How to Fire a Subcontractor the Right Way (6 Steps)

6 Important Steps when Terminating a Subcontractor. Like most general contractors we place a great deal of effort searching and vetting subcontractors. Unlike many other professions, the process of finding great contractors is far from straight-forward and difficult to gauge if they will be a great fit for your business and clients.

Training and mentoring are an investment we must make when hiring a subcontractor, but sometimes you have to decide whether to terminate a subcontractor for unfortunate reasons. This is one of the most difficult and risky decisions a general contractor is faced with and should never be taken lightly.

The financial stakes are real. A botched termination can cost you double the remaining contract value in legal fees and replacement costs. On the other hand, keeping a failing subcontractor on the job can bleed your project budget dry through rework, delays, and damaged client relationships. Getting this decision right, and executing it properly, is one of the most important skills a general contractor can develop.

Before we walk through the six steps, understand this: termination should always be a last resort. If there is any reasonable path to getting the subcontractor back on track, take it first. But when all other options have been exhausted, you need a clear plan. Here is the roadmap.

1. Verify Owner Approval
2. Confirm Ground for Termination
3. Review Practical Considerations
4. Follow Procedure for Proper Termination
5. Mitigating Damages and Documenting the Completion Work
6. Consider Consequences of Improper Termination

1. Verify Owner Approval

You must confirm the general contractor has the legal right to terminate a subcontractor before taking action. Projul’s document management features help you store and reference contracts quickly so you can find the relevant clauses without digging through filing cabinets. Start by reviewing your contracts to determine if the owner and/or architect has the right to object to subcontractor replacements.

For example, paragraph 5.2.4 of AIA Document A201-1997 (General Conditions of the Contract for Construction) provides that “the Contractor shall not change a Subcontractor, person or entity previously selected if the Owner or Architect makes reasonable objection to such substitute.” Thus, the general contractor may have to obtain the owner’s and/or architect’s consent to change subcontractors. This consent must be obtained in writing.

This step gets overlooked more often than you would expect. A general contractor gets frustrated with a subcontractor, makes a quick decision to cut ties, and then discovers they needed the owner’s sign-off first. Now the project is in limbo while everyone scrambles to sort out the mess. Do not let that happen to you.

Here is what to look for in your contract documents:

• Owner consent clauses. Many prime contracts require the owner to approve any subcontractor changes. If yours does, send a formal written request to the owner outlining why the change is necessary.
• Architect approval provisions. Some contracts give the architect a say in subcontractor replacements, especially on commercial or institutional projects.
• Notice requirements. Check whether the contract specifies a time frame for requesting approval. Missing a notice deadline can complicate the entire process.

Keep copies of all correspondence related to this approval. If the termination is later challenged, you want a paper trail showing you followed the correct process from the start.

2. Confirm Ground for Termination

Confirmed grounds for termination protect you legally and financially. Projul’s project tracking features help document recurring performance problems before they reach the termination stage. Subcontractors should only be terminated for major, recurring performance problems, and only after all avenues for getting the subcontractor to perform have been exhausted.

The key in making this determination is the subcontractor agreement. Common grounds for termination include: failure to adequately staff the work, supplying inadequate or nonconforming materials, failing to meet the schedule, and failing to comply with code and safety requirements.

Regardless of the particular terms of the subcontract, the law permits a party to terminate a contract only when the other party has committed a serious, or “material,” breach of the contract. A minor or technical breach of the contract will not justify termination. The termination is not appropriate where the subcontractor has substantially performed its contractual obligations.

What Counts as a Material Breach

For example, a subcontractor’s delay of a few days in meeting certain schedule milestones generally would not constitute a “material” breach justifying termination. The general contractor may have a claim for damages caused by the subcontractor’s brief delay. For example, if the owner assessed liquidated damages. It probably would not be justified in terminating the subcontractor from the project.

A more difficult question, one with no easy answer, is whether a subcontractor’s failure to complete punch list items constitutes a material breach. Especially where substantial completion has been achieved or a certificate of occupancy has been issued. Generally, failure to complete punch list work is not a material breach justifying termination. However, a subcontractor’s persistent failure to perform punch list work may constitute a repudiation of the contract, supporting a termination for default.

Building Your Case Before You Act

The strongest termination cases are built over weeks or months of documentation. Start keeping records the moment performance issues surface. Here is what to document:

• Written warnings. Every time you notify the subcontractor of a problem, put it in writing. An email or letter creates a timestamped record. A phone call does not.
• Photos and videos. Take pictures of defective work, unsafe conditions, or incomplete tasks. Date-stamp everything.
• Inspection reports. Failed inspections are powerful evidence of substandard work. Keep copies of every inspection result.
• Schedule comparisons. Show the planned schedule against actual progress. If the subcontractor is consistently weeks behind, that pattern tells a clear story.
• Meeting notes. Document discussions about performance issues, including who was present, what was said, and what corrective actions were agreed upon.

