Is It Done Yet? The Law on Substantial Completion

We get so used to the term “substantial completion” that we may be surprised at what an odd concept it is (meaning “not quite done”) and why it is often litigated.

A contract may define substantial completion as the happening of an event, such as the issuance of a punch list. But, generally, it is defined as beneficial occupancy—the date on which the owner can have full use of whatever was contracted for.

Just because an owner takes possession of a building does not, by itself, prove “beneficial occupancy.” The substantial completion date usually is the one that stops the accumulation of the owner’s delay damages or liquidated damages and may start the time for the warranty period and the time for filing a lien. All that is clear is that “substantial” does not mean 100 percent.

There are underlying concepts of fairness and practicality in contract law. Where there is a danger of forfeiture of right or money if a contract’s terms are not strictly followed, courts will sometimes apply these underlying concepts. In such cases, you will come across such terms as “substantial compliance” (applied to written “notice” clauses), “substantial equivalent” (for “or equal” clauses) and “substantially prevail” (for recovery of attorney fees by a winning party).

This is tricky business. It introduces the judgment of a third party—judge or arbitrator—to decide the degree of completion. What is substantial to one may be highly deficient to another. In this respect, percentage complete can influence the determination but is not enough proof of substantial completion by itself. The issue can be this: what is the 5 percent left?

Contract clarifications

Contract language can help define substantial completion, but the language of some standard contract forms still leaves a degree of vagueness. With AIA A-201, Section 9.8.1, the term means the owner can use the “work” as intended and that the work has been performed in accordance with the contract. These are two independent items; the owner may be able to use the building, but the contractor may not have installed exactly what the specifications called for so there is no substantial completion. Or, the work may be as planned, but the owner finds it inconvenient for it to move in because of the type of punch list work being performed.

Other contracts add a third requirement where there is an architect or engineer present. In those, substantial completion means that “in the opinion of the architect, there is beneficial occupancy and that the contract, including the design documents, has been strictly followed.”

Note that these form documents do not refer to a punch list, which, practically speaking, often defines the achievement of substantial completion.

Problem areas

Because of the legal ramifications of substantial completion, litigation over the concept has been extensive. Here are a few examples to consider:

  1. A tree knocks down power lines on the property at 95 percent completion.
  2. Everything is done except that the HVAC system has not been balanced, but the weather is mild.
  3. The job is done except for decorative lighting in the foyer and the manufacturer, designated by the owner, has gone out of business.
  4. Electrical systems are fully installed in an industrial installation, but the conveyors installed by another are malfunctioning off and on for months.
  5. A $1 million whole-house renovation is done, but the burglar alarm keeps malfunctioning.

With mechanic’s liens, many courts start the clock for the time to file a lien at substantial completion, meaning there may still be minor corrections/completion work in progress. Owners on one project continued to assess daily liquidated damages because outdoor parking lighting for a high-rise was not complete. Some architects do not issue substantial completion certificates or postpone their issuance for fear of being sued by the owner in the event they missed something. Some owners regularly confuse substantial completion punch list work with warranty work, leading to endless punch lists.

Is there a better way?

Is there anything an EC can do, whether in modifications to contract language or through project management, to help define the achievement of substantial completion? Some approaches include the following:

  1. Setting separate substantial completion dates where the scope of a project makes this separation possible, for example, where the job involves multiple buildings or different sites.
  2. Add language to the standard substantial completion clause that the owner’s occupancy or the availability of occupancy of the building shall constitute substantial completion.
  3. State in the contract that the issuance of a punch list by the contractor shall constitute substantial completion or shall begin the warranty period.
  4. State in the contract that the contractor’s issuance of a certificate of warranty shall constitute substantial completion.

None of these formulas is entirely satisfactory, but they may be of assistance. Then again, how can you define “pretty much done” as opposed to “done?”

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