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Termination For Convenience And The Question Of Profit

Sunday, March 02, 2003 12:46 pm

Termination For Convenience And The Question Of Profit

Most construction contracts allow the project owner to terminate the contract for the convenience of the owner. The purpose of this provision is to give the owner the flexibility to halt the project without incurring liability for breach of contract. The owner need not establish any default or performance shortcoming on the part of the contractor.

One of the more difficult issues in a termination for convenience situation is the question of profit. A terminated contractor is not entitled to profit on unperformed work. This "lost profit'is one of the elements of damages for breach of contract that the termination clause is designed to avoid. A contractor is entitled, however, to a profit mark-up on the cost of work performed prior to the termination for convenience. The percentage mark-up should reflect the profit margin the contractor would have realized on the overall contract had there been no termination for convenience. As the cases indicate, this determination is not always straightforward.

No Profit on Unperformed Work

In a termination for convenience situation, the policy against the recovery of lost profit or profit on unperformed work is very strong. Contractors sometimes attempt to disguise or mislabel this element of recovery, but courts and administrative boards generally detect the subterfuge. For instance, one terminated contractor included "loss of gross margin'in its termination settlement proposal. This was rejected as a euphemism for lost profit on unperformed work. Lamb Engineering & Construction Co. v. Nebraska Public Power District, 103 F.3d 1422 (8th Cir. 1 [...]

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