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CHAPTER 11. CONTRACT ADMINISTRATION
11.1 General
This chapter provides guidance on the administration of contracts. Administration
refers to all the actions taken regarding a contract after award to ensure that it
is successfully performed, and that the PHA receives the required supplies or
services.
11.2 Administering Construction Contracts
The following guidance and instructions are provided for administration of
construction contracts. Contract administration for non-construction contracts
is discussed in 11.3 of this chapter. (Information regarding contract administration
for PHA development contracts is included in HUD Handbook 7417.1, Chapter 12.)
A. Pre-construction Conference and the Notice to Proceed. Following
the award of a construction contract, a pre-construction and safety
conference should be held to thoroughly discuss key construction
and contract administration-related issues. The PHA should issue a
Notice to Proceed to the contractor stating the starting and
completion dates and typical contract-related information. The
notice should be prepared in an original with at least two copies
signed by the Contracting Officer. The contractor should retain the
original and sign, date, and return the copies. This Notice may be
hand-delivered to the contractor at the conference and signed
immediately. The PHA should retain one copy for the official
contract file and, if requested, send the other copy to HUD. See
Appendix 14 for a sample Notice to Proceed.
B. Progress Meetings. The PHA should meet with its architect and the
contractor on a regular basis (usually weekly for large or complex
projects) to discuss work progress, payments, any problems or
deficiencies noted during inspection visits, overdue reports, and
the construction schedule. The PHA or the A/E should prepare a
written record of the items discussed at each meeting and place a
copy in the construction contract file.
C. Inspections. If an A/E firm has been retained to conduct the
contract administration function, the PHA must hold the A/E firm
accountable for carrying out the necessary inspections and
monitoring. The quality of the inspection is critical, and the
PHA should ensure that either the A/E or the designated person
responsible for inspection (Clerk-of-the-Works) is fully qualified
and performs the inspections frequently and thoroughly.
1. Inspection Reports. All progress inspections should be
documented using an appropriate PHA inspection report form.
The inspection report should include a description of the
work completed and a determination as to whether or not the
work is acceptable. If payment is made on a unit price
basis, quantities must be verified. If payment is made on a
time and materials basis, the report should show that the
time charged was spent on PHA work and that materials were
charged at cost. A copy of the inspection report should be
included in the contract file. Based on the progress
report, the Contracting Officer should initiate any needed
follow-up actions to ensure that the terms of the contract
are being fulfilled.
2. Deficiencies. Upon being notified by its architect or HUD
of construction deficiencies, the PHA shall promptly
notify the contractor in writing of the deficiencies
observed. This notification should also advise the
contractor that
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failure to make timely corrections will be an infraction
of the contract and that the contractor will be held
liable for any resulting losses or delays.
D. Labor Standards. The PHA is responsible for the administration and
enforcement of labor standards requirements as provided in HUD
Handbook 1344.1, REV 1, Chg1 as required by DOL regulations
applicable to Davis-Bacon covered work (29 CFR 5). See 10.8.E of
this Handbook.
E. Progress Payments. Some state laws impose mandatory payment
schedules to contractors that may not be consistent with HUD’s
holdback requirements. Any such problems should be resolved
before soliciting bids for a contract. For Capital Fund and
Development Projects, payments shall be made as follows:
1. If progress payments are necessary (they may not be
necessary in small construction contracts), the PHA shall
require the contractor to prepare a construction progress
schedule for each project immediately after issuing the
Notice to Proceed. The PHA may require use of form
HUD-5372, Construction Progress Schedule, or another
appropriate form from various professional organizations.
The information must be realistic and consistent with the
information provided by the contractor on the PHA-approved
schedule of amounts for contract payments and the
HUD-approved Project Implementation or Development
Schedule, as applicable.
2. The PHA or its architect should review the contractor’s
construction progress schedule to ensure that the
scheduled dates and amount of work to be completed are
reasonable and consistent with the contract. If
acceptable, the PHA’s architect shall sign the schedule
and forward it to the PHA for approval. After approval
by the PHA, the construction progress schedule shall be
returned to the contractor and copies filed in both the
construction contract file and the official contract
file.
