If an owner terminates its contractor for cause, or if a general contractor or construction manager terminates one of its subcontractors for cause, it owes the terminated party as well as its surety, if applicable, a duty to incur only the reasonable and necessary costs to complete the work. [1] In other words, the non-default party has a duty to mitigate the costs of completion.
In this three-part series, we will discuss the process of determining “reasonable” as it relates to construction completion costs. Parts two and three of this series will separate the costs that are deemed reasonable and those that are not.
How to Determine if Completion Costs are “Reasonable”
Finishing the Work
Per Article 14.2 of the AIA A201 General Conditions, which is incorporated in most AIA contracts, the terminating party may “finish the Work by whatever reasonable method the Owner may deem expedient, including making demand on the surety to perform the Work.” When this occurs, the Owner will not furnish further payments to the Contractor until the work is finished. Once the work is complete, the Owner will reconcile its completion costs with the remaining contract balance to determine any payments required to the principal or potential damages to be recovered.
Similarly, the Standard Form of Agreement and General Conditions between Owner and Contractor published by the Associated General Contractors of America (“AGC”) and the Standard Form of Agreement between Contractor and Subcontractor (AGC Document No. 200 and 655 respectively) both provide similar requirements. Section 11.3 of Document No. 200 indicates that following a termination for cause:
All costs incurred by the Owner in performing the Work, including attorney’s fees, shall be deducted from any moneys due or to become due the Contractor under this Agreement. The Contractor shall be liable for the payment of any amount by which such expense may exceed the unpaid balance of the Contract Price. If the unpaid balance of the Contract Price for Work performed in accordance with this Agreement exceeds the expense of finishing the Work, Contractor shall be paid for Work performed in accordance with the Contract Documents up to the amount that the unpaid contract balance exceeds the expense of finishing the Work.
This paragraph further states that “[u]pon request of the Contractor the Owner shall furnish to the Contractor a detailed accounting of the costs incurred by the Owner in finishing the Work.” AGC Document No. 655, Section 10.1.2 presents nearly identical language. [2]
When an Owner terminates the Contractor and incurs costs to complete the Work (which often do exceed the contract balance), it is typically with an expectation that these costs will be recovered from the defaulting party.
In part two, we will discuss which costs should be considered reasonable.
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