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Section 8: Default of Contract

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Declaration of Default

Article 8.7.1, “Declaration of Default,” of the Standard Specifications provides a list of reasons a contractor may be declared in default of the contract. If any of these conditions arise on the project, consider sending the Contractor an intent to default notice (10-day notice) to inform the contractor and surety of the potential for default. It is important to follow the procedures for initiating and processing contractor defaults as outlined below. The 10-day notice must be signed at minimum by the Area Engineer at minimum in coordination with District Administration.

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/Construction & Maintenance Contract Letting Section (CST/CMCL) immediately when bankruptcy is legally declared by the contractor. If necessary, perform work using TxDOT resources in order to maintain safety for the traveling public. It is important to track the costs of performing this work so that the documented expenses can be properly charged to the surety. Establish a state force account to track costs associated with this work to properly charge them to the surety.

Do not default a contractor for insufficient insurance or allow them to perform any work on the project should their insurance lapse. Suspend all work until the contractor submits an acceptable certificate of insurance and continue contract time charges on the project. If, the work suspension period becomes excessive, the contractor may be defaulted.

Do not default a contractor for insufficient surety bond coverage or allow them to perform any work on the project should their bonds lapse. Should a contractor’s surety bond become inadequate for any reason, suspend all work and working day charges 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 failure to perform the work in accordance with the contract requirements.

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

If a Contractor gives written notice of voluntary default on the contract, TxDOT may forego the 10-day notice to default and immediately provide the contractor and surety a written notice of default. When a contractor is declared in default, update SiteManager critical dates with the date of the default. In addition, log each issuance of a 10-day notice in SiteManager key dates.

Default letters must follow the District’s latest delegation of signature authority. Signatures may not be delegated below the Deputy District Engineer or District Director.

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Contract with Performance Bond

Do not re-let the project. Continue contract working day charges from the date the original contractor was defaulted. The surety is responsible for any liquidated damages.

Coordinate with CST/Construction Support (CST/CS) to develop a Takeover Agreement with the surety and require that the surety completes the work as originally contracted. Submit the original Takeover Agreement to CST/CMCL and provide a copy to CST/Construction & Materials Information Systems Development (CMISD), Financial Management Division (FIN), and the managing office over the project.

If a project status meeting between the District and the surety is needed to discuss contract completion, ensure that district office and area office representatives are present. CST/CS may attend at the District’s request. The surety may have an attorney present at the meeting and if so, contact GCD. Do not accept monetary settlement or payment of the remaining contract balance from the surety.

In obtaining a completion contractor for performing the remainder of the contract, the surety may use the original contractor, if approved by the District, or enter into an agreement with a new completion contractor. The completion contractor will be considered a subcontractor on the contract.

Do not require that the surety comply with the Department’s contracting rules or use Department prequalified contractors. Suspend the 70% subcontracting limitation requirement. Follow the subcontractor approval procedure in accordance with Section 3, “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 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 resources. Establish a state force account to track costs associated with this work to properly charge them to the surety.

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Contract without Performance Bond

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

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 references the appropriate project number. Contact 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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Procedures

Use the following procedures in initiating and processing contractor defaults.

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  1. Except when default is at the request of the contractor, send the contractor a 10-day cure notice (by 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(s) for potential default and quote directly from the contract using the potential default items listed in Item 8.7.1. If the Contractor submits a voluntary default, skip to Step 5.
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  2. Coordinate the letter with CST/CS. If applicable, send the surety a certified copy of the letter with return receipt requested. Make sure the 10-day notice is signed at minimum by the Area Engineer in coordination with District Administration.
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  3. Begin the 10-calendar-day 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 DWR and make the time period effective 10 calendar days from the date the contractor and surety (if applicable) receive notification by email and delivery attempt of the certified tracking number.
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  4. Do not default the contractor if work is resumed and a concerted attempt is made to correct the problem within 10 calendar days.
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  5. If the contractor does not resolve the problem in 10 calendar days or default is at the request of the contractor, send the contractor a certified letter of default with return receipt requested. The default letter’s reason for default should exactly track the cause(s) listed in the 10-day notice and should state that TxDOT is making a claim against the performance bond. Provide a copy of the letter to the CST/CS and FIN. If applicable, send the surety a certified copy of the letter with return receipt requested. The default is effective per the date of the certified letter of default unless otherwise specified. Stop all payments to the contractor. Do not suspend working day charges; continue working day charges until contract completion.

Include the following information with all copies of default letters sent to CST/CS.

If determined necessary, perform work to ensure the safety of the traveling public between the time of default and the time that work resumes. Charge the surety for these costs. Continue working day charges until the project is completed.

Template Letters can be found on the CST Support website (internal access only).
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