SUBSTANTIAL COMPLETION is a term of art in construction. Nowhere else do these two words have special legal and financial significance. The legal significance comes from the fact that warranties, insurance, utilities and maintenance agreements usually commence when the customer begins to use the work. The financial significance comes from the fact that most contracts and many state prompt-payment laws require that retention be reduced to only the value of outstanding punch-list items (usually by a factor of 150%-200%).
One problem that seems to vex way too many jobs is the timing and procedure for determining when substantial completion has occurred. Many contracts are written to say that substantial completion doesn't occur until the owner or its design professional issues a written certificate saying this officially. The problem, of course, is that sometimes owners and their designers don't acknowledge substantial completion as soon as the contractor believes they should. This could be due to a legitimate dispute over the status of the work, but it could also be due to a desire to put off paying the contractor or accepting responsibility for the work.
The law in most states and with federal projects is that substantial completion occurs when the project is ready for the customer to use it for its intended purpose — whether the customer chooses to actually start using it or not. See Appeal of Randolph and Co. Inc., ASBCA 52957 (11/6/02) (a dike was substantially complete when it was physically capable of holding dredged slurry) and Appeal of The Gassman Co., ASBCA No. 44976 (12/29/99) (a facility is complete when it is available for follow-on contractors). In other words, it should be an objective test and not a subjective one.
There are exceptions to the 'ability to use work' definition.
There are, however, some exceptions to the "ability to use work" definition of substantial completion. Some contracts-provide that a project cannot be substantially complete until warranties are furnished (roof warranties in particular). Even though the building was usable without the warranty, courts have held that without it, the work was not substantially complete. See M.C. & D. Capital Corp. v. United States, 948 F. 2d 1251 (Fed Cir. 1991) and Appeal of Delta Construction Co., ASBCA No. 42453 (12/27/05); so contractors and vendors should not bank on being safe just because the equipment can be operated.
The determination of when substantial completion has occurred is an important one because on it rests several other legal decisions, such as: Can the other party still terminate for default? Generally, the answer is "no." After the owner can start using the work for its intended purpose (or, for work done for a general contractor, when the sub/supplier's main work is done), it is not proper to terminate for default.
In 845 UN Limited Partnership v. Flour City Architectural Metals Inc., Supreme Court of New York, Appellate Division NO. 7858 (4/13/06), a New York court ruled that once the base work was 99.5% complete (based on certified payments), the general contractor could not terminate a subcontractor for default over issues related to change order work.
The impact of this ruling is significant, particularly because it meant that the owner couldn't assess its excess cost to complete the remaining work. It can leave an owner or general contractor in a bind in a situation such as the Flour City one, if the contract doesn't have any provision as to how the parties will deal with a failure to complete the remaining work.
When do warranties begin to run? Although contract language varies a lot on this issue, in many instances where a contract contains a warranty of a set length of time, that length will be tied to when the equipment was put into service — that is, from the date of substantial completion. For contractors and vendors who want the clock to start ticking on this obligation, there is every incentive to get a clear statement from the customer that the work is substantially complete.
When do liquidated damages stop? An owner can't have it both ways: If the work is complete enough to be used for its intended purpose, the owner can't have liquidated damages after that date. It's not uncommon, unfortunately, for some owners to say liquidated damages continue to accrue because the designer hasn't issued a certificate of substantial completion. As noted above, that's not the legal standard. A designer can't prevent substantial completion from existing in fact by neglecting or refusing to issue the certificate. Casa Linda Tile and Marble Installers Inc. v. Highlands Place 1981 Ltd. 642 So. 2d 766 (Fla. App. 1994).
To keep the contractor's attention on completing remaining punch-list items, some owners include a separate, lower daily rate for liquidated damages after substantial completion. Trying to claim that the lack of O&M manuals, for example, is the equivalent of a nonfunctioning chiller, probably won't fly.
Addressing these issues in the purchase order or contract can make a huge difference in the way a contractor or vendor will be treated toward the end of a job. It's in your interests to clarify how and by whom substantial completion will be determined, and what happens after it occurs.
Susan McGreevy is a partner at Husch & Eppenberger, Kansas City, Mo.; e-mail to [email protected] husch.com or call 816/421-4800.