3. The PHA should require the contractor to prepare a
schedule of amounts of payments immediately after
execution of the contract. The PHA must use form
HUD-51000, Schedule of Amounts for Contract Payments,
for this purpose.
4. The PHA and its architect shall review the schedule to
determine that both the scheduled work to be completed
by the specified dates and the amount of payment for
such work are reasonable. If acceptable, the PHA should
approve and return the schedule to the contractor. HUD
review is not required.
5. The PHA is responsible for making progress payments to the
contractor based on the PHA-approved schedule of amounts
for contract payments. Generally, progress payments for
acceptable work and materials delivered and stored on the
site are made at 30-day intervals. HUD authorization of
progress payments based on the approved payment schedule is
not required.
6. The contractor should submit a request for payment for each
project on form HUD-51001, Periodic Estimate for Partial
Payment. The request shall be accompanied by the
contractor’s written designation of a certifying officer.
In addition, the contractor should submit the following HUD
forms or other appropriate forms, if applicable, with each
periodical estimate for partial payment: form HUD-51002,
Schedule of Change Orders; form HUD-51003, Schedule of
Materials Stored; and form HUD-51004, Summary of Materials
Stored.
7. The PHA should review each contractor request and should
approve the payment if the following conditions have been
met (if the contractor requests payment for
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items that have not been acceptably completed, the PHA
should delete those items and adjust the payment
accordingly):
a. The contractor’s request is consistent with the
PHA-approved schedule of amounts for contract
payments;
b. The request does not include the amount to be
retained by the PHA under the contract;
c. The work covered by the payment has been
performed in accordance with the construction
documents;
d. The form HUD-51001, Periodic Estimate for
Partial Payment, has been properly executed and
all applicable supporting documentation submitted;
and
e. The contractor has submitted all required
reports, such as payroll reports. The PHA shall
retain the original form HUD-51001 and any
applicable supporting documentation for its file
and return a copy of the PHA-approved forms to
the contractor.
F. Delays and Time Extensions. The contractor is responsible for
completing the work within the time established in the contract.
The PHA is responsible for monitoring the contractor to ensure that
work will be completed as scheduled. The PHA may authorize
justifiable time extensions without prior HUD review and approval,
unless the PHA is subject to prior HUD approval under a
HUD-established threshold that is less than the requested amount.
The “Default” clause on the forms HUD-5370, 5370-C and 5370-EZ
prescribes the conditions under which a time extension may be
granted. The basic principle is that delays arising from
unforeseeable causes beyond the control and without the fault or
negligence of the contractor may be grounds for allowing a time
extension. Such time extensions should be formalized in a written
modification to the contract.
1. Construction Log. The PHA should maintain a construction
log to record potential causes for delays that may be
used as the basis for granting time extensions or for
denying a request for a time extension. The construction
log should contain daily reports that record at least the
following: the daily temperature, the daily amount of
precipitation, delays in obtaining labor and materials,
including the duration and the applicable construction
trade, delays experienced by others in completing
non-contract public improvements (whether on-site or
off-site), and other causes for delays, such as fires,
floods, vandalism, or court orders.
2. Time Extension Criteria. In order to be considered for
approval by the PHA, requests for time extensions should
meet the following criteria:
a. The contractor should submit a written notice to the
PHA within 10 calendar days of the start of any
delay;
b. The severity and extent of adverse weather could not
have been reasonably foreseen by the contractor (
normal seasonal levels of rain, snow, cold or heat
should have been considered by the contractor); and
c. The cause of the delay was beyond the contractor’s
control.
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3. Documentation. Immediately upon receipt of the
contractor’s notification of delay or request for time
extension, the PHA should send a letter of
acknowledgment to the contractor. The letter should
indicate that either: (1) immediate consideration will
be given to the contractor’s request or (2) the actual
delay in work is difficult to determine and
consideration will be given to the contractor’s request
upon completion of work. PHA staff should review
records to ensure that the information provided by the
contractor is accurate and complete. This will allow
the Contracting Officer to determine the cause of the
delay and the extent that it was within the
contractor’s control. It will also determine if the
request meets the contract’s criteria for approving or
rejecting the request for a time extension. Two
criterion for approval of time extension requests
follow:
a. The contractor’s request, as documented by the PHA
“finding of fact,” meets the requirements stated in
paragraph 11.6.F.2 above, and
b. The additional time requested by the contractor is
reasonable based on the nature and duration of the
delay.
