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Footer Text Date CONSISTENCY IN CONTRACT DEFAULT PROCESS Joe S. Graff, P.E., Director Construction Section, CST 10/10/17
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CONSISTENCY IN CONTRACT DEFAULT PROCESS
Joe S. Graff, P.E., Director
Construction Section, CST
10/10/17
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Presentation Outline
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Defaults – A Necessary evil.
Default Considerations
Default Process
Proposed Default Process
Notice to Cure and Default Letters
Takeover Agreements
Termination for Convenience
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See Something? Say Something!
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STORY: DEFAULTSThey are not beautiful!!!!!!!
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DEFAULTS – A VERY SERIOUS STEP!!Do not take them lightly!
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Disclaimer!
The proposed changes are not
approved and included in TxDOT policy
at this time! Formal policy changes
will be sent out to the Districts as
changes are approved by the
appropriate parties!
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Item 8.7.1. Declaration of Default
Declaration of Default. The Engineer may declare the Contractor to be in default of the Contract if the Contractor:
1. fails to begin the work within the number of days specified;
2. fails to prosecute the work to assure completion within the number of days specified;
3. is uncooperative, disruptive or threatening;
4. fails to perform the work in accordance with the Contract requirements;
5. neglects or refuses to remove and replace rejected materials or unacceptable work;
6. discontinues the prosecution of the work without the Engineer’s approval;
7. makes an unauthorized assignment;
8. fails to resume work that has been discontinued within a reasonable number of days after notice to do so;
9. fails to conduct the work in an acceptable manner; or
10. commits fraud or other unfixable conduct as determined by the Department.
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Default Categories
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1. fails to begin the
work within the
number of days
specified;
2. fails to prosecute
the work to assure
completion within
the number of days
specified;
6. discontinues the
prosecution of the
work without the
Engineer’s approval;
8. fails to resume work
that has been
discontinued within
a reasonable
number of days after
notice to do so;
4. fails to perform the
work in accordance
with the Contract
requirements;
5. neglects or refuses
to remove and
replace rejected
materials or
unacceptable work;
10. commits fraud or
other unfixable
conduct as
determined by the
Department.
Timeliness Quality Criminal Other
3. is uncooperative,
disruptive or
threatening;
7. makes an
unauthorized
assignment;
9. fails to conduct
the work in an
acceptable
manner;
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Default Considerations
1.Default frequently has disastrous
financial consequences
2.Often result in Claims and
potential litigation
3.Explore other possibilities before
exercising your default rights.
4.Remove emotions out of the
process!
–Use every step in the escalation
ladder!
–Give adequate opportunities for
success.
5.Meet with the Contractor.
6.Follow the standard process to
the letter!
–Notice of Intent to Default –
Notice to Cure
• Copy Surety.
• Provide clear, reasonable criteria.
7.Act in a timely fashion
–Default at the end of the period
indicated in the notice!
–Failure to act, indicates
acceptance of performance!
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Existing Default Process –
Exhaust all options to continue the project before moving to
default.
1. Escalate issues!
2. Send a Notice of Intent to Default. Copy Surety.
3. Analyze performance. Was there a concerted effort by the
contractor?
4. If the answer to 3. is no, send default letter.
5. If the answer is yes, meet with contractor to establish the
expectations going forward.
6. A new notice should be sent for future issues.
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Default Process – Proposed.
Exhaust all options to continue
the project before moving to
default.
1. Escalate issues to the
highest person on escalation
ladder!
2. Send Warnings. Use a
formal letter to notify the
contractor that:
• They are behind schedule.
• Their material or
performance quality is not
acceptable
• You have safety concerns
• Their equipment is
unacceptable
• Project management is
poor.
• Their workforce are not
skilled.
• Etc.
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Default Process – Proposed. (Continued)
3. Last Chance Meeting –
Meet with the contractor.
Establish Expectations.
Communicate next step -
Notice of Intent to Default.
Include Division staff as
desired.
4. Send a Notice to Cure.
Copy Surety. Use an
appropriate time period.
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Default Process – Proposed. (Continued)
5. Follow up in a timely
manner
6. Analyze performance
during the cure period.
7. If the answer to 6. is no,
prepare and send default
letter. Default letter
should come from no lower
than the Director of
Construction or Director of
Maintenance.
8. Consider forming a District
Default Review Committee.
If the answer is yes, establish
the expectations going
forward.
Send a new notice for future
issues.
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Questions and Answers
When can you default a contractor?
– As soon as the contractor fails to meet the requirements of Item
8.7.!
– Too early – Give the contractor an opportunity to perform.
– Too late – We have put up with poor production and they are now
120-200% of the adjusted time used. However they have
performed 80-90% of the work.
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2%5%
9%
14%14%
20%
27%
35%
44%
54%
65%
77%
90%
100%
0%
20%
40%
60%
80%
100%
120%
0% 20% 40% 60% 80% 100% 120% 140%
Pe
rce
nt
Co
mp
lete
Percent of Time Used
Performance Curve
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1% 2%5%
10%
15%
20%
25%
30%
35%
40%40%
50%
60%
70%
80%
90%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
0% 20% 40% 60% 80% 100% 120% 140% 160%
Pe
rce
nt
Co
mp
lete
Percent of Time Used
Performance Curve
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Questions and Answers (Continued)
What other problems have occurred.
