Section 5: Contractor Default

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A contract default may be declared if the contractor:

  • fails to begin the work within the time specified
  • fails to prosecute the work to assure completion within the number of days specified
  • fails to perform the work in accordance with the contract requirements
  • neglects or refuses to remove and replace rejected materials or unacceptable work
  • discontinues the prosecution of the work without the engineer’s approval
  • fails to resume work that has been discontinued within a reasonable number of days after notice to do so or
  • is uncooperative, disruptive or threatening or
  • fails to conduct the work in an acceptable manner.

Do not overrun the quantities on a different contract with the same contractor or allow performance of the work by changing the project limits on another contract. Refer to Chapter 7, Assignments for procedures to allow another contractor to complete the work.

Do not default a contractor if they have filed for bankruptcy protection. Permission must be obtained from the bankruptcy court to default a contractor that has filed for bankruptcy protection. Contact the Construction Division (CST), Contract Letting and Contractor Prequalification Branch (CL&CP) immediately when bankruptcy is legally declared by the contractor. Perform work determined necessary to maintain safety for the traveling public. Document this work in the diary and charge the work to the contract.

Do not default a contractor for insufficient insurance or Surety bond coverage. Do not allow a contractor with insufficient insurance or Surety bond coverage to perform work. Suspend all work until the contractor submits an acceptable certificate of insurance. Should a contractor's Surety bond become inadequate for any reason, suspend all work for 15 calendar days or until an acceptable Surety bond is provided, whichever is less. If an acceptable Surety bond is not provided at the end of the 15 calendar days, the contractor may be defaulted for inability to perform the work.

Do not default a contractor at the request of the Surety company. Allow work to proceed and continue making payments to the contractor until the contractor is declared in default according to the contract.

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Contract with Performance Bond

Do not re-let the project. Do not accept monetary settlement or payment of the remaining contract balance from the Surety. Prepare a Takeover Agreement with the Surety and require that the Surety completes the work as originally contracted. The Surety is responsible for any liquidated damages. Contact CST, Field Engineering Branch (FE) for assistance as needed. Submit the original Takeover Agreement to CST-CL&CP.

As soon as possible, schedule a meeting with the Surety to arrange contract completion. Ensure that CST-FE, district office and area office representatives are present at this meeting. Allow the Surety to have an attorney present at the meeting. Make all future progress payments to the Surety. Continue contract working day charges from the point where the original contractor was defaulted.

In obtaining a contractor to complete the contract, the Surety may use the original contractor or enter into an agreement with a new contractor. Do not require that the Surety comply with the department’s contracting rules or use department prequalified contractors. Suspend the 70% subcontracting limitation requirement. Approve all subcontract use by the authority in accordance with Subcontracting of this chapter.

Ensure that the original DBE/SBE goals are satisfied in accordance with the contract. Require that the Surety use the original DBE/SBE subcontractors, or approve substitutions in accordance with the contract.

Do not make any payments to the defaulted contractor, even if the payment is for work performed prior to the default. Make all payments, including payment of retainage, to the Surety subsequent to the contract default. In rare instances, usually when contract default occurs near the end of a contract, work may be completed with department maintenance forces. Deduct the cost of this work from future estimates.

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Contract without Performance Bond

For a contract without performance bond, work may be completed by:

  • department maintenance forces
  • re-letting the contract or
  • an emergency contract.

At the time of default, if the contract has a negative balance, send a letter to the contractor outlining the charges and requesting payment. Require that the payment submitted reference the appropriate project number. Contact the Finance Division (FIN) as soon as possible if the contractor does not make payment. FIN will coordinate with the Attorney General for collection.

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Use the following procedures in initiating and processing contractor defaults:

  1. Except when default is at the request of the contractor, send the contractor a certified letter with return receipt requested explaining the performance deficiencies and reason for potential default. State in the letter that the contractor must correct the deficiencies and resume work within 10 calendar days. Be specific about the reason for default and quote directly from the contract (see Warning letter example).
  2. If applicable, send the Surety a certified copy of the letter with return receipt requested. Provide a copy of the letter to the CST-FE.
  3. Begin the 10 calendar day time period on the date the contractor signs the receipt. If the certified letter to the contractor is returned or the return receipt is not received, note this information in the project diary and make the default effective 10 calendar days from the date of the letter.
  4. Do not default the contractor if work is resumed and concerted attempt is made to correct the problem within 10 calendar days.
  5. If the contractor does not resolve the problem in 10 calendar days or default is at the request of the contractor, stop all payments to the contractor. Do not suspend working day charges. Continue working day charges until contract completion. Send the contractor a certified letter of default with return receipt requested. Do not suspend time. Time charges will continue until completion of the contract. Be specific about the reason for default and quote directly from the contract (see Surety or No Surety examples). Provide a copy of the letter to the CST-FE and FIN.
  6. If applicable, send the Surety a certified copy of the letter that was originally sent to the contractor with return receipt requested.

Include the following information with all copies of default letters sent to the CST-FE:

  • contractor name
  • project number
  • control-section-job number ( CSJ) number
  • payee ID
  • contract number
  • highway and county and
  • name of Surety and Surety's mailing address, if applicable.

If determined necessary, perform work to ensure the safety of the traveling public between the time of default and the time that work resumes. Establish a state force account to track costs associated with this work. If applicable, charge the Surety for these costs. Continue working day charges until the project is completed.

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Contractor Appeals

Contractors may use the department’s claims process for allegations of wrongful default. Refer to Chapter 8, Disputes and Claims for department procedure.

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