Shutting Down the Construction Project

This article outlines significant issues that an owner should consider when suspending or terminating a California commercial construction project. Similar principles apply to projects in other states and of a residential, industrial or public nature, but the statutes and other requirements are highly technical, and the specifics of the laws and contracts should always be reviewed by counsel.

Delivering the News—Notice of Suspension or Termination

Most construction contracts include a clause conferring on the owner the right to suspend the work in whole or in part for any length of time, sometimes subject to an outside limit, as well as the right to terminate the work due to a contractor default or insolvency event or for the owner’s “convenience.” See, e.g., AIA A201 General Conditions, Article 14. (Termination for either side’s default or insolvency, and jobs where the owner and contractor have made claims against each other, are beyond this article’s scope.) The notice exercising such a right naturally should include all of the information required by the clause,such as the effective date of the suspension or termination and instructions on whether subcontracts or purchase orders should be terminated or assigned to the owner or its designee.

In addition, the owner should consider addressing matters in the notice or in a letter agreement confirming the state of contractual rights and duties. For example, the owner might require delivery of design work product and a formal assignment of copyright or other rights in that design. If materials have been ordered or are in transit or stored offsite, the owner might require that the manufacturer, carrier or warehouse operator be notified of the assignment of rights in those materials and have the contractor acknowledge the ownership transfer. Moreover, policies of insurance may require actions based on the transfer of care, custody and control of the project site and materials.

The owner generally will seek an acknowledgment of the specific amount owing to the contractor and the conditions on which such amount will be paid. The remaining payment generally includes costs of work done prior to the effective date of the notice, plus reasonable costs of demobilization, termination of purchase orders and shutting down operations, and undisbursed retention for work properly completed. Some contracts provide that a termination for convenience requires payment of a portion of the fee that the contractor otherwise would have earned, while under other contracts no such additional fee is owing. The payment should be released only upon receipt of lien waivers and releases completed by the contractor and by its applicable subcontractors and vendors.

Under what circumstances should the owner suspend rather than terminate the prime contract? Suspension usually entails some carrying cost or standby and security services and some additional amounts payable to vendors and manufacturers. As these costs add up, the owner eventually will need to decide whether there are sufficient prospects of restarting the project or selling it to a buyer who wants the contracts to remain in effect.

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