How To Get Out Of A Construction Contract

One of the main questions I always get asked is, how do I get out of a contract? And that is exactly what we're going to talk about in this video. It's a training we did a few months ago, so it's for our clients and we're putting it out there for the rest of the world to have a look. Really, it's important that you know before you sign a contract, how do I get out of this contract if I get myself into trouble? How can I escape, right? So it's an escape hatch. So hi, my name is Cian Dillon Brennan. I'm CEO of a company called Quantum Contract Solutions. The reason we do these videos and podcasts is because there's so many construction companies out there that lose money hand over fist because they signed something terrible in the contract or they don't manage the contract well, and we don't want you to be one of them. So listen to this training. It goes for about 15 minutes and it'll show you exactly what to look out for in the termination clauses, and it gives you an idea of how you can get out of a contract if you get yourself in trouble. So that's it. Enjoy, and I'll see you in the next one. Okay, so the escape route termination clauses. So in this presentation, hopefully by the end of it, you will have skills and understand the different types of termination clauses. You'll be able to understand what to look for when you get a contract and how to make sure that you've got a way out of the contract, and then what to do in the post-award phase when you're actually seeing some cracks in the, in the surface of your client. Maybe they're not paying on time, that sort of thing. So 2 cans of V. Oh, Andrew, getting going. Good man. Excellent. And then hopefully you guys will have the skills then to be able to negotiate better terms yourselves. And then in the post-award phase, kind of understand what's happening and how to minimize your costs and what we need to do to make sure that you guys are covered. Okay. So let's get going. So just in the chat box again, from some of our clients that are on, if you can put a yes or no into the chat box to say if you've had any issues with termination, be it termination for convenience, or you have been terminated for some reason, or whatever it is, just put a yes or no in there just so we understand how relevant we are today. And what we're going to talk about today is understanding different differences between the different termination clauses, the problems that you can have, how terminations can impact you, and practical steps that you can take to ensure you've got a way out and to limit your downside. So yeah, look, we've got a 50/50 of yeses and nos. It is an issue and it's becoming more and more of an issue. And we'll touch on that in this presentation. Okay, so I'm sure you're all aware of our framework. And where does termination fit in, in our framework? And it is in pre-award and it is in post-award. In pre-award, you got to negotiate terms. It's actually probably the most important thing. And post-award, you got to take action. So both sides are important. Now, before we get started, it's important to understand the different types of terminations and how they can, you know, how they differ. So termination by performance, that is basically you've both done that, you've both complied with the contract, you've both done everything you're supposed to do, and the contract has just come to a natural end. So termination by performance. Termination by agreement, you guys agree to terminate the contract for whatever reason, and you work out the terms of what that looks like. Termination by frustration is when you cannot finish the contract. You're not able to, and this is one to always look out for. So for example, if one party dies or a new law comes in or COVID stops you from being able to complete it. Okay, so something like that is a bit relevant for now. Termination for convenience. So that's obviously one that is important because, and something to look for because clients always want to retain the power to be able to terminate you for convenience. Now, depending on the type of contractor you are, this can impact you in different ways. If you're, say, a scaffolding company that can potentially be easily replaced, you can get rid of scaffolding equipment pretty quickly and bring in new scaffolding equipment. And so if you're a scaffolding company, termination for convenience is not good. You want to almost try and negotiate against that because they can replace you easily with another supplier who potentially could be cheaper or will say, we'll do it 10% less than the guys that you currently have. So that's somebody— if you're a contractor where you've got some stuff in the ground and it's very difficult for them to get rid of you, then it's not so much of a deal. And then the final one is termination due to breach or default. Now those terms are kind of interdependent. They do mean slightly different things, but for all intents and purposes, breach and default termination is basically one side not doing the right thing. And that's one we really need to be aware of, particularly from the client's point of view or your point of view, but looking for the client. Now, we put this presentation together and we thought Terminator was a good analogy, but I spent a bit of time and it was a bit wrong. And so we spent a bit of time getting it right. And so just to give you an idea of the analogy we're going with, it is Terminator 2. The T-1000 is this guy you see in front of you now. I'm sure most of you guys know him. And T-1000 was made from some sort of metal, liquid metal, can shapeshift, and he was sent back in time to kill someone called Sarah Connor. Arnold Schwarzenegger was the Terminator, and he was there to protect her and stop her being killed, basically. So in this analogy, your clients are the T-1000s, always out to get you, shapeshifting their argument to suit whatever they need. And you guys are Arnie. Okay, so just so you get the references. Okay, so sometimes there's terminations and there's nothing you can do, right? You got that T-1000 coming after you nonstop, right? And the first one is your client terminates for their own convenience. And that's what we talked about previously and depends on the type of contractor that you are. And you got to be aware of how much of a risk that is to you. And if you're worried about being replaced, that's a big risk. And then we'll talk about the costs as well. But in general, you got to make sure that you're okay with the cost if you're terminated. Okay, and we'll talk about it a little bit more in a second. Your client enters administration. Now, this is becoming a really big issue. And it's kind of, you know, you've looked at you know, COVID for the last while, and the construction industry actually has been going the other way, right? But now we're starting to see a little bit of cracks. Now, if we just look at just a few articles here, and they're all recent, right? So up to 25% of all insolvencies in Australia are from the construction industry. And they're reckoning that there's builders big and small are not making profits, going bust. And we can see Pindan, gone bust, leaving creditors owed millions. ECM went bust, voluntary administration. So, you know, that was May 2021. I know ECM was a little bit longer ago, a little bit longer, but in relative terms, it's— these things are happening now. And so it's very important that we, you know, understand this particular topic and make sure that we have got a game plan, basically. So the next thing is when you have the termination clause not in your favor. And that's a big, big one. And that's basically because you've negotiated a termination clause very badly and