Sometimes the last 5 or 10 percent of the job is the hardest to complete, and the most expensive per item. You think that you have reached substantial completion and want to come to an understanding about what is left to be done for final completion and final payment. You, the general contractor or the architect—somebody—develops a punch list.
The term “punch list” rarely appears in any contract. It is generally assembled near the end of the job and is understood to mean a tabulation of deficiency items. Normally, there are few problems with this checkout procedure, but when problems arise, they can be vexing, including the following:
• The issuance of multiple punch lists requiring multiple call backs (a potentially major problem where the project is at a remote location).
• Ones that seem to raise industry quality standards to ones of perfection.
• Ones that, after a time, include maintenance demands.
• Ones that, in effect, are change-order demands.
• Demands to complete the punch list in an unreasonable time.
• All of the above.
What can you do? What is the law on these issues? These questions are important as final payment hangs on the answers.
Who prepares the list, and when?
The principal question here is “when,” more than “who.” Generally, the time for a punch list is at substantial completion, a concept discussed in my July 1998 Legal column.
In one variation, the owner’s contract contains an “acceptance form,” which is to “be submitted by the contractor when, in its opinion, all requirements of the drawings and specifications for its work have been met.” The form, which is referenced here, contains space for the contractor to list items, which remain in “noncompliance.”
The effect of submitting this form is to get the owner itself to inspect the installation for anything the contractor missed and thus create a final punch list.
The AIA Document A-201 also expects the contractor initially to prepare the list. However, when the architect issues the certificate of substantial completion, it can add other items that require attention prior to final payment.
Even where the contract is silent about who prepares the punch list, the contractor should perform the task first. This way, you will force yourself to inspect the installation and make corrections before you bring in the owner. You should also prepare a list for your subcontractors.
The multiple punch list syndrome
There are unfortunate instances where the owner’s first punch list is only the beginning of a series. It may be that the owner is anxious to have the job done and starts the list too early, or the owner does not feel compelled to do a thorough inspection before its first list is issued.
These practices are annoying and costly to the contractor. But refusing to correct the deficiencies often means that funds will be withheld to cover the estimated value of the work, or the owner will hire another contractor and then backcharge you. Keep in mind that, if the owner does miss something the first or second time around, it is not a waiver of the deficiency.
Here are some suggestions:
• Try to arrange a walk-through with the owner to create a joint checklist.
• Keep detailed notes of the work and inform the owner in writing as the items are corrected.
• Let the owner know whether the multiple punch lists are causing delays to substantial completion.
The punch list as an extra
The fact that you are in the punch list stage does not change the terms and conditions of your contract. If the owner’s list contains items of extra work, you must send written notice of cost and time in accordance with the contract.
Often at the final stages of a job, the contractor lets its guard down. Its position becomes “let’s just do the extra work and get out of here.”
That position is understandable but may be unwise. In one case, extra work performed on a security system at a jail (adding new devices) disrupted the software system and contributed to a three-month delay in finding a cure.
Do it now or else!
Punch list work falls under the contract category of defective work not remedied. The owner’s enforcement mechanisms include withholding funds and issuing a partial default termination. The exact terminology for default varies from contract to contract, but some examples of pertinent contract clauses are:
• “Should the contractor . . . neglect to perform the work, the owner may, after 48 hours’ written notice provide any necessary labor, materials or equipment required.”
• In another example of a partial termination clause, the owner must give the contractor a three-day written notice to cure, then another three-day notice of default.
The courts will uphold these “cure” periods and, except in emergencies, will not permit an owner to make unreasonable time demands for punch list completion.
So long as the punch list work is proceeding, express time limits for default are not normally a factor. However, when the owner makes demand for work to be done in a specified time, the “termination” clause cure notices come into effect. The failure of the owner to give adequate notice to cure may act as a waiver of the repair costs.
Holding up final payment
After substantial completion there is normally a final punch list, presumably with only minor items. There are instances where the owner will withhold substantial amounts in final payment until those minor items have been completed or corrected.
At least one court has held:
The function of the punch list is to apprise the contractor of work in need of correction. If corrective work is required, the owner is entitled to deduct the cost of this work from the retainage until the work is satisfactory. However, the owner is not entitled to hold the entire retainage until every minor deficiency is taken care of.
Even if the above quote is generally accurate in other jurisdictions besides this court’s, where does it lead? At a minimum, the court seems to say that the owner is acting wrongfully to withhold an excessive amount of payment. Depending on your contract, you may be entitled to suspend your work because of this nonpayment issue.
In one case, a contractor did suspend because a minor replacement part would take months to be delivered and the owner was holding a large retainage in the interim. The court eventually found that the contractor acted properly and was entitled to payment plus interest.
The “maintenance” factor
This factor is a variation on the multiple-punch-list syndrome. It can occur that the final close-out takes so long that the owner has actually moved in. Now you have interferences from the owner’s operations, and possible damage by the owner’s employees. What should be warranty work (which you could dispute if there is owner-caused damage) becomes maintenance work. The owner’s hammer, of course, is final payment.
This problem is a difficult one. You will need to judge whether to proceed, hoping on the owner’s good faith, or look to another remedy. If the circumstances are severe enough, suspension of your work is a consideration. So is submitting requests for extras, documented, for the added work and extended time of performance.
Abuses of the punch list process do occur. Where the job has gone smoothly, this last process usually does also. On problem jobs, the punch list will usually be a problem.
Maintain your documentation, double-check the plans and specifications to detect any overreaching by the owner and, of course, know your contract.
Last, consider having a separate crew for this final work who may not be as discouraged with the owner’s inspections as the crew who first performed the work. EC