whether the construction contract contains a right to terminate for failure to pay. Have you considered adding this to the contract to clarify your rights to walk away from a project if you haven’t been paid? Does that same provision provide for remobilization costs if you do return to the project?
The AIA A201-2017 specifically allows a contractor to stop work, but only if the architect fails to certify a payment or if the owner fails to make payment, and the contractor provides an additional 7-day notice to the owner and architect. Importantly, that same provision allows for shutdown and startup costs, and an extension of the contract time should the contractor return to work.
If you are not using the AIA contracts, consider adding your own provision that allows you to terminate the agreement if you are not paid within a certain number of days of submitting your pay application. This will certainly clarify your rights to terminate and potentially avoid litigation. Here is a simple clause:
Contractor may terminate this Contract if Owner fails to make timely payment. Contractor must provide Owner with 10-day notice of its intent to terminate and the reason for termination. Upon termination, Contractor shall be entitled to all costs incurred in the performance of the work and lost profit on unperformed work.
Take Away: Clarifying your right to terminate a contract will improve your chances of successfully walking away from a project.
If you you need help reviewing your termination clauses, we recommend you contact an experienced construction attorney.