you've put yourself in a situation where there's no way out contractually speaking. And this is what we call reciprocal termination clause, or you don't have a reciprocal, it's a one-way termination clause. So your clients basically have all of these different ways of terminating you, but you don't have a way of terminating the contract, right? So if you're in that situation, let's say you are working for Pindan and Pindan know they're going bust, haven't gone into administration yet, and you haven't been paid and you're worried now, you still have to keep working according to the contract. And if you don't, you could be liable for damages, compensations, legal fees, you know, and additionally, how does that impact you on your side? If you're going to be responsible for all of those things And on your side of the fence, you still have to pay your employees. You've got contract— there's contractual obligations that you need to abide with. There's lots and lots of costs. So it's paramount that you negotiate the termination clause and you know extremely well what's in there and that you're able to terminate the client if they default or if they breach the contract. And what we're really talking about here is if you were working for Pindan, for example, and they're supposed to pay you, and on day 1 of them not paying you, you know they've breached a contract. They've not complied with the contract and you potentially can get out. Okay, you've got to be aware of that and that's what you want. So what can happen if you're impacted by these particular things? So you can have obviously a loss of profit. You could potentially go insolvent yourself depending on how big of a company you are and how much they owe you. Your cash flow is depleted. And then the cash flow, we're always harping on about cash flow because cash flow is really negotiation. So if you have no cash flow, you need money badly, potentially. And when you're in that situation, your leverage from a negotiation point of view is pretty poor. You have to get money and you're almost willing to take a lot less, even if it's not the right thing. You could be involved in a lengthy litigation and there is issues where if you have the option but you don't exercise it, you could get yourself in trouble as well. Okay, so that's how really it can impact your company if you're on the wrong way. So what we need to do is we need to put practical steps into place. Okay. So practical steps to take in pre-award, right? This is where the Terminator comes in. This is where you guys are protecting yourself. You've got to negotiate reciprocal termination, right? This is one of the most important clauses in the contract when you're negotiating. A lot of the contracts you guys will be sent will— they can terminate you for default, but there's nothing. It's silent about terminating them for default. So we need to make sure that that clause is in there. That's very, very important. Now, the next thing is we need to negotiate what happens if you get terminated. Right. So more often than not, you're not going to get your profit. Right. So they'll need to pay you. Okay. So just, they'll need to pay you for all the work that you've done to date. But where it can fall over is when you— it's the overheads question. And that means they're like, oh, we'll pay you for the work that you've done today, but we're not giving you overheads. And that's always the argument. Okay. So we need to make sure in the first instance that you will get overheads paid for. So at least then you're breaking even. And actually you can then go back to them and say that, well, the price that we gave you was based on overheads that were over the full contract duration. And so we would never have given you that price if we knew the contract was only going to be half the length. So you've got a very valid argument to claim overheads for the full duration. So that's something worth considering. And so the bottom line is, from a pre-award point of view, you need to negotiate reciprocal termination, and you need to make sure that if you're terminated for convenience or you're terminated for default or whatever it happens to be, that you're going to get all the work that you've got done to date and overheads as well. Okay. So that's important. Now, post-award. This is where it takes a bit of skill from you guys to just assess what's happening. And, you know, sometimes you can hear on site as well if, you know, there's something happening with the client. So it's important to keep an eye on the financial situation of your client. Because if they are not getting paid for something from the client or they've had a massive delay and you know about these sort of things, you just need to be aware that the SH1T can flow down the line and they'll start rejecting valid variations and EOTs because they don't have the money and they need to stop that happening. Okay? So keep an eye on it. And if you see something happening, right, and you're pretty concerned, right, the first thing is to start reducing your overheads, your site, your costs on site. So reduce your site presence, the amount of people that you have on site, slowly reduce your site costs. Basically, that's what you're trying to do. Because this time from that point onwards, you're not sure if you're going to get paid or not. So it's better to start reducing those costs in the first instance. I have written down here, stop doing additional work. Now, some contracts will say, if we give you a variation, you've got to go ahead and do it, or instruction. And that's fine, but you can certainly do a go slow, which is if you know that they're going to be slow in approving variations, you go, yeah, absolutely, more than happy to do it. But according to the contract, we need to sign variation. So give us a signed variation and we'll get on with it. So go slow. And then the next thing is when you haven't been paid. So you've got 30-day payment terms or 20 business day payment terms or whatever it happens to be. On the day after they were supposed to pay you and they haven't, you need to get a notice, a dispute notice in straight away. And the biggest advice that we can give you is the squeaky wheel gets the oil. So if the client goes into administration or the client is in financial trouble, they have to pay some people, but they're going to choose the people who are shouting the loudest. So get your notice of delay— sorry, your dispute notice in on day 1 and just start following it very, very quickly. And the second thing will be— and each contract will change slightly on what the process is. So it's worth going in there to have a look and understand what the process is after you've come into a dispute. But you go into dispute and then you submit your notice of termination more than likely after you submit your final claim, which your final claim will include everything that you've done today plus your overheads. If they don't pay it again, go straight to adjudication. And just very, very quickly, that's the process of what you need to do. Follow the Security of Payments Act. That act is designed to help you guys get paid quickly and it can be enforced by court as well. So if you get it done, if you've done everything, you submit in the notice of delay, you submit a notice of termination, you submit your final claim, they haven't paid you, then you put that to an adjudicator. It all looks perfect. They rule in your favor, which they should do. And then you're in a very, very good position to get paid. In comparison to, say, someone who was just working away on site, submitting invoices and get paid, submit another invoice and get paid. And that could have been a situation that you found yourself in, um, today.