G. Completion of Work. The completion of a construction contract
requires some formal procedures, including the following:
1. Notification. The contractor should provide prompt
written notification to the PHA when all work is completed.
A final inspection of completed work shall then be
conducted. Until the final inspection has been carried out
and corrections made, the PHA should not advance any of the
retainage or make the final payment to the contractor.
2. Final Inspection. Upon receipt of the contractor’s
notification of the date when the work has been completed,
the PHA should conduct a final inspection within 10
calendar days.
3. Post-Inspection Meeting. The inspection team should meet
after completing the final inspection to determine whether
the work has been completed in accordance with the
construction documents and to identify any minor items of
incomplete or unsatisfactory work (or seasonal work such
as planting of shrubs and lawns). The team should also
reach agreement on the items to be included on the PHA’s
or its architect’s final punch list and on any major
deficiencies that must be corrected by the contractor.
4. Documentation. Following final inspection, the PHA should
notify the contractor to submit the following documentation
to the PHA:
a. A certificate of occupancy issued by the responsible
local agency for each building (where appropriate);
b. One notarized original and two copies of the
contractor’s release, including certification that
indicates:
i. The work was completed in accordance with the
construction documents, including contract
modifications, except any minor items
identified on the PHA’s or its architect’s
proposed certificate of completion;
ii. The total amount due the contractor and a
separately stated amount for each unsettled
claim against the PHA;
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iii. Documentation noting that the PHA is released
of all claims, other than those stated in the
contractor’s release; and
iv. Wages paid to laborers or mechanics were
consistent with the wage rate requirements of
the contract and there are no outstanding
claims for unpaid wages.
c. Assignment of all guarantees and warranties to the
PHA; and
d. “Final” partial payment. The PHA may accept part
of a project for occupancy before contract
settlement if the following conditions are met:
i. The dwelling units to be accepted (except items
approved for delayed completion) have been
completed and are ready for occupancy;
ii. The general contractor agrees to early occupancy
and completion of items approved for delayed
completion;
iii. Early occupancy will not unduly inconvenience
or represent a safety risk to tenants while the
unfinished work is being completed;
iv. The PHA has obtained occupancy permits from the
responsible local agency for each unit to be
accepted; and
v. The PHA has executed an occupancy agreement
with the general contractor indicating that the
PHA partially accepts specified work, provided
that the contractor accepts the responsibility
to complete the project by the established
completion date.
H. Final Payment. The PHA should ensure that an adequate and notarized
certificate and release are received from each construction
contractor to assure that the work was in full compliance with the
construction contract documentation and that all materials,
supplies, equipment, and labor-related expenses have been paid in
full by the contractor. Prior to making final payment, the PHA
should ensure that all required certified payroll reports have been
received and that any discrepancies and/or wage underpayments have
been corrected. Upon receipt of the approved certificate of
completion, the PHA is authorized to make payment to the contractor.
The PHA payment to the contractor should be the amount specified in
the certificate of completion, but it should not include any amount
to be retained for disputed items and incomplete work, such as the
punch list or seasonal items.
I. Construction Warranties. The warranty period for all construction
work should be at least 365 calendar days from the date of final
acceptance of the work in question or such longer period as
otherwise specified in the contract. For complex equipment or
systems (such as boilers, air conditioning units, thermal paned
windows or storefronts, or membrane roofs), the PHA should
consider using a full two-year warranty. The extra year will help
to ensure that the PHA can discover and report any hidden or
latent deficiencies while the warranty is still in force. The
contractor is fully responsible to correct any and all legitimate
deficiencies reported within the warranty period. It is often a
good approach to specify the additional warranty period on
replaced or repaired items; one full additional year is generally
reasonable and appropriate.
