ConstructionPro Week, Volume: 2 - Issue: 1 - 01/04/2013

Why Is Substantial Completion So Significant?

By Bruce Jervis

 

No milestone in a construction project is more significant than substantial completion. It has a tremendous impact on the rights and remedies the owner has against the contractor. The owner can no longer assess liquidated damages for late completion. The owner cannot withhold large sums from the contract price; only the costs of repairing or completing punch list items may be retained. In many jurisdictions, the owner loses the right to terminate the contract for default; incomplete punch list items are not a material breach.

 

Substantial completion is generally defined as the point at which the project is suitable for occupancy or use for its intended purpose. This sounds objective enough, but it is not always easy to determine. Project owners have an inherent interest in treating the work as less than substantially complete.

 

In a recent Louisiana case, the new lighting system at an airport had been in continuous use, and the runway Federal Aviation Administration certified, yet the project owner refused to acknowledge substantial completion. The owner withheld significant contract funds and insisted the contractor replace much of the work. A court ruled that notwithstanding the owner’s complaints, the actual use of the physical facility established that the contractor had achieved substantial completion.

 

Do you find that project owners are loath to acknowledge substantial completion, knowing they will lose leverage with the contractor? In some cases, including the recent one, the owner refuses to acknowledge substantial completion even in the face of certification by the owner’s own design professional or construction manager. Are project owners manipulating the substantial completion milestone? I welcome your comments.

 

COMMENTS

Alot of architects/owners won't acknowledge substantial completion so we document our progress in writing (e-mail is great!) so there's no question where things are. Also now seeing architects forcing a line item for punch list/close out 5 to 10% of the contract plus retainage! If you argue, your sov doesn't get approved. Got any ideas how to stop that?
Posted by: June Michael - Friday, January 04, 2013 11:03 AM


The status of substantial completion is jointly determined by the owner,design professional,and CM. If one of these parties object to the status determination, the substantial completion cerification cannot be issued since they all must sign the document; seems pretty strightforward.
Posted by: Ron Cilensek - Friday, January 04, 2013 11:05 AM


Substantial Completion is typically also the start date for the warranty period. If project specifications indicate a Manufacturer's Warranty for certain products that may be different from the Contractor's warranty, the Manufacturer's Warranty begins at substantial completion. It does not matter if the Manufacturer's "terms and conditions" indicates warranty begins at date of shipment. The Contractor is responsible for warranty arrangements with the Manufacturer for the warranty to begin at substantial completion. If an extended warranty must be purchased from the manufacturer to accomplish this, then the Contractor must make arrangements accordingly.
Posted by: Loyd Heimbruch - Friday, January 04, 2013 11:06 AM


Use or occupancy by an Owner is frequently not a reasonable milestone to establish substantial completion - especially and for example when a School District Owner occupies a school where construction is incomplete, because to do otherwise would disrupt the pre-scheduled school year and educational process, and result in a massive confrontation and legal claim that would only benefit the Attorney's. Under these circumstances a Contractor is not entitled to the "protection" that achieving substantial completion might otherwise infer.
Posted by: Thomas Olam - Friday, January 04, 2013 11:18 AM


Alternatively, I find that owner project managers most often manipulate substantial completion to allow for early (semi) occupancy to perform construction related tasks that are ourside of a general construction contract such as installation of security cameras, IT cabling and other low voltage work like building intrusion systems and audio video installations; or to receive furniture and equipment or to perform training and orchestrate pre-operations. This sometimes allows for a notice of substantial completion that ackowledges that there remains important or critical work by the contractor over and above the identified punch list items. This is usually accompanied by phased punch list walk-throughs under the auspices of releasing portions of the facility or project in phases. Multiple or phased subtantial competions further complicate the relationship in acheiving final completion.
Posted by: WIlliam Thornton - Friday, January 04, 2013 11:20 AM


As an Owners Representative my perspective is as follows-

The Owners Rep needs to set clear quality standards in the project documentation and regularly during the Work so the contractor is fully aware early in the project of required the quality. Easy to say not so easy to do.

At Substantial Completion create accurate punchlists and identify which items actually prevent the Owner from taking possession. We use an independent quantity surveyor to price defects accurately so retention being held can be deemed as fair and reasonable.

Contractors who treat Close Out as almost a separate Project are most successful from my experience as they allocate proper resources to the process. My experience regrettably also is many contractors unfortunately wind down their project management staff and fail to effectively address rectification of defects and omissions and preparation of Record Documents. This inevitably leads to withholding monies and disputes.
Posted by: Jim Scott - Friday, January 04, 2013 11:24 AM


Some good comments. Bottom line, substantial completion should be defined in special provisions of incorporated by State contracting code. Substantial completion would be the point of beneficial use of a particular milestone. Beneficial use of a building should be determined at the time the Building Official Issue the Certificate of Occupancy. For a public works project or civil project, substantial completion starts when the activity componant, e.g. a pipeline, is put into its intended service service. I have managed projects such as water/sewer plant retrofit and rehab in which there were several substantial completions issued prior to the end of the project. Warranty items and punchlist items need only be completed prior to project completion. If your contractor CM and the owner CM are doing what they should there shouldn't be issues.
Posted by: Will Weber - Friday, January 04, 2013 11:30 AM


Ron Cilensek,

It is not that straightforward. My expereince mostly coincides with what June Michael & Loyd Heimbruch have stated.

