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CONTRACT TERMINATION FEE

5 replies [Last post]
Wed, 2005-09-21 01:26
Q ZHOU
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Joined: 26 Jul 2005
Posts: 12
Groups: Petro-Chem / Oil & Gas
Gentlemen, In the EPC turnkey contract, an article says CLAUSE 1.TERMINATE ALL THE WORK, A termination fee which shall be equal to 5% of the amount of the lump sum described in CLAUSE @@@ which remains unpaid, less amounts invoiced but not yet paid, at the date of termination. CLAUSE 2. TERMINATE PART OF THE WORK, for the purpose of assertaining the amount the lump sum which is applicable to the part of the WORK terminated, The lump sum in clause @@@ shall be reduced so it bears the same proportion to the part terminated as the full lump sum bears to the initial CONTRACT PRICE. question #1: does CLAUSE 1 mean TERMINATION FEE=(LS UNPAID-INVOICED UNPAID)*5%? question #2: what is the meaning of clause 2? Enlighten me or share your TERMINATION experience with me pls. thank you.
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Replies

Thu, 2005-09-22 03:58
#1
Stuart Ness
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Hi Q,

The point of a Termination Fee payable to a Contractor is that he is allowed a fee based on a percentage of the balance of unpaid and unexecuted work; in this case, the intention appears to be to pay him 5% of the balance of the unpaid work at time of termination.

However, to answer your question more fully, Q, we need to know what the difference is between the Lump Sum Price and the Contract Price, or are they the same thing?


Generally, a Termination Fee would be based on [Total Contract Price – Price Actually Paid] x 5%, but this is not what appears to be the situation in your case, based on your initial post! ;-(

However, that may still be the intention although your Contract is not clearly written that way.

As you correctly point out in your second post, you may fall into the trap of the extent of unpaid invoices being greater that the value of 5% of the Lump Sum, in which case there would be no Termination Fee, although the Contractor would have pretty much completed the Works for this to be the case.

I think we still need a definition of what represents a ‘lump sum’ in your case, however.

Hope this helps,

Stuart

www.rosmartin.com
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Wed, 2005-09-21 19:19
#2
Q ZHOU
User offline. Last seen 17 years 22 weeks ago. Offline
Joined: 26 Jul 2005
Posts: 12
Groups: Petro-Chem / Oil & Gas
Does that mean if 5%LS unpaid is less than the invoice unpaid the client hold, the contractor can get no termination fee at all?
regards.
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Wed, 2005-09-21 05:20
#3
Shahzad Munawar
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Hi Q

The formula which derived by Stuart is true in relation to your given statemnet whereby u will only take 5% of LS not whole and unpaid invoices will be treated as seperately w/o 5%.

The seond part of inquiry does not clear as Lump Sum, Full Lump Sum and Initial Contract Price. All these three things are confusing the situation? Where is your Final and Actual Contract price?

So well define the things .
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Wed, 2005-09-21 03:55
#4
Stuart Ness
User offline. Last seen 12 years 43 weeks ago. Offline
Joined: 30 Jun 2004
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Hi

It appears to me that the Termination Fee under Clause 1 is calculated as :

[5% of Unpaid LS] – [Unpaid Invoices] = Termination Fee

With regard to Clause 2 for termination of part of the Work, like you, I am equally confused!
Is the Contract Price made up of Lump Sum + other cost elements?

Or does the term ‘lump sum’ mean the balance of the Contract Price still to be spent?

I think we need to know what is meant by the ‘FULL’ lump sum before any real light can be thrown on this!

Cheers,

Stuart

www.rosmartin.com
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Wed, 2005-09-21 19:12
#5
Q ZHOU
User offline. Last seen 17 years 22 weeks ago. Offline
Joined: 26 Jul 2005
Posts: 12
Groups: Petro-Chem / Oil & Gas
Stuart,
thank you for your explaination, I had the same understanding with yours at the beginning.
after thinking it over, I thought it could be wrong if the client hold the invoice unpaid more than the 5% of LS, i.e. 5%LS unpaid regards,
Q
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