1. Warranty Inspections. The PHA is responsible for
performing required warranty inspections, including the
11-month inspection, during the warranty
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period and promptly notifying the contractor in writing to
remedy any defects relating to manufacturer or contractor
warranties on equipment and systems and contractor
warranties on materials and workmanship. This is an area
that has been frequently overlooked by some PHAs and their
A/Es. Failure to enforce warranties is a violation of the
ACC requirement for economy and efficiency and can be very
costly to the PHA. In such cases, the PHA will have to use
its own funds after the expiration of the warranty to
correct defects that were the contractor’s responsibility.
2. Corrective Action. Upon receipt of the PHA’s written
notice, the contractor should promptly remedy any defects
due to the use of faulty equipment or materials or poor
workmanship. The contractor is also responsible for paying
for any damage to other work resulting from such defects.
If the contractor fails to resolve such warranty issues,
the bonding company should be contacted by the PHA for
final resolution.
11.3 Administering Non-Construction Contracts
The necessary amount of oversight and monitoring, i.e., contract administration, will
vary with the complexity of the work. Relatively simple contracts may require limited
monitoring, while large, complex contracts will need more in-depth monitoring and
oversight. Efforts to develop good specifications and a carefully planned
solicitation can be undermined by weak contract administration.
A. Post-award Conference. For relatively complex projects, it is
advisable to meet with the contractor soon after contract award
to ensure that all parties understand the contract’s performance
requirements. Terms of the contract should be thoroughly
discussed. In addition, formal minutes of the meeting should be
recorded and subsequently issued to all meeting attendees. Also
at this meeting, samples may be presented if required and
inspection personnel introduced. Any necessary changes to the
contract resulting from this meeting should be reflected in a
formal written modification to the contract, rather than through
oral agreements or instructions from PHA staff. Only the
Contracting Officer has the authority to make a formal change in
a contract.
B. Establishing a System for Receiving Supplies, Equipment, and
Services.
1. The PHA should establish a system for ensuring that the
items required by contract are delivered to an appropriate
location where PHA personnel can make certain that receipt
of supplies, materials, or equipment is properly handled
and documented. For example, a contract for supplies should
indicate where delivery should be made (what room or other
location, such as a management office) and how the receipt
will be recorded and provided to the contractor.
2. The receiving report, either a standardized PHA document or
one submitted by the contractor, should contain, at a
minimum, the following information: contract number, item
number/description of the item, date of receipt, place
received, receiving official (printed name, signature,
date), date of inspection, inspection official (printed
name, signature, date), whether the work/item was or was
not accepted (and, if not accepted, reasons for rejection),
and accepting official (printed name, signature, date). The
receiving, inspecting, and accepting official may, in
certain circumstances, be the same individual, particularly
under project-based management.
C. Monitoring and Inspecting Supplies and Services. Once received, the
PHA should monitor or inspect the supplies or services obtained in
accordance with the contract. If poor contractor performance
occurs, the PHA should document the file and remember that
performance when awarding future contracts. The PHA should
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also make recommendations to HUD, when appropriate, regarding
suspensions and debarments and provide evidence involving serious
complaints, areas of non-responsibility, and other violations of
or failure to comply with Federal, State, or local laws and
regulations to the HUD Field Office for review (see Chapter 10,
Evaluating Contractors and Analyzing Cost and Price).
D. Enforcing Specifications and Timelines. The PHA should establish a
system to enforce both specifications and timelines and, when
necessary, enforce compliance with all of the contract
specifications, particularly since the rules of law may relieve a
contractor of any liability if the PHA failed to regularly
monitor the contractor’s performance before final acceptance. The
PHA is not obligated to pay for or accept supplies or services
until it has had an opportunity to fully inspect them. Such
inspection and any rejection resulting therefrom should be within
a reasonable time after delivery or performance. If the PHA fails
to require the contractor to correct a particular defect because
of the PHA’s failure to inspect (assuming that the defect could
have been found by reasonable inspection), the PHA may have
waived its rights to future rejection based on that particular
defect.