The trick,in your approach,lies in who appoints the design professional and the CM ? In most cases, it is the Owner. Hence, the other two mostly will put Owner's interests before the Contractor's when a dispute arises about "substantial completion".

I suggest an idea. Allow the Owner or his representatives to use the facility or product when the contractor feels it is substantially completed and video record the "usage", preferably "repeated usage" by Owner's personnel and this video can speed up getting the substantial completion certificate and related payments,when still disputed by the Owner.
Posted by: Ondiappan Arivazhagn " Ari " - Friday, January 04, 2013 11:31 AM


I think there is also a topic that an Owner has trouble knowing the difference between beneficial use and substantial completion. In my experience, all of this can be eliminated by discussions early in the project to determine what the requirements will be. Most often Requests for Information during the bid phase can eliminate common items such as change order procedures, warranty start dates and metrics to reach substantial completion. If they are not addressed prior to a bid submission, these can be defined during contractural negotiations (if a private project).
Posted by: J. Myers - Friday, January 04, 2013 12:10 PM


Landscape contractors complete almost all their work at the end of a project and get caught having to complete many site project elements that are not theirs that they MAY get blamed for, and often have seperate close-outs and/or punch list tracks. Phased projects bring other problems where site use interferes with required maintenance and/or plant establishment and use degrades the project before it ever gets accepted. Often a fair solution requires some one other than the Owner or GC or CM to determine substantial completion.......with reasonableness.
Posted by: Don Godi - Friday, January 04, 2013 12:33 PM


The issue can be contentious. It is important in most cases for the contractor to file a notice of claim when substantial completion is improperly withheld and to protest time charges after that date. Unless the contract provides otherwise, the contractor should not allow occupancy or require the owner to insure and take responsibility for damage to any occupied part of the work. Finally, if the design professional unreasonably withholds substantial completion the contractor should provide notice that the design professional and/or the owner are acting in "bad faith". In some cases acting in "bad faith" makes the design professional liable to the contractor in spite of the lack of contractual privity. The design professional's insurer will weigh in and urge reasonableness in aggregious cases.
Posted by: Bill Cloran - Friday, January 04, 2013 12:46 PM


It's unfortuntate when Owners and/or architects become contentious in recognizing when Substantial Completion has been accomplished because no GC wants a fight with a client at the end of the project. However, it does happen. In such cases, I have found the best thing to do is to get your full Certificate of Occupancy from the local ruling authority as quickly as possible which will be strong evidence that all aspects of the building complies substantially with the plans and specs that have been submitted to, and approved by, the local legal authority. This typically can make a very strong argument with the Owner and architect that SC has been met without having to get lawyers involved.
Posted by: Kevin Ragsdale - Friday, January 04, 2013 5:36 PM


Can a substancial completion con be get with energy plant instead of permanent energy.???
Posted by: jes vel coll - Saturday, January 05, 2013 1:07 PM


The definition in the article is typical of what is found in standard contract forms such as EJCDC, AIA and some government forms. Preparers of such forms should consider revising such language to include more specific language for a specific project if appropriate. This can avoid disagreements at the end of the project.
Posted by: Bill Gurry - Monday, January 07, 2013 9:41 AM


The phrase "suitable for occupancy" is much too vague. Our architectural project General Conditions make the issuance of the AHJ's Certificate of Occupancy (CO) a prerequisite to Substantial Completion (after all, one cannot occupy a facility with the AHJ CO). Other arrangements can be agreed to in writing among the Contractor, the Owner and the Architect if unforeseen conditions arise. This allows for obtaining a Temporary CO from the AHJ which would be accompanied with a partial Sub Comp Certificate. The partial Sub Comp Cert covers the equipment warranties and insurance requirements for the physical portion of the project that are identified in the Temporary CO.
Posted by: James B Clark - Monday, January 07, 2013 11:02 AM


Substantial Completion parameters should differ from project to project, depending on the project nature, thus the need for ALL to be aware of the extent of completeness required for issuance early on. And I personally wouldn't put too much weight on a Certificate of Occupancy as local building officials could, for example, care less if markerboards are installed in classrooms in issuing a CO, however, the classrooms are not fully functional for their intended use.
Posted by: Archer T. Joyce - Monday, January 07, 2013 9:36 PM


This one struck a few nerves!...

There are 3 issues here 1)definition of substantial completion 2) Phased or partial completion of the work and 3) completion of the punch list.

In many cases, definitions and schedules are not clear regarding completion as it relates to any of the above items. Better contracts, discussing these things before starting and ensuring the contract reflects the discussion seems to make a great deal of sense.
Posted by: Marshall Wilson - Tuesday, January 08, 2013 1:03 PM


It is always better to have a phased completion schedule which must form a part of the contract and must be strictly adhered to irrespective of the owner's pressure. A temporary completion certificate (TCC) for that particular phase must be issued such that this TCC must form a part of the final completion certificate.
Posted by: Murtuza F Nadeem - Thursday, January 10, 2013 3:34 AM


As architects, we have found it best to include in the specifications a very detailed definition of "Substantial Completion" and all of the requirements necessary to achieve Substantial Completion. The Owner must also buy into those requirements and not jump the gun under pressure to occupy and use the project. Can't have it both ways. It is either suitable for use or not. The requirements have to be explicit.
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