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Mutual Agreement of termination of a subcontractor

Good Morning One of our subcontractors is not performing and the we are in a mutual agreement to terminate. We do have a contract in place. I can think of the having a unconditional waiver for final payment. Also, we are planning to use his retainage to hire another subcontractor to finish the task. Do you have any guidelines for this type of situation. I can email you a copy of our original agreement. Thank You Ray Williams PS: To note both are Arizona companies and the project is in Arizona.

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Sep 18, 2019

When there's a written contract in place, termination (and getting payments squared away with the terminated party) should generally be done in the manner prescribed by the contract. Naturally, though, construction contracts won't always have extensive termination provisions - after all, no one wants to plan for the worst right there in the contract. Regardless, here are some things worth keeping in mind when agreeing to terminate a relationship with a subcontractor. Putting the termination in writing A termination should always be in writing, and it should generally lay out the factual reasons why the agreement is being terminated. In a situation where both parties agree to terminate the relationship, it'd probably be wise to put the termination conditions in writing and having the agreement signed by both parties. That way, everyone understands the terms of the termination and has clear expectations for moving forward. Obtaining a final unconditional lien waiver upon termination In addition to putting a termination in writing, it's a good idea to obtain a final unconditional lien waiver once final payment has been made to a terminated subcontractor. Arizona has strict lien waiver requirements (which you can read about here), so the best way to avoid a future lien from the subcontractor will be to obtain a waiver from them. Mechanics lien rights will only exist where the claimant hasn't been paid in full, but having a mechanics lien waiver in hand provides more security and makes it easier to dispute a future claim if one is made. For more on AZ lien waivers: Arizona Lien Waiver Forms & Guide – All You Need to Know. What to do with retainage of a terminated subcontractor Continuing to withhold a subcontractor's retainage and using it to hire another sub might end up being problematic. Retainage represents amounts earned by a subcontractor but that's being withheld until a later date. But, to be sure - it is an amount that has been earned by that subcontractor. So, since retainage represents payment for work that's already been performed, rerouting that retention payment to go to another party could create issues. If a subcontractor is willing to leave retainage on the table, it might not matter all that much. But, it's generally unwise to redirect retention to a third party without putting more thought into it. While a sub might not be entitled to their full retainage amount if they're terminated, that doesn't mean they won't be entitled to any of it. Amounts that relate to work which was satisfactorily performed very well may be due. Ultimately, though, what should be done with retainage is something that can be negotiated and agreed upon in a termination agreement. And, if there's an agreement in place regarding how retainage should be treated, any future disputes regarding prior retention payments should be bound by that agreement. As a final note, here are some resources I think should be valuable for you: (1) Termination for Convenience (2) Termination for Cause (3) Arizona Retainage FAQs

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