When a job goes really wrong, for any number of reasons, it can result in the owner deciding that the contractor is so much at fault that their contract comes to a premature end. An owner’s default termination of a contractor has many ramifications. A prior article discusses termination issues that confront the contractor.

Let’s look at that situation from a different angle: the owner calls your company to complete the work.

The owner has looked at your Web site, has checked with your previous clients and called on you. Should you be happy? Are there hidden problems? When you are brought in midstream you are the hero until something goes wrong.

The muddy road

Being a replacement contractor has its obvious dangers and hidden land mines. You need to know why the prior contractor was terminated. Is there some fixed end date (a supply agreement that must be met), financial problems, impossible owner demands? If the owner was unhappy with Contractor No. 1, what makes you think that you are immune from the same rancor?

There are several things you can do to protect yourself. You need a clear agreement with these three parts:

1. Payment on a time and materials (T&M) basis for inspection;

2. An indemnity agreement; and

3. A very clear payment clause for the completion work.

Time and materials

This issue is problematical, but it is critical, both for your finances and for your relations with the client. Business is business and nobody gives you credit for free work.

You have to assume that the defaulted contractor did not do quality work. Checking a partial installation is difficult at best. Were the correct wires, cables and conduit installed? Will there be any tear-out? For completed portions, you need to perform continuity tests.

Review the schedule. In a large portion of cases, default termination is for delayed work. You need to prepare a completion schedule and, if it is a multiprime job, or one with a general contractor and you will be one of a number of subcontractors, coordination issues must be considered and addressed.

In any event, we are talking about inspections, estimating, scheduling and coordination, repairs and replacements, etc. Because of the size of this effort, you should get a pre-agreement. In other words, before you sign the completion contract, you should have a separate contract for your investigation, whether cost-plus or T & M.

Indemnity

Even with a thorough and reasonable inspection of the now-abandoned work, you may have missed something. For example, on a highway project I was involved in, the completion contractor essentially did a quantity survey. His analysis concentrated on how much had been installed by the first contractor and what was left to do, when the system was energized and splices melted.

Who was at fault? The No. 1 for poor installation or the follow-on contractor for not detecting the errors? You do not want to fight this dispute in court.

One approach to this problem is to have a warranty clause covering only the quality of your installation. Even better is to get a written release from the general contractor or owner that you will be indemnified and held harmless from any damages arising from the original installation.

Payment

You arrive after a prior electrical contractor was default terminated. The owner is not happy. It is often said that the first few months of any job is the honeymoon period. As a replacement contractor, you do not have that luxury.

Your analysis should be influenced by when the default took place. Did the falling out occur early in the job or later? The following comments are based on a default of a midway disagreement.

You need to make certain that future payments to you are not based on the past sins of the defaulted contractor. In one case, the general contractor was terminated and the owner wanted the electrical contractor to complete under the original agreement. Not a good idea. The defaulted contractor had been paid for work performed, but had not paid his subcontractors. Translated: the owner did not want to change the overall contract value, but the follow-on contractor risked getting stuck with past due bills from the subcontractors.

Consider drafting contract payment clauses to (a) apply an interest to late payments and (b) entitle you to attorney fees for a collection action.

The litigation dilemma

A defaulted contractor may defend against an excess completion cost claim by the owner by asserting that the follow-on contractor over-charged. What this means in the event of litigation is that you may be called in as a witness or as a party. Reread the indemnity section above and consult your attorney about these protections.

The No. 1 rule in medicine is “First do no harm.” In contracting, rule No. 1 is: “Protect yourself with the contract.” Ornate language is not necessary, but your agreements should be clear and complete.

Default terminations are messy. Analyze the dangers of the muddy road to decide if you need to detour.