Brian S. Case Construction Law Blog on Lawyers.com

Construction Project Terminated for Lack of Funding

Thursday, April 30, 2009 by Brian S. Case

With the Propositions 1A-F in California likely going down to defeat, many California construction projects will lack the necessary funding to be completed.  What is a contractor to do when faced with a suspension or termination for lack of funding? Much depends upon the contractual provisions of the prime contract and the subcontracts.

Most prime contracts by governmental agencies contain a Termination for Convenience clause.  Termination for Convenience clause came into existence toward the end of World War II when the government began to believe the end of the war was nearing yet more war time products needed to be procured but if the war ended the government wanted the ability to cancel (terminate) future undelivered military procurements.  So came the Termination for Convenience clause in federal contracts now embodied in the Federal Acquisition Regulations ("FAR's").  Soon after that State and local governmental agencies began adopting their own version of the FAR Termination for Convenience clauses that have nothing to do with military spending and have been extended to every possible reason for terminating a contract without cause.

So long as the clause is not used in bad faith the termination is usually upheld however the prime contractor needs to make sure it can enforce the same against is subcontractor and that will depend upon such clauses in the subcontract and proper flow-down provisions.

Often the contracts and subcontracts are only suspended and not terminated.  In such cases there may be Suspension clauses that need to be examined.  This raises issues of delay damages, stand-by damages, re-mobilization damages, escalation damages and valuation of work in place issues.

Posted at 14:43 PM
Topic: Construction Law
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