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:
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:
And the best part is, with the Flexbase app:
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.
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.
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:
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:
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.
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:
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.”
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.
Project owners may want to initiate termination for convenience for a number of reasons.
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.
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.
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.
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:
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.
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.
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.
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.
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.