Client Alerts
December 24, 2008

What you need to know about dealing with project suspension

Stites & Harbison, PLLC, Client Alert, December 24, 2008

In today's construction market, every contractor must be prepared to deal with unexpected financial problems that arise during a project. One such problem is suspension of a project that occurs when an owner demands, pursuant to a contractual right to do so, that a contractor stop work for a specified period of time on a project. Suspension can occur for a number of reasons, but generally arises when the owner has a problem with project financing or encounters some unexpected issue during construction that requires major changes in the scope of the work.

Project suspension may alleviate the owner's short term financial problems, but it has a real impact on every contractor's bottom line. In today's market, every contractor has to be prepared to deal with project suspension and must have a game plan in place to mitigate its impact on the company. Below are some practical suggestions to consider when dealing with project suspension.

(1) Read your contract: Do not sit on the side lines—be proactive and ready to preserve your rights. The contract between the parties will generally determine when an owner can suspend construction and what a contractor's rights are when that occurs. On every project, a contractor should review its contract and prepare a list of key deadlines and notices required to preserve claims for additional compensation. Project suspension is no exception, and therefore, you should be aware of the circumstances under which an owner may suspend a project and what your rights are when it occurs.

(2) Require written notice from the owner: Insist that the owner document the suspension of the project in writing. In the event that a dispute arises regarding the owner's intent, you do not want to rely on the owner's oral representations to prove your case.

(3) Follow contract notice protocols: Follow notice protocols established in the contract to preserve claims for additional compensation. When in doubt—send a letter! The notice letter should state, at a minimum, that the suspension of the project will cause you to incur additional costs and delays in completing the project. You should also request an equitable adjustment to the contract price and schedule when construction resumes.

(4) Consider engaging a cost accountant: A qualified cost accountant can help the general contractor and subcontractor establish a procedure to capture and document all costs that can be recovered under the contract. Most contracts will allow a contractor to recover costs incurred due to project suspension. For example, a contractor may incur added costs for demobilization or mobilization, storage of materials or equipment, extended rental costs, relocating workmen, adjusting schedules, or performing work under more harsh weather conditions than originally contemplated. Under AIA Doc. A201, § 14.3.2 (2007), a contractor is entitled to an adjustment in the contract time and contract sum (including profit) caused by suspension of the project.

(5) Submit most current pay estimate: Even if the owner has suspended construction, contractors should submit their most recent pay application for all work performed prior to suspension. In many states, this may allow a contractor to establish a claim for statutory interest on the unpaid balance. Additional statutory notice requirements may apply; consult the laws of your state to determine what procedures you must follow.

(6) Preserve your mechanics' lien rights: Project suspension is a clear message that the owner's finances are on shaky ground. In this situation, therefore, it is critical that a contractor preserve its right to file a mechanics' lien against the property. Record your last date of work on the project and speak with an attorney to determine the applicable lien filing deadlines in your state. At the end of the day, you may be forced to foreclose on the property to get paid.

(7) Notify subcontractors: If you are serving as the general contractor, immediately notify all subcontractors of the project suspension. A properly drafted subcontract should allow a contractor to suspend the subcontract to the same extent the owner has the ability to suspend construction under the prime contract. Within this notice, therefore, you should also suspend performance of the subcontract until the owner resumes construction. You should also request that the subcontractor provide information regarding the cost implications of project suspension to its scope of work. These issues need to be considered when negotiating with the owner for an equitable adjustment.

(8) Notify sureties: If you have procured a payment or performance bond for the project, notify the surety of the project's suspension. There may be affirmative notice obligations imposed on a general contractor pursuant to the terms of the bond.

(9) Request financial assurances from the owner: Many standard form construction contracts give a general contractor the right to request information from the owner to verify that it has the financial capacity to complete the project. For example, AIA Doc. A201, § 2.2.1 (2007) allows a contractor to request in writing that the owner provide reasonable evidence that the owner has made financial arrangements to fulfill the owner's obligations under the contract. After construction of the project is underway, the Contractor's ability to request such information is limited, but suspension of the project should allow a contractor to make this request. If the owner fails to provide such evidence, the contractor may not be required to continue working on the project.

(10) Prepare to terminate the contract (if allowed): Many contracts will allow a contractor to terminate the contract if the owner suspends the project and does not resume construction within a specified period of time. For example, AIA Doc. A201, § 14.1.4 (2007) allows a contractor to terminate the contract if work is suspended for 120 days in any 365 day period. If the contract is terminated, a contractor can recover payment for work performed, including reasonable overhead and profit, costs incurred due to the termination, and damages. AIA Doc. A201, § 14.1.2 (2007). Sometimes its better to cut your losses and look for a new playing field rather than keep your resources tied up with a project that may never come to fruition.

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