Acceptance may be assumed to have occurred, with or without
concurrence by the PHA, if after a reasonable time to inspect
has passed and the PHA has failed to make any notification to
the contractor that the supplies, services, or construction do
not conform to the contract requirements.
E. Acceptance of Supplies and Services
1. The Contracting Officer should ensure the supplies
received from vendors are inspected and accepted, the
performance of services was satisfactory, and receiving
documents are prepared and processed for payment. This
acceptance should not be delayed, since prompt payment
will help to ensure good relations with vendors and
contractors. In addition, many contracts allow a
discount for prompt payment if made within a specified
number of days. Discounts, if offered by the contractor,
should always be taken by the PHA to the greatest extent
feasible, and procedures should be established to
facilitate expedited receipt and prompt payment.
2. Nonconformance. When supplies, services, or construction
items do not conform to the contract, the PHA has three
response options. reject the items, require the
contractor to correct them, or conditionally accept them.
If any items or services are rejected, the contractor is
subject to being declared in default unless it can provide
conforming items or make a correction within the required
delivery schedule/completion time. If the contractor is
required to correct the defects, it would appear that the
PHA has elected to have them corrected; therefore, the PHA
may not terminate the contract for default until the
contractor has a reasonable opportunity to correct the
defects. If the contractor does not correct the defects
within the required timeframe, the PHA may accept the
defective items or deficient services, but negotiate a
commensurate reduction in price.
F. Labor Standards. Maintenance contracts in excess of $2,000
require the payment of HUD-determined wage rates.
1. Posting Wage Rates. PHAs must ensure that a copy of the
applicable HUD wage decision is displayed at the job site
in a place accessible to all maintenance laborers and
mechanics and placed in an area that is protected from
inclement weather.
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2. Compliance Monitoring. PHAs have certain compliance
monitoring and enforcement responsibilities for
maintenance contracts subject to HUD-determined wage
rates. See Chapter 10 of this Handbook for a discussion
of the wage and recordkeeping requirements and the
enforcement requirements of the PHAs.
G. Control of Payments. To the extent practical, and to help eliminate
disputes that arise when shortages or damages are not discovered
until after payment has been made, payment for supplies and
services should be made only after the delivered items are
inspected and found to be satisfactory.
11.4 Contract Modifications
A. General. Occasionally, it is necessary to modify a contract or
purchase order to reflect changes in the required effort, period of
performance, or price. Contract and purchase order modifications
shall be issued in writing in one of the following forms:
1. Unilateral modification (a modification that is signed
only by the Contracting Officer, such as a change order
pursuant to the Changes clause on form HUD-5370, or
administrative modification, such as a change in the
address of the payment office), or
2. Bilateral modification (such as a supplemental agreement
in which both parties mutually agree on contract changes)
that is signed by both the Contracting Officer and the
contractor. Bilateral modifications are the preferred
method of modifying contracts and purchase orders.
B. Process. A change order is issued by the Contracting Officer after
the award of a contract in any of the contract terms, including
specifications, completion time, description of the work, etc.,
within the scope of the contract.
1. The Changes clause is included in form HUD-5370 (for
construction) and form HUD-5370-C (for non-construction
contracts) and form HUD-5370-EZ (for small
construction/development contracts).
2. A change order may be issued unilaterally by the
Contracting Officer. In such cases, the contractor is
entitled to submit a change order proposal to identify
any changes in cost or schedules as a result of the
change, and the parties negotiate an equitable adjustment.
3. Change orders may be issued bilaterally if the contractor
agrees to the change in advance. When a change is mutually
agreed upon, including price adjustment for concessions
made by either party, a contract modification is prepared
and signed by both parties to the original contract. See
Appendix 15 for a Sample Contract Modification format that
may be used for modifications.
4. Change orders/modifications should include at least the
following: a detailed description of the proposed change in
work, a reference to the applicable working drawings and
specifications, when applicable, a price (credit, debit, or
no change) for the change in contract work, estimate of
additional time, if any, required to complete the work, the
contractor’s itemized breakdown of the cost of materials
and labor and an itemized breakdown for any applicable
subcontractors, and the change indicate on the
architectural or engineering drawings, if applicable.
