Have you ever been fired on a project? Have you ever been forced to pay for someone else’s work that you were supposed to be paid for? Most subcontractors think when they get terminated on a construction job that their responsibility to the project ends there. In reality, whether a subcontractor is terminated for cause or convenience, their connection to the project remains until the project is completed. Unfortunately, termination is just the beginning of the story, and there are so many things subcontractors could be liable for down the road that they need to be wary of.
What Happens if I am Terminated?
If you are terminated and are still owed money for work you have already performed, the general contractor does not have to pay you. The payments can stop. When you signed the subcontract, you promised the general contractor that your scope of work would be completed for the price in the subcontract. The general contractor has relied on that promise. When you are terminated, the general contractor may be uncertain that they can finish your scope of work for the price you promised. Legally they get to retain any funds owed to you to make sure your promise is kept and that your scope of work will be completed for the agreed upon price.
The next step in the process, for a general contractor, is to hire a new subcontractor to complete your work. Let’s think about this for a second. If you were the subcontractor that was going to present a bid for the work of a subcontractor that was fired, would you give your most reasonable price? As the potential new subcontractor, you know that the general contractor needs someone right away to keep the project on schedule…therefore, you would have leverage. The price of the replacement subcontractor will almost always cost more than what was agreed to in the original subcontractor’s bid.
Something to keep in mind: General Contractors add administrative fees. In most subcontracts, there is a provision that allows the general contractor to add a fee to the cost of the new subcontractor. This fee acts as a grievance for the hassle of dealing with the termination and finding a replacement. Normally, the fee is an additional 10 to 15% added to the cost of the alternate subcontractor.
What Happens if it Costs More to Complete My Scope?
Considering the factors mentioned above, it is highly unlikely that once you are terminated that the general contractor can complete your scope of work for the same price you originally agreed upon. Because of this, the general contractor can demand that you pay them the additional cost to complete your scope of work with the new subcontractor. If you refuse, they can take you to court or arbitration to recover their damages. Legally, you owe them the money. If you just ignore the lawsuit, they will get a judgment and come after your assets.
Bottom line: do not get terminated! The alternative will cost you way more money. But if you follow the steps we laid out in the first two blogs: putting everything in writing, and ensuring your right to cure, you have a good chance of avoiding a termination. These are just a few things you need to be aware of when working on a construction project. There are many things you could be liable for that you need to be aware of in your construction contracts. Contact us, so we can help you walk through every step of your subcontract. Joseph Munoz will teach you how to best protect yourself and your business from terminations at our free webinar on November 17, at 12 pm. Sign up today! We look forward to seeing you.