Section 5: Default of Contract

Declaration of Default

Section
 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.
It is important to follow specific procedures for initiating and processing contractor defaults. Important things to consider prior to default:
  • do not default a contractor if they have filed for bankruptcy protection. Contact the Construction Division/Construction & Maintenance Contract Letting Section (CST/CMCL) immediately when bankruptcy is legally declared by the contractor. Permission must be obtained from the bankruptcy court to default a contractor that has filed for bankruptcy protection.
  • do not default a contactor for insufficient insurance. CMCL sends notification to the district to stop work for insufficient insurance. Suspend all work and continue time charges until CMCL notifies the district to allow the contractor to begin work again. If the suspension of work becomes excessive, or the contractor fails to return to work after submittal of sufficient insurance, the contractor may be defaulted for failure to perform the work in accordance with the contract requirements.
  • do not default a contractor for insufficient surety bond coverage. Do not allow them to perform any work on the project should their bonds lapse or are 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 the contractor to continue work until they are declared in default.

General Procedures

Use the
template letters
available on the Construction Division webpage (internal access only). All letters regarding a default must be submitted to CST prior to sending to the contractor. Submit draft letters to
CST-ConstructionSupport@txdot.gov
for review and approval.
  • the
    Intent to Default
     letter must be signed at minimum by the Area Engineer in coordination with District Administration.
  • Default
     letters must follow the district’s latest Delegation of Signature Authority and may not be delegated below the Deputy District Engineer or District Director.
  • all letters require certified mail return receipt. Use the following as a best practice to ensure communication is made with the contractor for receipt of the letter:
    • certified mail (send to the physical address for the Prime Contractor).
    • email (include a delivery and read receipt for record).
    • phone call (document date, time, person talked to and description of conversation for record).
Voluntary Default
If a Contractor gives
written notice of Voluntary Default on the contract, TxDOT may forego the 10-day notice (Intent to Default) to default and immediately provide the contractor and surety a written notice of default.

Procedures

Use the following procedures in initiating and processing contractor defaults.
Prepare the
Intent to Default
letter (10-day notice). Submit to
CST-ConstructionSupport@txdot.gov
for review. Upon approval from CST, send the letter to the contractor and surety (if a surety performance bond is applicable). Enter the Intent to Default date into in SiteManager’s key date.
Begin the 10-calendar-day period on the date the contractor signs the certified mail receipt or the date of the “reply back”, email.
If the certified letter to the contractor is returned or the return receipt is not received, note this information in the DWR. Make the period effective 10 calendar days from the date the contractor and surety (if a surety performance bond is applicable) receive notification by email and delivery attempt of the certified tracking number.
Do not default the contractor if work is resumed and a concerted attempt is made to correct the problem within 10 calendar days.
Prior to the 10th day, the district should prepare the
Default Letter
and submit to
CST-ConstructionSupport@txdot.gov
for review. CST will provide the approval of the letter in an email response to the district with the instructions listed below, then send the letter to the contractor and surety (if a surety performance bond is applicable).
  • enter the default date into SiteManager’s critical dates.
  • perform a final contractor evaluation of the contractor (a meeting is not required for this evaluation).
  • enter the final evaluation score into SiteManager.
Once declared in default, CST will notify Finance to issue an administrative hold. District will need to continue working day charges and process zero-dollar estimates. The original prime must leave traffic control in place until TxDOT or the Surety can provide devices to replace those required on the project. No further project direction should be had with the prime, except for TCP issues. If necessary, perform work using TxDOT resources in order to maintain safety for the traveling public. Establish a state force account to track costs associated with this work to properly charge the surety. CST will coordinate with the district and surety from this point forward.
The contractor can return to the project after being defaulted to remove equipment and materials they own. They cannot remove MOH that has been paid, or damage work that has already been paid for.