C. Limitations on Change Orders. The Changes clause contained in forms
HUD-5370, 5370-C, and 5370-EZ, prescribes the specific circumstances
in which a
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change order may be issued. For example, adding the construction of
a new building to a modernization contract would not be considered
within the scope of the contract or within the authority of the
Changes clause but should be considered a new contract (and subject
to competition).
D. Modification Register. The PHA shall maintain accurate records and
documentation regarding contract modifications by including a
modification register or other record in each contract file. This
register is required to provide a permanent record of all actions
taken in connection with each contract. The modifications register
should generally include information on the following: the number
of modifications, a brief description of the change, the cost of
the proposed modification, the date submitted to HUD for approval,
if applicable, any critical deadline dates, the date of HUD
approval or disapproval, if applicable, and the action taken, and
the amount of any additional time required by the contractor.
E. HUD Approval of Modifications. PHAs must submit to HUD for prior
approval any proposed contract modifications changing the scope of
the contract in accordance with the Changes clause in the contract,
or that increases the contract by more than the Federal small
purchase threshold, unless exempted under paragraph 12.5 of this
handbook.
11.5 Contract Claims
A. General. Contract claims may occur after the contract has been
executed and may be pursued by the PHA or the contractor, although
most often the contractor is the claimant. Disputes may arise
regarding breach of contract, mistake, misrepresentation, other
cause for contract modifications, or other disputes as described
in the contract documents, such as unforeseen conditions. Forms
HUD-5370, 5370-C and 5370-EZ, describe types of disputes and how
claims will be processed. PHAs are required to have a provision in
the procurement policy that explains how claims and disputes will
be handled.
B. Filing Claims. The PHA should make every effort to resolve claims
informally and expeditiously to avoid time losses or expensive
delays. However, if the dispute cannot be resolved by mutual
agreement, the following steps must be taken:
1. The contractor must submit the claim to the PHA’s
Contracting Officer in writing within the timeframe
specified in the contract documents.
2. The claim must identify the nature and scope of the claim,
including extra costs or time sought by the contractor.
C. Rendering Decisions on Claims. The Contracting Officer shall review
the facts pertinent to the claim and secure any necessary assistance
from legal, technical, or other advisors and shall issue a final
written decision promptly and within the timeframe stated in the
contract documents. (As provided by forms HUD-5370 and 5370-C, if
the Contracting Officer does not issue a final decision within 60
days after written request by the contractor for a final decision,
or longer period if mutually agreed upon by both parties, then the
contractor may proceed as if an adverse decision has been received.)
The written decision should include:
1. A description of the claim;
2. A reference to the pertinent contract clauses;
3. A statement of the factual areas of agreement or
disagreement;
4. A statement of the Contracting Officer’s decision with
support rationale; and
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5. A statement referencing appeal rights as provided in the
PHA’s Procurement Policy.
D. The Contracting Officer shall immediately furnish a copy of the
decision to the contractor by certified mail, with return receipt
requested.
E. Records of Claims. The PHA shall maintain a complete written and
dated record of any actions that may result in a dispute or claim
for damages. An example would be records of weather conditions
during the course of a contract, delays in receiving materials
ordered by the PHA, or other items that may result in requests for
time delays that may be disputed. These records protect the PHA’s
interests during any litigation that may arise later.
At a minimum, the PHA should maintain records of the following:
1. A complete and detailed job record; and
2. A disputes and claims file, including a cross-reference to
other pertinent files (such as a separate file for a
particular subcontractor), any correspondence related to a
dispute, written minutes of meetings between the PHA and
architects, or job meetings where decisions or agreements
were made regarding disputes.
11.6 Contract Terminations
A. General. Contracts are terminated either for default or termination,
as prescribed in the termination clauses on forms HUD-5370, 5370-C,
and 5370-EZ.
