Contract provision addresses payment when an owner terminates a contract for convenience
Previously, we have recommended termination for convenience provisions be deleted or limited so they only apply when the contract is terminated for convenience. This month’s contract provision is intended to be inserted into an owner-drafted contract when the owner insists on retaining the right to terminate for convenience. Some owner-drafted agreements unduly limit the payment to the contractor in the event of termination for convenience. This provision sets forth a fair and equitable calculation for payment. Although American Institute of Architects (AIA) documents call for the contractor to be paid profit on work not performed in a termination for convenience scenario, we have not included this language here because owners typically refuse to accept it and delete it from the AIA document.
Payment when owner terminates contract for convenience: Upon termination for convenience, Contractor shall be entitled to payment of the following: 1) the actual cost of work completed in conformity with this Agreement; 2) the actual cost of work performed by Contractor pursuant to a written or verbal directive, including change order work and/or additional and extra work regardless of whether the change, additional or extra work has been approved by the Owner at the time of termination; 3) 15 percent of the actual cost of work performed in 1) and 2) above for overhead and profit; 4) the cost of items properly and timely fabricated off-site and/or for materials properly stored pursuant to this Agreement at the time of termination or pursuant to Owner’s directions after notice of termination; and 5) direct close-out costs incurred by Contractor as a result of termination. There shall be deducted from such sums as provided in this paragraph the amount of any payments made to Contractor prior to the date of termination of this Agreement.