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Coronavirus & Construction: How to Get Paid on Projects Terminated or Suspended for Convenience
What should you do to get paid if your construction projects are terminated or suspended for convenience due to COVID-19? Learn the right next steps to take to survive in this pandemic.
What you’ll learn in this webinar
- What is a termination or suspension for convenience?
- How to determine options based on your contract
- How to make a claim & get paid
Meet the hosts
Webinar Transcript
Seth:
Hey everyone, this is Seth Bloom, Senior Director of Attorney Services at Levelset and thanks for being with us today. I know things are a little chaotic out there with the Corona virus and we just hope that everyone out there that’s listening to us stays safe and is healthy. We’re going to continue to educate all of our clients and our customers with bringing on great programming and webinars like we have today terminations for convenience and project suspensions and the age of COVID-19. It’s brought to us by Peter Lindborg and he’s from the law firm of Lindbergh and Mazor from Glendale, California and they service most of the Southern California Los Angeles area and I’ll bet you can even get them up to Northern California if you need them. So without further ado, Peter, thanks for coming on during all this chaos. I know we have a lot of people online right now. Wow. Huge amount of participants. So I know we have a lot of questions, so have it away. Okay, great. Seth,
Peter:
Thanks a lot and glad to see you up and around. The idea for this seminar came to me where it should come from, which is direct from my clients because in one 48 hour period I had three separate clients tell me they had gotten multiple either termination notices or suspension notices on projects on which they were working. And some of these guys had been around, haven’t been around for forever and had never seen one of these before and had no idea how to react to it. These are clauses in contracts which everybody ignores and hardly ever get invoked. But when they get invoked, it’s a question of protecting your rights. So what I want to do today is go over three separate topics. Kind of broadly speaking.
Peter:
Number one is just what, what are terminations for convenience and suspensions of work? Number two, what are the factual and cost elements of each type of claim? Because when you get a termination for convenience, notice you have been given a claim and sometimes, but not all the time when you get a suspension of work, notice you’ve been given a claim. So we’re going to talk about those things. And then we’re going to get down kind of into the weeds a little bit and talk about how contractors make each kind of claim, right. So turning first to terminations for convenience. What we want to do is say a termination for convenience is a decision by the owner determinate all or a portion of the project. Now this is not,
Peter:
We’ll go,
Peter:
I’ll get down into, get down into the, to the weeds a little bit here on the, on the legal stuff, quote unquote, when you sign a contract, when Seth and I went into our first day of contracts law in law school, what we were taught is that, is that when you sign a contract, you have an obligation to perform that contract. And if you don’t perform that contract, it’s called breach. That’s fine. But
Peter:
Pushing, well, what’s, what is this now pushing during the second world war there were a lot of federal contracts going on and when the war broke out, the government’s priorities changed. And the government had no way to put a project either on hold or cancel a contract that it no longer wanted. So what the government did is it put in a termination for convenience provision. This is a pure creature of contract. There is no such thing as a common law or a statutory right in an owner to terminate a project for convenience. It’s only there because it is in the contract. So what you have to do, the first thing you have to do when you get a termination for convenience notice in your contract is go to your contract, find out what the rights of the owner are and and what you have to do in terms of complying with that.
Peter:
The two most prevalent termination for convenience clauses. And we’re going to be talking a lot about federal law because for two things, number one, a law on federal projects is very highly developed in this area. And number two, I know a lot of contractors out there on federal projects that are right now are getting termination for convenience notices and suspension notices. So we want to talk about that. The termination for convenience provision in federal law is found at the federal acquisition regulations in the numbers up there on the on the board. The second one is in the AIA A201 form that is the typical set of general conditions under an AIA contract, which is obviously a fairly commonly used contract in private works, but you will find in probably 99% of construction contracts between a prime and an owner that there is some type of a termination for convenience clause written in there. There almost always are. It’s become kind of an article of faith in our industry and it’s like I said at the top, it’s something that nobody ever pays attention to, but I bet you a whole lot of people are going to be paying attention to it now.
