The following is adapted from Quit Getting Screwed.
You signed a subcontract, spent $10,000 to buy the necessary equipment and supplies, and showed up at the job site. You were ready to start. Then, all of a sudden, the general contractor terminated your subcontract before you had even begun. What can you do now?
This scenario might sound like a nightmare, but if your subcontract contains a termination for convenience clause, it’s legal. Unfortunately, if it’s in your subcontract, there’s no getting around a termination for convenience clause. The best way to protect yourself is to avoid sudden termination in the first place.
Understanding Termination Clauses
A termination for convenience clause allows the general contractor to terminate your subcontract without any notice. This is what happened in the example above—the general contractor doesn’t even need a reason.
You might also see the other type of termination clause in your subcontract: termination for cause. Termination for cause goes into effect if you are in default, meaning you’ve failed to comply with the subcontract in some way. For example, you might have used the wrong materials, gone past the deadline for completion, or run out of money before the job is finished.
Usually, if you are in default under the subcontract, the general contractor will send you notice that you are in default. If you fail to fix the default, the general contractor can then terminate you and your subcontract. The result is the same as a termination for convenience clause, except that you get a chance to fix the problem before losing the project.
Negotiate Better Construction Contracts
At The Cromeens Law Firm, we have extensive knowledge and understanding of construction contract laws and are licensed in Texas, Georgia, and California. We are often able to solve contract disputes for our clients through informal negotiations, mediation, or arbitration. Work with us to equip yourself with the ability to properly evaluate your risks before you sign and negotiate your next subcontract with greater confidence and ease.
Protect Yourself Against Sudden Termination
So how can you avoid the shock—and potentially devastating cost—of sudden termination?
First, know what your subcontract says about when you are in default and the time you have to fix the default. If your subcontract contains only a termination for cause clause, make sure you adhere to its provisions or adjust the requirements to be more realistic, and you should be safe.
If, however, your subcontract contains a termination for convenience clause, it may need some heavier editing before you sign the subcontract. Here is an example of what the clause might look like:
TERMINATION OF THE SUBCONTRACT FOR CONVENIENCE: General Contractor may, without cause, terminate Subcontractor in whole or part. General Contractor will give Subcontractor written notice of such termination. Subcontractor will be paid for any Work performed; if Subcontractor had not started Work at the project, Subcontractor is not entitled to any payment.
As you can imagine, this provision does nothing to protect you from wasting thousands of dollars on materials or other costs to prepare for a project. That’s why you’ll want to remove these provisions; they serve no purpose other than offering an easy out for the general contractor if they find someone else to do your work for cheaper. This provision is completely one-sided, and you are taking a huge risk by signing a subcontract with this language.
I’ve Been Terminated. Now What?
You can take steps to avoid termination by altering your subcontract before signing, but what if it’s too late? What happens if you’ve already been terminated?
Nothing very good. First, payment for work you have already completed will be withheld until your scope of work is completed. When your scope of work is completed, if it has not cost the general contractor more than your subcontract amount to complete your work, you will be paid any remaining amount.
Be warned, however, that in all of my years working in construction law, I have never seen a subcontractor paid any amount after they were terminated. When you are terminated, the general contractor now must hire someone else to complete your work. The general contractor will not owe you any money if the replacement subcontractor costs more than you agreed to do the work.
Prevent Problems, Don’t Count on Solving Them
The best solution to sudden termination is to prevent it in the first place. You have negotiating power before you sign a subcontract—use it. Remove any termination for convenience provision because it does nothing to serve you; it only gives the general contractor an easy out.
If the subcontract includes a termination for cause provision, be familiar with all the requirements of the subcontract. Failing to follow any of them will cause you to be in default. Know how long you have to fix a default and respond immediately and in writing to any notice of default that you receive.
If you follow these guidelines, it doesn’t eliminate the possibility of termination entirely, but at least you’ll be protected from losing a job before you even start.
For more advice on negotiating better subcontracts, you can find Quit Getting Screwed on Amazon.
About Karalynn Cromeens
Amazing wife, outstanding mother to three super-talented daughters, small business owner, and committed leader to more than twenty employees, Karalynn has been a licensed attorney for more than fifteen years. She has spent her entire legal career in construction litigation, advising countless clients on how to stay out of litigation in the construction industry. Karalynn has reviewed thousands of subcontracts, breaking them down to help her clients understand exactly what they were signing, and giving those clients tips and advice on how to negotiate the best subcontract possible. Now she’s offering that same advice to you in Quit Getting Screwed. For materials referenced in the book, visit subcontractorinstitute.com.