Default -
 Contract with Performance Bond

Once the contractor has been defaulted, the surety has several options to remedy the contract so the project can be completed. The surety will choose one of three options: Takeover Agreement, Tender Agreement, or paying the Penal Sum. TxDOT does not have the authority to direct the surety towards any option.
All the options will require the district to contact CST-Construction & Maintenance Contract Letting Section (CMCL) on the option chosen by the surety. CMCL will develop the template and work with the district to complete the process. The district will work with the surety on items of work left to do, the time charges, and liquidated damages.
When negotiations between the surety and the district start and the surety has an attorney present at the meeting contact GCD. Do not accept monetary settlement or payment of the remaining contract balance from the surety.
If TxDOT and the Surety cannot agree upon a completion process, the project will be turned over to Attorney General’s office for a resolution.
Takeover Agreement
When a Takeover option is selected, the surety will secure a completion contractor to complete the work. The surety can hire the original contractor. The selected contractor must be approved to work for TxDOT (contact CMCL to verify the contractor is pre-approved) and the district also has the option to reject the completion contractor. Once all negotiations have been completed and the surety has signed the Takeover Agreement. Ensure that the original DBE/SBE goals are satisfied in accordance with the contract. The contractor needs to maintain the DBE commitments approved on the job if the DBE is agreeable to complete the work with the new contractor.
The following would occur:
  • CMCL will change the Prime Contractor to the Surety in SiteManager
  • the completion contractor will become a subcontractor.
    • any additional subcontractors to the completion contractor will need to be submitted as second tier subcontractors.
    • the 70% subcontracting limitation is no longer a requirement.
    • follow the subcontractor approval procedure in accordance with Section 3 of this chapter.
  • FIN will change the payments over to the Surety.
  • the new completion contractor can begin working after the preconstruction meeting.
Tender Agreement
When a Tender option is selected, the surety will select a completion contractor to complete the work. The selected contractor must be approved to work for TxDOT (contact CMCL to verify the contractor is pre-approved) and the district also has the option to reject the completion contractor. Once all the negotiations (items left on the project, MOH, LD’s etc.) and the completion contractor is selected the surety pays TxDOT any additional cost above the amount left on the project and, the original surety is released from the contract.
The completion contractor will need to secure an approved Surety for the completion of the project. Once all the negotiations and Contractor and Surety are approved work can begin. Once all negotiations have been completed and the surety has signed the Takeover Agreement. Ensure that the original DBE/SBE goals are satisfied in accordance with the contract. The contractor needs to maintain the DBE commitments approved on the job if the DBE is agreeable to complete the work with the new contractor.
The following would occur:
  • CMCL will change the Prime Contractor to the Surety in SiteManager
  • the completion contractor will become a subcontractor.
    • any additional subcontractors to the completion contractor will need to be submitted as second tier subcontractors.
    • the 70% subcontracting limitation is no longer a requirement.
    • follow the subcontractor approval procedure in accordance with Section 3 of this chapter.
  • FIN will change the payments over to the Surety.
  • the new completion contractor can begin working after the preconstruction meeting.
Penal Sum
When a Penal Sum option is selected, the surety will write a check to TxDOT. The amount of the check will be determined based on negeotions (between TxDOT and the Surety) or for the bond amount of the project. The check will not exceed the bond amount, if any remaining work and liquidated damages (LDs) amounts exceeds the bond amount, the excess LDs will be removed from the project.
The following would occur:
  • FIN will receive the check from the surety
  • the district will complete a unilateral non-participating change order(s). These change orders will not affect the Penal Sum paid by the surety.
    • if Material on Hand (MOH) exist on the contract process a change order to move the MOH into the district stock account, using reason code 3K. (This material can be used when the project is relet).
    • if no MOH exist, process a change order to close the project out, using reason code 7G. In the change order description ensure to include the check information that was received by FIN and the project was terminated due to Penal Sum being paid.
  • if the Surety has paid to maintain traffic control or environmental work, these costs will reduce the Penal Sum.
  • the project can be relet using state funds, completed by TxDOT maintenance crews or the project cancelled.
  • the district will work with FIN to transfer the money from the Penal Sum to apply to the appropriate fund to pay for the work to complete the project.
  • if the project is a TxDIP project, contact TxDOT’s FHWA liaison to work with FHWA.

Default -
 Contract without Performance Bond

For a contract without performance bond, work may be completed by:
  • Department resources,
  • 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 references the appropriate project number. Copy Financial Management (FIN) Division-Accounts Payable. If the contractor does not make payment, FIN will coordinate with the Attorney General for collection.