Peter:
Okay. The one proviso is in a termination for convenience, all termination for convenience clauses typically say that the owner can terminate for any reason at all or no reason at all, but if the owner is acting in bad faith, then that puts a limitation on invoking the termination for convenience clause. That’s not going to happen here because with, with, with covert 19 going on, there are lots of good insufficient reasons to either suspend a project or to say this project no longer makes economic sense. I’m going to terminate it halfway through. Okay.
Peter:
The other thing about termination for convenience clauses is that they’re typically written so that they can apply to either all of the project or a portion of the project. We’ll talk about that in a little while.
Peter:
Okay. What should you do when you get a termination for convenience? Notice. Okay. And literally you will get a letter that says, dear contractor or dear prime contractor, from the owner, the owner is exercising its right to stop work and here’s what you need to do. Okay? So the first thing you do is stop because any work that you do after you receive that termination for convenience, notice you’re essentially doing it as a volunteer. Okay? In other words, for free. So don’t, okay, stop work immediately. Second thing you have to do, call your lawyer. All right? And if the lawyer on the other end of the phone, greet you with stone cold silence because he or she has no idea what you’re talking about. Call a different lawyer. All right. This is no time for somebody to learn on the job. Okay. All right. Like I said, termination for convenience is a creature of contract, so you have to analyze two things. Number one, what’s the scope of the contract provision? Okay. What does it say about, about the owner’s right to stop work? What does it say about how much notice you have to be given? Does it say about the elements of a claim? Because a claim can vary or will vary by the termination for convenience provision and we’ll get to that in a sec.
Peter:
Okay.
Peter:
Then the next thing you should do is you should notify all your subcontractors and suppliers because they’ve got to stop work.
Peter:
Okay.
Peter:
Now, this is where things get really interesting for you primes out there because hopefully your lawyer has done a good job in your form subcontract and there’s something called the flow down provision in there which basically says if among other things is, if it’s not dealt with specifically in terms of this subcontract, then the provisions of the prime contract flowed down into the subcontract so that the prime contractor has the exact same right to terminate all the subcontracts for convenience under the exact same terms and that’s really important because if you’re terminating for convenience, if you’re being terminated for convenience by the owner on the one side under a certain cost reimbursement formula for instance, and you owe your subs on the other side for let’s just say the contract value of the work that they have performed today, you’ve probably got a dichotomy there in the amounts you’re going to receive from the owner on the one side and the amounts you’re going to have to pay out to subs on the other side, which becomes a problem.
Peter:
Okay.
Peter:
It said must be settled in conformity with policies applicable to the prime contracts. All right? And then you need to assemble your claims and management team because you’ve got a lot of work to do, okay? This is a situation when you get these notices, you are not without remedies, but you cannot sit on your rights here. You have to go about doing what is required, not only under the terms of the contract but assembling your claim. Okay? So let’s take a look at those.
Peter:
Alright.
Peter:
In a termination for convenience claim, like I’ve said, the contract provision defines what you can recover. For instance, and this is probably the most, this is the federal rule. It’s probably the most prevalent rule among all construction contracts because a lot of people have adopted the federal model. What you’ve got, and I’m talking about you’re, you’re working on a typical hard dollar fixed price job, okay? When you are working a project like that under the federal model and you get a termination for convenience, notice your fixed price contract has been automatically converted into a cost reimbursable contract. Okay? Now, what does that mean? What it means is under federal law, you are essentially going to recover on a termination for convenience, claim all of the money that you have spent on this job plus a reasonable markup, less the amount of payments you’ve already received.
Peter:
It’s essentially, to my way of thinking, at least, it’s essentially the quote unquote fairest way to terminate a, a contract for convenience. In other words, you’re gonna need to be facing a situation where the contractor is going to recover everything he or she is spent on the project plus a markup and, and less payments. Okay? And those costs can include pre-construction costs. I’ve got one client right now, we have a claim on a, on a termination for convenience, where that, where the termination notice was issued between notice of award and prior to notice to proceed, but the client had already spent about $75,000 just doing, you know, pre NTP work, ordering, scheduling, et cetera, et cetera, et cetera. So you can include those types of pre-construction costs in your claim, in other contracts, however you sometimes, as I mentioned previously, the termination for convenience is based not on the costs incurred by the contractor, but on the value, quote unquote, whatever that means received. And typically what that means is if you’re working on a schedule of values, then you get what the contract has assigned to the work you have accomplished thus far.