– Sent Cure Notice(s) Letters to wrong Zip Code.
• Recommend correspondence be mailed using certified mail
and emailed. Maintain accurate records of all
correspondence.
– Did not monitor mail return receipts.
• Keep a log of correspondence and monitor return receipts.
– Pressure by third parties to default. For example, 3rd party
financing entities.
• Manage Contract in a timely manner.
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Notice to Cure and Default Letters
Recommendations for Notice of Intent to
Default (Notice to Cure)
– Escalate the issues through the
escalation ladder!
– The intent should be to salvage the
project! If you have already decided to
default, you have waited too late!
– Make sure that the stipulated
requirements are clear and more
importantly, reasonably achievable.
– Must use one of the ten “thou shalt nots”
– Be specific enough to provide notice of
the reason for the default: Is there
enough information for the contractor to
be able to successfully dispute it?
– Set a time and place for a final meeting to
see if default can be avoided.
– Let CST or MNT review the draft before
sending!
– Do not reference issues that are not true!
For example:
• fails to prosecute the work to assure
completion within the number of days
specified. - project is already at 150%
of time used.
• discontinues the prosecution of the
work - Contractor worked every week.
– Copy the Bonding Company!
– Do not ask the contractor to accelerate
their schedule.
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Notice to Cure and Default Letters
Recommendations for Default Letters
– Set a time and place for a final meeting to see if default can be avoided.
– Have contractor explain why they should not be defaulted.
– If they have not satisfied Notice to Cure, prepare default letter.
– Let CST review the draft before sending
– Contractor’s may declare themselves to be in self default (must be in writing). The 10 day cure notice is not required under this circumstance.
– Know when to pull the trigger! Default them if they have not
performed in the time given! Failure to default can be considered acceptance of performance!
– Copy the Bonding Company!
– Stop all work!
– Make project safe to the traveling public!
– Work with CST, to have estimates stopped immediately.
– Work with CST and FIN to prepare takeover agreement with Surety.
– Continue time charges.
– Document, document, document!!!
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Takeover Agreement
Work with CST to prepare
takeover agreement.
Frequently takes 2-6 months.
– Surety hires consultant.
– Consultant may have to hire
surveyors or other consultants
to review existing situations.
– Consultant bids work out to
selected contractors.
– Takeover Contractor will have
to mobilize.
Surety is now the prime
contractor.
– Takeover contract is a sub-
contractor to the Surety and
we may deny subcontractor.
– Once a takeover agreement is
executed, SiteManager will be
changed to reflect the Surety’s
name as the contractor.
• Payment can be released.
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Item 8.8. Termination of Contract
The Department may terminate the Contract in
whole or in part whenever the Contractor is
prevented from proceeding with the work by
reason of :
An executive order of the President of the
United States or the Governor of the State,
A national emergency, freezing or diversion
of materials, equipment or labor as the
result of an order or a proclamation of the
President of the United States,
An order by any federal authority,
A preliminary, special, or permanent
restraining court order where the issuance
of the restraining order is primarily caused
by acts or omissions of persons or agencies
other than the Contractor, or
The Department determines that
termination of the Contract is in the best
interest of the State or the public.
– Discovery of significant hazardous
material problems,
– Right of way acquisition problems,
– Utility conflicts that would cause
substantial delays
– etc.
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Item 8.8. Termination of Contract
Consider Termination for Convenience if
there are issues on TxDOT side. - A
termination for convenience clause allows
you to terminate without cause, and without
having to justify the termination decision.
– CST should Terminate Contracts in
accordance with the CCAM.
– TxDOT required to pay contractor for their
costs to terminate – Mobilization,
restocking materials, bonds, insurance,
etc. Will not pay for anticipated profit.
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Item 8.7.2 Wrongful Default
What is a wrongful default?
– If TxDOT did not follow all
procedures to the letter, it
could be considered a
“Wrongful Default”.
• Failure to give adequate
notice.
• Failure to provide
warnings.
• Defaulting a contractor for
poor performance when
TxDOT is the cause of the
delays
• Failure to act in a timely
manner.
• Expecting more than the
specifications require.
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Use a Progressive Process when Defaulting!
Progressive discipline is a
process for dealing with job-
related behavior that does not
meet expected and
communicated performance
standards. The primary
purpose of progressive
discipline is to assist the
contractor to understand that
a performance problem or
opportunity for improvement
exists.
The process features a series
of increasingly formal efforts to
provide feedback to the
contractor so that they can
correct the problem.
The process of progressive
discipline is not intended as a
punishment, but to assist the
contractor to overcome
performance problems and
satisfy job expectations.
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Summary
1. Explore other possibilities before exercising your default rights.
2. Have a Last Chance Meeting.
3. Make sure documentation and all procedures have been followed!
4. Get CST or MNT involved.
5. Provide clear, reasonable criteria.
6. Act in a timely fashion – Know when to pull the trigger!
7. Send formal Warning letters.
8. Do not ask the contractor to accelerate their schedule.
9. Have contractor explain why they should not be defaulted.
10. Use Termination of contract when appropriate.
11. Use a Progressive Process
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