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D4COST Software

Arthur O'Leary, FAIA, MRIAI

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To illustrate this article, it is assumed that the construction contract consists of: Standard Form of Agreement Between Owner and Contractor where the basis of payment is a Stipulated Sum, AIA Document A101-1997, or Standard Form of Agreement Between Owner and Contractor where the basis of payment is the Cost of the Work Plus a Fee with a Negotiated Guaranteed Maximum Price, AIA Document A111-1997, and General Conditions of the Contract for Construction, AIA Document A201-1997. 

Terminating the Contractor
One of the most disruptive of events that can occur in construction is the owner’s decision to oust the contractor and terminate the contract. The owner’s necessary right to terminate and the governing terms and conditions should be included in all construction contracts. Contracts based on standard AIA documentation include a practical termination procedure that respects the interests of both owner and contractor.

The AIA general conditions provides for three termination possibilities:
1. Termination by the contractor. (A201, Paragraph 14.1)
2. Termination by the owner for convenience. (A201, Paragraph 14.3)
3. Termination by the owner for cause. (A201, Paragraph 14.2)

The first and second cases provide for certain conditions precedent and prescribe orderly procedures for termination. Neither of these cases requires the architect’s approval or certificate of opinion.

However, in the third case the contractor’s interests are protected from an ill-informed or precipitate owner by requiring the architect’s concurrence in the form of a certification that there is sufficient cause to justify the contractor’s expulsion. It also shields the owner from making a potentially costly error in judgment.

Usually the reason the owner wants to expel the contractor is that a series of adverse events gradually causes a loss of confidence and trust in the contractor’s abilities or motives, resulting in the fear of monetary loss, or concern that the project will not be completed on time. Sometimes the owner and contractor develop irresolvable personality conflicts.

These general reasons, while compelling, are not listed among the specific grounds that justify the contractor’s removal. They are merely graphic descriptions of the owner’s state of mind. The architect’s certificate must be based on one or more of the concrete reasons stipulated in A201.

Applying the Contract Procedure
Considering the far-reaching legal and economic consequences of ejecting the contractor, both owner and architect must be meticulous in applying the dismissal procedure delineated in the contract. There is little likelihood that an ousted contractor will voluntarily concede to an involuntary expulsion without rigorous contention.

The dissatisfied owner should be advised to seek the architect’s considered evaluation of the contractor’s alleged shortcomings. If they can be honestly sustained, in the architect’s independent judgment, then a written certificate should promptly issue. The architect’s opinion should be based upon current firsthand knowledge of field conditions and personal examination of the relevant documents and not simply an unconfirmed reiteration of the owner’s position.

The Architect’s Certificatee
The architect’s certificate should carefully correlate each of the contractor’s supposed transgressions with the corresponding reason in Subparagraph 14.2.1. (See Reasons Justifying Owner's Termination of the Contract)

It is inevitable that the certificate will be minutely dissected, thoroughly discussed, and painstakingly analyzed by the contractor’s team of technical advisors and legal counsel.

The architect should have appropriate backup documentation or other proof or evidence of each of the allegations set forth in the certificate. Some of the allowable reasons are not exactly defined, as in Subparagraph, failure “to supply enough properly skilled workers or proper materials.” Thus the architect will have to make a subjective professional judgment as to what constitutes enough. Similarly, in, the architect will have to decide what constitutes a “substantial breach of a provision of the contract documents.”

When an owner, in a moment of panic or intemperance, fires the contractor and then seeks legal advice, counsel will generally review the contract’s termination provisions and remind the owner of the required architect’s certificate.

The certificate should be dated. A certificate dated after the expulsion date would not be very impressive to construction arbitrators, while a fraudulently pre-dated certificate can produce obvious problems with the architect’s honesty of purpose. A prudent owner would have served a copy of the architect’s certificate on the contractor simultaneously with the termination notice. When the contract is bonded, the termination notice and certificate should also be served on the surety. All of the termination procedures should be performed within the time limits prescribed in the contract.

There is always the risk that an ejected contractor will be able to convince arbitrators that the termination was unjustified. Then, the owner’s burden will be doubly onerous. Not only would there be the excessive completion costs and delayed completion with a new contractor, but also the payment of lost profits and damages to the discharged contractor. All this would be further compounded by the necessarily extensive legal costs.

Note: Further information on termination of construction contracts will be found in “A Guide to Successful Construction - Effective Contract Administration,” Third Revised Edition, by Arthur F. O’Leary, FAIA, MRIAI, Chapter 20, Termination of the Construction Contract.

Reasons Justifying Owner’s Termination of the Contract
AIA Document A201, Subparagraph 14.2.1
The Owner may terminate the Contract if the Contractor:

1. Persistently or repeatedly refuses or fails to supply enough properly skilled workers or proper materials;
2. Fails to make payment to Subcontractors for materials or labor in accordance with the respective agreements between the Contractor and the Subcontractors;
3. Persistently disregards laws, ordinances, or rules, regulations or orders of a public authority having jurisdiction; or
4. Otherwise is guilty of substantial breach of a provision of the Contract Documents.


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