Peter:
Subcontractor claims.
Peter:
Okay. So
Peter:
One of the first things you have to do as a prime contractor, like I said, is notify your subs, tell them to stop work and tell your stubs to start putting their claims together. They’re going to have lots of questions, so you’re going to have to walk them through this kind of a process and what it is you need. But you need to gather up all of those subcontractor claims.
Seth:
Can you hear me? I was just gonna I was gonna we had a question come up.
Peter:
Sure, go ahead, Seth.
Seth:
Yeah, sorry. I know there’s a little bit of a delay, but Debbie asks, can the subcontractor who supplies materials still file their liens then?
Peter:
Yeah, you can sub, you can secure a, you can secure a claim with a lien. There’s no doubt about that. So you can, you still have, you still have your rights. Now what your claim may be worth is, is one issue, but there’s no doubt that you can secure that claim with a lien at that stage of the game.
Peter:
Mmm. So the next element of a, a termination for convenience claim would be things like rental and restocking charges. You know, a lot of times when you get a termination for convenience, notice you’ve got equipment that’s rented over and you’ve got a rental agreement that requires X amount of days fixed and you can’t cancel that. You can’t cancel that lease. Those types of charges that you have to pay when you return materials to a supply house, a lot of supply houses charge you restocking charges. You get to add those to your termination for convenience claim, you can do demobilization and site protection costs. Not only do you have just the cost of demobilizing, but in a lot of projects you have some pretty valuable stuff that the owner wants secured in one way or another. So the costs of protecting that type of equipment or, or the rest of the project or whatever it is, can get added to the claim. This is important. All right? This is, this is in a lot of cases, the one place where you get to add your claim preparation costs. That’s your outside professionals that your lawyers, that your accountants, that’s your own staff time in assembling this claim, all get to be elements of the claim in most cases.
Peter:
And you get your overhead and profit, like I said. So sometimes the overhead and profit is defined in the contract. Sometimes it’s whatever your overhead and profit rate was for the job in and of itself. And then on the AIA form, if you’re lucky enough to get terminated for convenience on an AIA contract, the AIA form says you not only get a markup on what you’ve spent, you get to recover the profit and the overhead on the unperformed portion of the work. It’s pretty hard to lose money when you’re getting paid your overhead and your profit on work you didn’t do. And then, like I said, you just subtract out the bottom the previous payments. So if you stack up all of these types of charges, that’s the amount of a termination for convenience claim in a partial termination for convenience, you have to not only look at what is being terminated, but also the portion of the project that’s still going on. Are there increased costs on your performance of the remaining work? Do you have, for instance, unabsorbed overhead? Have you encountered delay costs? Have you got other kinds of impact costs in terms of losses of efficiency?
Peter:
Okay. Then you have to look at whether subcontracts for the portion of the work that’s still going to be performed. Can they be assigned in the event of a termination for convenience and under what terms? For instance, the AIA two Oh one only provides for assignment of subcontracts in a termination for default, not in a termination for convenience situation. And if there is an assignment provision, then you, the contract should hopefully spell out what the general contractor will receive for the costs incurred already for those subcontracts that are going to be assigned.
Peter:
Okay. Now submitting the termination for convenience claim. Again, we’re going to default to the federal model. So unless you’re in a on a federal project, there’s no specific form. If you’re on a federal project, that typical form for submitting these, and you can look these up online, but there are forms SF 1436-04a, that’s the primary form. And the following form is essentially information about how you keep your books because these claims typically do get audited because remember, you’re converting a, a fixed priced hard dollar contract. Now to a cost reimbursable contract. Okay, and the other thing you know need to know at least on the federal project is that termination for convenience claims have to be submitted within one year of the date of the notice of termination.
