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Terminating a contract? How to avoid disaster.

Terminating a contract, how can you avoid disaster when changing contractors.

The news that electrical work on Crossrail’s Paddington station has been halted has raised concerns over the project’s progress, but terminating a contract and changing contractors part-way through a job is not an uncommon occurrence. Main contractor Skanska claimed the work had been paused in order to review M&E installation processes, but other reports suggest the project is disarray, hence the need to overhaul delivery. Pausing work to terminate a contract and replace a contractor working on any aspect of a project leaves owners exposed to a number of risks, but there are processes and measures that can be taken to keep additional costs and delays to an absolute minimum.

Terminating a Contract: The changeover challenge
Everybody accepts that there is a premium to pay when you bring a new contractor in to work on an ongoing project.

Taking over from someone else’s work involves a significant amount of investigation and quality management checks, and there is an increased level of risk taken on by the new contractor when compared to a brand new project. What’s more, the remaining work will be likely to take place in a piecemeal fashion, and will thus be more expensive to deliver.

For the project owner, the challenge is threefold:

1. Claiming money back from the original contractor based on uncompleted work.

2. Agreeing realistic costs and timeframes with the newly appointed contractor.

3. Making the transition between the two contractors happen as quickly and smoothly as possible.

At Kenzie, we have assisted in contractor transitions in all sectors of the construction industry, and our experience has taught us that the following steps are of vital importance.

Terminating a Contract: Create a status report
In any contractor changeover scenario, claiming back money that has already been paid to the original contractor is difficult. However, that’s not to say it is impossible.
At the date of termination with the original contractor, a status report must be created by carefully documenting the project’s progress. This report should include as much detail as possible about the original contract work and any variations, with drawings, photographs and schematics where possible.

This detail will be invaluable should the original contractor dispute the claim for repayment of costs. When asked to make repayment for uncompleted work, a common response from contractors who have been dismissed from a project is: “That wasn’t part of the original scope of work”.
The status report and the original project brief must be carefully studied in order to create an accurate summary of the outstanding, uncompleted work. This ‘full and final scope’ document will determine what is left to complete by the replacement contractor, and help you to calculate a price and create a schedule.

Terminating a Contract: Know what you can claim
It is vital that you know exactly what you can claim back from the original contractor, before pursuing those costs.
For example, and in simple terms, you may be able to claim:

The additional cost for completing the remaining scope. For example, if it costs you £200 to complete an item and the original contract price was £50, you would claim back £150.

Your legal costs and overheads for having the original contractor removed from the project and replaced.

You must pay the original contractor the contract rate for all the work completed when you issue a final account.

Terminating a Contract: Make a realistic schedule
Whatever your reasons for changing contractors, you need to be realistic about what is required in order to bring the project to completion.
A thoroughly researched status report will give you a clear picture of the scope of the remaining work, and you should be able to create a schedule that makes life as easy as possible for the contractor arriving on the project. For example, the speed at which the completed work was carried out will help to inform the new timescales for the project.
The new contractor will be likely to quote a more expensive rate than the previous contractor, simply because working on an ongoing project presents increased risk and the need to carry out detailed background checks. However, the original contractor is unlikely to be happy about bearing the brunt of those additional costs.

Be firm but fair
There is a balance to be struck here: the new contractor will charge an expensive rate because ongoing projects are difficult and risky, but the original contractor will refuse to make repayments for uncompleted work if they see the costs as being outlandish.
By supporting your position with thorough documentation about the work already carried out, you can strengthen your hand and prove to both contractors exactly how you arrived at your costs.
Your detailed project status report and a thorough schedule for the remaining work will be two of the most powerful tools to help you avoid disputes and delays, and get your project back up and running.

This article, written by Kenzie Group MD Joseph Bond, was featured online in Building Talk last month.

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