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Technically, you are responsible for any damages the other party suffered due to your inability to perform/breach of the contract.
Depending on the liability insurance policy you have, they may cover these types of damages. I would review your policy to see if it covers situations like these before speaking to your insurer. You may even want to sit with an attorney and have them review your policy with you.
If they have paid me, could I possibly have to pay them back even though I completed about 35% of the initial scope of work? So, if I told them the project would cost about $25K and it ends up costing about $100K, and they've paid me $35K so far, and the other company charges them $65K to finish it, could I potentially have to pay the $35K and the $65K or just the $65K and possibly the amount above the $25K plus the customer's expense? Just trying to assess how much I may have to pay at this point, if anything?
You would need to pay them back proportionately. You would not be able to keep more than what 35% of the work would've cost them.
In other words, you would be compensated for the work you did. However, they could sue you for any damages that they suffered resulting from your breach of contract.
So, if you told them the job would cost a total of $100k (this is just an example) and you completed 35% of the job which would equal $25k, then that's what you would be entitled to. If they had to find someone else to complete the job and they charged them $100k to do so, you would be on the hook for the surplus amount they had to pay over your original $100k because of your inability to perform.
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