Peter:
Okay, let’s go to suspensions for work before we run out of time. Suspension for work is a decision or action by the owner which suspends work on all or a portion of the project. This is not a termination, it’s not like we’re done now. We don’t want to play anymore. It’s just we’re going to be taking a pause. All right. This can be ordered by the government pursuant to the federal acquisition regulations, for instance on a federal project, but there are typically, again in all construction contracts, suspension of work provisions and unlike a termination for convenience, which can only be done by notice, a suspension of work can also happen constructively. That is essentially the owner is suspending the work without telling you it’s being suspended. If it’s done constructively, then the contractor has to deal with this just like it’s any other kind of request for a change or a claim. In other words, you have to give the, you have to give the owner whatever notice is required by the terms of the contract
Peter:
And the suspension can be for either a definite or an indefinite period of time. Some suspension notices that I’ve seen over the last couple of weeks, say 60 days, others say indefinite and so you don’t know when the government may start up work again. Okay. Let’s talk about examples of types of things that can lead to a constructive suspension and this is essentially the same type of list that you would see in the case of any other type of a delay claim. An unreasonable delay in making the site available. A failure to make timely progress payments, a delay in investigating contractor’s request for a change or a time extension and unreasonable delay in returning submittals or shop drawings. A failure to furnish owner supplied materials, errors or omissions in the plans and specifications, improper rejection of progress. Payment requests, issuance of numerous change orders, failure to respond to RFIs or make decisions within a reasonable time and a failure to make proper and timely inspections. Okay. The, the thing you’ve gotta be cognizant of here is that in a suspension claim, this suspension must be unreasonable for it to be compensable. Okay? So it’s kind of the same notion that you go through whenever you encounter a delay of any type on the project. Is it an excusable versus an inexcusable delay? If it’s an inexcusable delay, in other words, contractor’s fault, nobody’s going to get anything either time or money. If it’s, if it’s excusable, then the next question becomes, is it compensable versus non-compensable delay? Okay. In other words, am I not only going to get time for this, but am I gonna get paid for this? Okay. So when we’ve been talking about unreasonable suspensions of time, what we’re talking about is something that’s ipso facto, a compensable suspension you know, a, a compensable, a compensable suspension and an unreasonable suspension. Okay? You’ve got to make sure that there’s no concurrent delay on the job that’s already holding up the job.
Peter:
Because if there is, then you’re not going to get compensated. You may get time but you won’t get money. And like I said before, the suspension has to be unreasonable given the facts and circumstances of the project. What does that mean? Well, let’s just say for instance, you get a 60 day suspension notice on a four year long project that you’re in say year two of right now. And there is 90 days float built into the project schedule as it currently sits. Well, if the owner is putting the project on pause for 60 days, when there is 90 days to give, that’s probably not going to be an unreasonable suspension. All right? On the other hand, if you’re working on a four month project and you get a 60 day suspension notice, I’m gonna add that that claim is probably going to be deemed to be an unreasonable suspension of time given the facts and circumstances of the project.
Peter:
Okay. All right. So like you said, you’ve got to decide first whether it’s excusable versus an inexcusable delay and an excuse and excusable delay entitles a contractor to extension of time, but not necessarily to increase compensation. And an excusable delay is not usually a foreseen and not the fault of either party. Now I will tell you that there are a lot of owners taking the attitude right now on project suspension claims that these suspensions may entitle contractors to time, but not money because this is a result of unforeseen events. I think that that’s a little baffle. And again, I think you have to look at the facts and circumstances of each particular project. Okay? But I will tell you that the, that a lot of owners are now taking the attitude that this is an unforeseen force and therefore it may entitled contractors at time, but not additional compensation.
Peter:
Okay. If you do have an unreasonable suspension of time or suspension of work, then what are your cost elements? This is like any other delay claim, all right? You’ve got your extended direct job expenses, salaries, performance superintendents, blah blah, blah, blah, blah equipment, standby costs, additional local office expenses, trailer phone utilities, et cetera, et cetera. Increased material costs or labor wages or other expenses due to escalating prices. If you get, if you’re on a project that gets delayed or gets suspended and your material costs or labor costs go up in the interim, that could be an element of your claim. You got additional insurance costs because of the extra time. I mean, insurance is a time driven cost. You might have additional bond premium expenses and particularly in the case of an indefinite suspension on a project, if you’ve got one of those, you may have the right to claim for extended home office overhead.