B. Termination Notice. The Contracting Officer shall terminate
contracts for convenience or default only by a written notice
to the contractor. The notice shall be sent by certified mail
with a return receipt requested. The notice shall state, at a
minimum, the following:
1. The contract is being terminated for default or for the
convenience of the PHA under the cited contract clause
authorizing the termination;
2. Whether the contract is terminated in whole or in part
(for partial terminations, identify the specific items
being terminated);
3. If terminated for default, the acts or omissions
constituting the default, the Contracting Officer’s
determination that failure to perform is not excusable,
the PHA’s rights to charge excess costs of
re-procurement to the contractor, and the contractor’s
appeal rights;
4. The effective date of termination;
5. The contractor’s right to proceed under the
non-terminated portion of the contract;
6. Any special instructions; and
7. Copies of the notice should be sent to the contractor’s
surety, if any, and any assignee.
C. Termination for Convenience. Contracts may be terminated for
convenience when the PHA no longer needs or desires the supplies
or services under contract or can no longer fund the procurement.
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1. Settlement. Settlement of contracts terminated for
convenience may be settled through negotiations or by a
unilateral determination of the Contracting Officer.
The contractor should submit a settlement proposal
promptly to the Contracting Officer for any amounts
claimed as a result of the termination. Whenever
possible, the Contracting Officer should negotiate a
fair and prompt settlement with the contractor and
should settle by determination only when mutual agreement
cannot be reached.
2. Compensation. A settlement should compensate the
contractor fairly for work performed, for other costs
incurred under the contract, and for preparations made for
the terminated portions of the contract, including a
reasonable allowance for profit. However, no profit shall
be allowed on settlement expenses. In addition, the
Contracting Officer shall not allow profit if it appears
that the contractor would have incurred a loss had the
entire contract been completed. Fair compensation is a
matter of judgment and cannot be measured exactly. The
Contracting Officer should use prudent business judgment in
the settlement process, as opposed to strict accounting
principles. The parties may agree to a total amount to be
paid to the contractor without agreeing on individual cost
items or profit.
D. Termination for Default. A contract may be terminated for default
because of the contractor’s actual or anticipated failure to
perform its contractual obligations. Under a termination for
default, the PHA is not liable for the contractor’s costs on
undelivered work and may be entitled to the repayment of progress
payments. If the contractor fails to make progress so as to
endanger performance of the contract, the Contracting Officer
should issue a written notice to the contractor (generally called
a “Cure Notice”) specifying the failure and providing a period of
10 days (or longer period if needed) in which to “cure” the
failure. After the 10 days, the Contracting Officer may issue a
notice of termination for default, unless the failure to perform
has been cured.
1. Notice. If the contractor has failed to perform work
within the required time and a termination for default
appears appropriate, the Contracting Officer should, if
practicable, notify the contractor in writing of the
possibility of the termination. This notice shall call the
contractor’s attention to the contractual liabilities if
the contract is terminated for default, and request the
contractor to “show cause” why the contract should not be
terminated. If the response to this “show cause” notice is
inadequate or insufficient, action is taken in response to
it; the contract should then be terminated for default.
2. Alternatives to Termination. Alternatives to termination
for default include the following (at the PHA’s
discretion): allow alternative dispute resolution
(arbitration or mediation) as agreed to by both parties;
allow the contractor or the surety to continue
performance of the contract under a revised delivery
schedule (in exchange for a reduced price or other
consideration); permit the contractor to continue
performance of the contract by means of a subcontract or
other business arrangement with an acceptable third
party, provided the rights of the PHA are adequately
protected; or, if the contractor is not liable to the PHA
for damages, execute a no-cost termination settlement
agreement.
3. Repurchase. When the supplies, services, or construction
activities are still required after termination, the
Contracting Officer should seek to contract for the same
or similar items as soon as possible. The Contracting
Officer may use any appropriate contracting method for
the procurement (sealed bids or competitive or
noncompetitive proposals, as appropriate), provided
competition is solicited to the maximum extent
practicable to secure the lowest price obtainable under
the circumstances in order to mitigate damages.
11-11
2/2007
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Handbook No. 7460.8 REV 2
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