Don’t just take our word for it. See what contractors say about Projul.

Projul’s file storage lets you attach all of these records directly to the project, so everything is organized in one place if you ever need to present your case.

3. Review Practical Considerations

Legal grounds alone do not make termination the right move. Projul’s reporting and budgeting tools help you weigh costs so you can make informed decisions. One of the primary considerations is whether a replacement subcontractor can be obtained to complete the work at a reasonable price.

Something else to consider is whether the replacement subcontractor will perform any better than the terminated subcontractor. Additionally, will the project be delayed, and will the warranty be impaired? Also of importance is whether the terminated subcontractor will file a mechanics’ lien and thereby potentially damage the relationship between the owner and the general contractor. These and other important practical issues should be carefully considered before deciding to terminate a subcontractor.

Running the Numbers

Before you pull the trigger, sit down and run the actual numbers. Here is a practical checklist:

• Remaining contract value. How much work is left on the subcontract? If the sub is 90% complete, it may cost more to bring someone new up to speed than to push through the remaining 10%.
• Replacement cost estimates. Get informal quotes from at least two other subcontractors. What will it actually cost to finish the work? In a tight labor market, the premium for a replacement sub can be significant.
• Schedule impact. How many days or weeks will the transition add to the project? Will those delays trigger liquidated damages from the owner? Will they push other trades out of sequence?
• Warranty considerations. If the original sub did 80% of the work and a new sub finishes the rest, who is responsible for warranty issues? Get this sorted out before you make the switch.
• Lien exposure. A terminated subcontractor who has not been paid for completed work can file a mechanics’ lien. Factor this into your financial planning.

Exhausting Other Options First

Because of the potential major consequences, a subcontractor should be terminated only as a “last resort” and after other default remedies have been considered. General contractors should first ask the subcontractor for a “cure and complete” plan or discuss with the subcontractor other possible ways to cure the default.

The general contractor should also consider other remedies short of termination. These could include supplementing the subcontractor’s workforce, deleting portions of the subcontractor’s work, and asking the surety to finance the contractor’s completion. Sometimes a direct, honest conversation about the problems and their impact on the project is enough to change behavior. Other times, a formal cure notice with a specific deadline is what it takes.

If you have tried all of these approaches and the subcontractor still fails to perform, then termination becomes the appropriate next step.

4. Follow Procedure for Proper Termination

Proper written notice and procedural compliance are required before terminating a subcontractor. Projul’s file storage and communication features, rated 9.8/10 on G2, help you maintain a paper trail for every step. Assuming that termination is wise from a practical perspective, the general contractor should carefully follow the notice and other procedural requirements for termination contained in the subcontract agreement.

For example, paragraph 7.1.1 of AIA Document A401 (Subcontract Agreement), requires two seven-day written notices before the subcontractor can be terminated. That means at minimum 14 days of notice before you can actually remove the sub from the project. If you skip one of those notice periods, the entire termination could be ruled improper.

The general contractor should also attempt to obtain letters from the owner or architect directing the general contractor to remove the subcontractor. The letter should describe the problems that the subcontractor is causing to the project, or it should consent to the termination and name the replacement subcontractor.

Writing an Effective Termination Notice

Your termination notice should include the following elements:

• Specific contract reference. Cite the exact subcontract clause that authorizes termination and the clause the subcontractor has breached.
• Detailed description of defaults. List every instance of nonperformance, with dates, locations, and supporting documentation references.
• History of cure attempts. Show that you gave the subcontractor opportunities to fix the problems and they failed to do so.
• Effective date. State clearly when the termination takes effect, in compliance with the notice periods required by the contract.
• Instructions for the site. Tell the subcontractor when to remove their equipment and materials, and when to surrender access to the work area.
• Financial accounting. Note the current state of payments, retainage, and any back-charges that will be applied.

Send the notice via certified mail and email. Keep proof of delivery. Some contractors also hand-deliver a copy to the subcontractor’s superintendent on site and get a signature confirming receipt.

5. Mitigating Damages and Documenting Work Completion

Immediate damage mitigation prevents cost overruns after a subcontractor departure. Projul’s job costing tools help you track replacement costs in real time. For example, the general contractor should make sure that the work has been protected until a replacement subcontractor is on site.

This means physically securing the work area. If the terminated sub was doing roofing work, make sure the building is weather-tight. If they were doing electrical rough-in, confirm that all exposed wiring is safe and capped. Neglecting this step can lead to weather damage, safety hazards, or theft of materials that further inflate your costs.