Peter:
I won’t go into the Eichleay formula because that’s an entirely different webinar as to how home office overhead is calculated. But if you’ve got an indefinite suspension on a given project, you may have the right to claim home office overhead in your suspension of work claim and you submit a suspension of work claim just as you submit any other requests for a change order. Okay. You’ve given your notices, you’ve assembled your costs. Yes. Send the, you send the client whether it’s sub to prime or prime to owner you send them a request for a change and that’s it. I think we made it.
Seth:
Yup, that was great. And in fact, you gave us a minute or two for some questions, so that will be good. Someone had asked about the PowerPoint presentation and we’ll still, we’ll make it available to you. I’m not sure exactly how that will happen, but we will do it. So Elizabeth had asked, we haven’t received any termination notices, but we do have several jobs that have suspended due to the shelter in place orders in our, in our area. Is there a way to make a claim for our expenditures on these jobs?
Peter:
I would say the answer to that may very well be yes. I mean, you’ve got you, you’re, you may be incurring costs that you would not otherwise incur. You may have had to demobilize from the job and, and when the job starts back up, you may have to remobilize that’s, that’s two extra sets of those expenses. You may have additional security expenses on the on the job, keeping it safe while the, while the project is suspended. You could have other sets of costs depending the Powell how long the suspension goes on. So yeah, if it’s additional sets of costs resulting from a suspension, I would say at least when in doubt, make the claim.
Seth:
Okay. And I have one more question here. If I submit my claim as a subcontractor, but the general contractor doesn’t send to owner, what are my options?
Peter:
Well it’s pretty brave contract. It ‘s a pretty brave general contractor. But, but your contract right there is, is, is clearly against the prime contractor. The prime contractor chooses not to send your claim on. Then the prime contractor tends to own that claim. And again, just like we said in response to the first question, the you’ve still got your, your standard job rights depending on what kind of job you’re on to secure that claim in terms of bond or lien or whatever.
Seth:
Peter, I have a question. It’s a little bit more general, like we’re at levelset, down here in new Orleans and we’ve been hit pretty hard with COVID, a little bit less than a, we’re a hotspot over Southern California. So, but I have noticed that in certain governmental briefings that construction is an essential service. So when I walk around my neighborhood alone to get my, my walk-in per day, I see construction going on. I see cranes moving. So how are people justifying these suspensions when construction is still allowed with some of these precautions, if that’s state by state? How is that working and how will that affect litigation?
Peter:
That, that’s a really good question. Yeah, it’s, it’s very hard. And I think that this goes back to the, that one section we were talking about where we said the owners are taking the attitude that this may entitled contractors to time, not money. You know, if construction is an essential industry and it has been designated as such in most regions of the country that I know of it’s a little hard to use the Coronavirus as an excuse to suspend the work. So I don’t think, again, that, that
Peter:
That’s going to get the owners out from underneath claims for additional compensation based on that. Now I have heard at least in certain places that residential construction may be deemed or is starting to be accepted from, from the essential construction services, but that, that tends to be in fairly isolated areas.
Seth:
Well, we’ve made this a 30 minute webinar. I know this is probably worth an hour, an hour and a half, especially since I just saw we had 11 more questions come in. But you know, so I’m sorry to Tina and Megan and Tina and Jay and Newell and Nicole and Melody. I’m glad you liked my question, but so you know, again, Peter, thank you so much for coming on.
Peter:
You got it. And if anybody’s got any questions, you know, they can get me my email’s up there or they can get me direct or they can get me through Levelset.
Seth:
Absolutely. And Peter, once again thank you so much for doing this. I’m Seth Bloom, I’m Senior Director of Attorney Services at Levelset. Send me an email if you have any questions we can help get your questions answered by wonderful attorneys like Peter who’s located in Southern California and in services most of the California area there in Glendale. I’d been to their offices met with all the partners. So this is the real deal. They were vetted out. These are construction people that really know what they’re doing. So, and that’s what we try to pride ourself in. The expert center is really getting the best people in every part of the country. So Peter, again, thank you everyone. Stay safe. Please post those questions on the expert center. I’m sure Peter will answer a few more today and if not, some other lawyers can help them out. Have a great day and thank you so much.
Peter:
Good to see you as always stay safe. Thank you.
Summary