Case Studies in Determining the Contractor’s Allowable Costs and Profit after a Termination of a Construction Contract for Convenience

Determining Responsible Damages Payable to the Contractor

Without a contract termination clause, a contractor that is terminated during the completion of a construction project is due “the benefit of the bargain.” This means that if the contractor’s cost estimate is deemed reasonable, the entire unpaid amount of anticipated project profit, along with incurred costs to produce and terminate the work in process—including project preparation and materials procurement—becomes payable by the owner. The question that must be answered, and which the contractor must be willing to provide complete financial documentation in support of, is: “How much profit did the contractor anticipate to earn from the complete and successful prosecution of the project?”

Before this profit can be determined, the owner should determine an as-accurate-as-possible evaluation of the percent and dollar value of the contractor’s properly completed work at the time of termination. If any work was in need of remediation, the owner should determine the cost of remediation and reduce the amount payable to the terminated contractor.