Getting a Replacement Sub on Board

If attainable, the general contractor should also solicit bids from several qualified subcontractors before contracting for the work to make sure that a competitive price is obtained. Where possible, the work should be procured on a fixed-price rather than time-and-material basis. This will help to avoid an argument by the terminated subcontractor that the replacement contractor was given a “blank check.” The bid solicitation process should be documented, and the scope of work should be well-defined.

When writing the replacement scope of work, be specific about what has been completed and what remains. Walk the site with potential replacement subs and point out any defective work that needs to be corrected before they can proceed. This transparency helps you get accurate bids and avoids surprises after the contract is signed.

Tracking Every Dollar

Finally, the general contractor should require the replacement subcontractor to provide detailed applications for payment. The payment should be broken down by line item and supported by appropriate backup documentation. If the work can be procured only on a time-and-material basis, it is especially important that the replacement subcontractor maintain detailed backup documentation. Documentation needs to include payroll records, equipment and material invoices, and daily construction reports describing the work completed.

Use Projul’s scheduling features to track the replacement sub’s progress against the revised project timeline. This real-time visibility helps you catch any new problems early, before they turn into the same cycle of delays and nonperformance you just went through with the terminated sub.

Keep a separate cost code or line item for all replacement costs. You will need this accounting breakdown if you pursue a claim against the terminated subcontractor or their surety. The cleaner your records, the stronger your position.

6. Consider Consequences of Improper Termination

Improper termination can cost you double the remaining contract value. Projul helps 5,000+ contractors organize the documentation needed to avoid this expensive mistake. The consequences of improperly terminating a subcontractor can be severe.

If the general contractor improperly terminates the subcontractor, the subcontractor may have a claim against the general contractor for lost profits plus any additional damages caused by the improper termination. This includes amounts owed by the subcontractor to lower tier subcontractors and suppliers. The general contractor would also lose the right to recover from the terminated subcontractor amounts paid to a replacement subcontractor hired to complete the work. In other words, a general contractor that improperly terminates a subcontractor may end up paying at least twice for the remaining work.

If the general contractor gives proper notice of the default and can prove that it had adequate grounds to terminate the subcontractor, the general contractor’s exposure to the subcontractor will be limited to the total subcontract amount, not including the expense of finishing the subcontractor’s work and other damages incurred by the general contractor.

Real-World Financial Impact

Let’s put some numbers to this. Say you have a $200,000 subcontract with $80,000 of work remaining. If you improperly terminate, here is what you could face:

• Lost profits claim from the terminated sub: The sub could claim the profit margin on the remaining $80,000, which might be $15,000 to $25,000 depending on their markup.
• Replacement costs: A new sub may charge $100,000 to $120,000 to complete the same $80,000 worth of remaining work, because of mobilization costs, the learning curve, and correcting existing defects.
• Legal fees: If the terminated sub litigates, expect $20,000 to $50,000 or more in legal costs.
• Mechanics’ lien: The terminated sub could file a lien for unpaid work, creating problems with the owner and potentially holding up your final payment.

Now compare that to a proper termination: you follow the contract, document everything, give proper notice, and the sub cannot dispute your grounds. Your exposure is limited, and you are in a strong position to recover excess completion costs.

Protecting Your Business Going Forward

The best way to handle subcontractor terminations is to minimize the need for them in the first place. Here are a few practices that help:

• Vet thoroughly before hiring. Check references, review past work, verify licenses and insurance, and look for patterns of disputes or liens. The time you spend up front saves you from painful situations later.
• Use clear, detailed subcontracts. Vague contracts make terminations messy. Include specific performance standards, schedule milestones, notice requirements, and termination clauses. If you are using standard AIA or ConsensusDocs forms, read them carefully and understand what they require.
• Document from day one. Do not wait until problems escalate to start keeping records. Use Projul’s project management tools to log daily progress, store photos, and track schedule performance from the first day the sub is on site.
• Communicate early and often. Most subcontractor problems start small and grow. A quick conversation about a missed deadline today can prevent a termination decision six months from now.
• Keep your own schedule current. When your master schedule is up to date, it is easy to spot when a subcontractor is falling behind. Projul’s scheduling tools make it simple to compare planned versus actual progress and flag issues before they become critical.

Building strong relationships with reliable subcontractors is one of the most valuable assets a general contractor can have. But when those relationships break down despite your best efforts, following these six steps will protect your business, your project, and your reputation.

Portions of this content was sourced and/or published in:

• *Building Ohio (Associated Contractors of Ohio) and The Constructor (ACI/AGC-Cincinnati) Scott Gurney is Chairman of the Construction Law Group of Frost Brown Todd LLC. He can be contacted at (513) 651-6841 or sgurney@fbtlaw.com. *
• Michael C. Stone,Markup & Profit (Follow Him onLinkedIn)

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