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May 4, 2022

Starting a construction project can be an exciting endeavor, but what happens if things don’t go as planned? While we all hope that contract termination never becomes necessary, it’s crucial to understand your rights and responsibilities in case the need arises. Addressing termination in your contract upfront ensures that both you and the contractor are protected and that any disputes can be resolved smoothly. 

What You Need to Know About Terminating a Construction Contract 

Terminating a contract with a contractor isn’t a decision to be taken lightly. Whether due to a change in project scope, contractor performance issues, or unforeseen circumstances, knowing how to terminate a construction contract can save you time, money, and headaches. Here’s an overview of key termination clauses and the processes involved. 

Right of Rescission: Can You Cancel Your Construction Contract? 

Depending on your location and the specifics of the contract, you may have the right of rescission. This legal right allows you to cancel the contract within a specified period after signing, but before the work has started. This period varies by state or federal law, so it’s important to verify your rights and ensure the contractor provides you with the proper notice of rescission. 

If you choose to exercise your right to rescind, you may be required to complete a formal notice, often using a specified form. However, this option is typically available only before work commences, so it’s crucial to act quickly if you decide against moving forward with the contractor. 

Termination for Convenience: Ending the Contract Without Cause 

A termination for convenience clause allows you, the project owner, to end the contract even if the contractor hasn’t breached the agreement. This option doesn’t require you to provide a reason for termination. Sometimes, the relationship simply doesn’t work out—perhaps due to unforeseen circumstances or personal changes on the owner’s side, such as a financial shift. 

What to Include in Your Contract: 

• Compensation for work performed: If you terminate the contract for convenience, the contractor should be paid for the work completed up to that point. 

• Costs incurred: The contractor may be entitled to reimbursement for any costs associated with the termination, such as materials purchased or labor already expended. 

• Termination fees: A negotiated termination fee may be required, especially if the contractor turned down other work in favor of your project. 

While termination for convenience can offer flexibility, it comes with the responsibility of finding another contractor to complete the project. Additionally, if your original contractor provided design documents, you may encounter issues in transferring or using those documents with a new contractor. 

Termination for Cause: What Happens if the Contractor Breaches the Contract? 

If the contractor has violated significant terms of the contract, termination for cause may be the best course of action. A “material breach” typically refers to serious issues, such as: 

• Failure to provide skilled workers or proper materials 

• Failure to meet financial obligations (e.g., paying subcontractors) 

• Violations of local laws or codes 

Your contract should outline the process for termination for cause, including: 

1. Notice provision: The contractor should be given the opportunity to correct the issue within a specified time frame. 
2. Alternate arrangements: After the notice period, the owner may proceed with alternate arrangements to finish the work. 
3. Final settlement: Any final balance due to the contractor will be determined after the project is completed, considering the cost of hiring another contractor to finish the work. 

When Can a Contractor Terminate the Contract? 

Contractors are also entitled to terminate a contract under certain conditions, most commonly due to non-payment by the owner. The contract should clearly define payment terms, including how many days after an invoice is issued the payment is due. If the owner fails to make timely payments, the contractor can issue a notice and terminate the agreement. 

In addition to non-payment, a contractor may also be able to terminate the contract if: 

• There are significant delays or work stoppages outside of their control. 

• Scheduling conflicts arise that prevent the contractor from continuing the project. 

Best Practices for Contract Termination in Construction 

While no one hopes for a termination scenario during a construction project, it’s vital that your contract anticipates potential issues and outlines clear provisions for compensation and dispute resolution. By understanding and negotiating termination clauses in advance, you can avoid unnecessary conflict and ensure a smoother process should you need to make difficult decisions down the line. 

Having clear guidelines for termination for convenience, termination for cause, and other scenarios ensures both parties are protected and can manage unexpected events more effectively. 

In our next article, we will explore dispute resolution in construction contracts—how to resolve conflicts efficiently, the pros and cons of different methods, and the most cost-effective strategies for handling disputes. 

Susan Van Bell, Esq. was Senior Director of Content for AIA Contract Documents for over ten years. She is currently a consultant.

AIA Contract Documents has provided this article for general informational purposes only. The information provided is not legal opinion or legal advice and does not create an attorney-client relationship of any kind. This article is also not intended to provide guidance as to how project parties should interpret their specific contracts or resolve contract disputes, as those decisions will need to be made in consultation with legal counsel, insurance counsel, and other professionals, and based upon a multitude of factors.