March 14, 2019 by Siobhan Small
Project wrap-up entails a variety of legal processes, including the release of contract and statutory holdback funds, shifting responsibility for insurance coverage, and commencing lien filing and statutory limitation periods. These processes often turn on a project achieving completion.
The complicating question is, what constitutes “completion.”
Whether or not your responsibilities on a project have come to an end depends on the contractual structure of the project and your role within that structure. This article outlines the various definitions of “complete” as it applies to a construction project. Make sure to understand which definition applies to you before you assume your contract is complete and you begin taking steps related to holdbacks, insurance, or other claims.
Final completion is the term most commonly used in the context of project finance. It occurs when the project has achieved all the technical and performance requirements set out in the prime contract and the final payment has been made to the contractor. Not only is the original scope of work finished, but all remediation work identified in the punch list is complete. The contractor must also have paid the owner any applicable delay or performance liquidated damages.
The project has not achieved final completion until the contractor has transferred control of the site to the owner, including title to all materials and equipment used in the construction of the project that the contractor is not entitled to retain.
Substantial completion is the more common trigger for project wrap-up. Once a project is deemed substantially complete, the owner of the project can usually take possession of the project and begin commercial operations. The definition of substantial completion, unfortunately, can be complicated.
The milestone occurs when the project satisfies certain performance requirements. A contract that requires substantial completion of the project may define those parameters by stipulating that the project be able to perform the required service at a set minimum level. Alternatively, substantial completion can rely on a statutory definition. The confusion lies in the fact that the completion of a contract can differ from the completion of a project, and often only one can trigger the legal processes listed above. The applicable term depends largely on whether the project involves a “prime” or “head” contract.
PROJECTS WITH HEAD CONTRACTORS
Where there is a head contractor, the project is substantially complete when that head contract is complete. Alternatively, the project is complete when the head contract is validly certified to be complete (take a look at On-Site’s October 2018 Law Column for further details). This completion date applies to all contracts across the project by default.
Because of this default position, subcontractors may achieve completion long before the head contractor, sometimes by years.
Subcontractors relying on this default completion deadline could thus be deprived of holdback funds potentially for years after leaving the work site. To prevent such hardship, it is possible to certify subcontracts complete prior to completion of a general contract. While the project will not be considered substantially complete, the subcontract work will be and will thus trigger the legal consequences for that aspect of the project without consequence to the project as a whole. In that case, the subcontract holdback can be released early, along with an equal amount of the general contract holdback.
PROJECTS WITHOUT HEAD CONTRACTORS
Where there is no head contractor, the project is considered complete when the project (or a substantial part of it) is in use or ready for use for its intended purpose. Certification can still be performed for individual contracts, but the project itself is only complete when it meets the “ready for use” test.
Pay special attention to the “intended purpose” element of that test. Just because a project is occupied in some way does not necessarily mean it is complete. For example, a residential building is not “substantially complete” just because a ground floor commercial office is in use. The residential building has to be inhabitable by residential tenants to qualify as “ready for use.”
Do not rely on the “ready for use” test as evidence of substantial completion if there is a head contractor. Also remember that only contracts and subcontracts can be certified complete, not projects or scopes of work.
Applying the wrong definition of “complete” is a common mistake, but one that can result in inaccurate claims of completion which can undermine a claim defence or lead contractors to forgo legal rights.
This column originally appeared in the March 2019 issue of On-Site. To read through the entire issue, click here.