Construction Concepts Tip #4: Substantial Completion New Construction Projects Abound, Remember to Focus on “Substantial Completion”

A quick trip down Brickell Avenue, up the Biscayne Boulevard Corridor, or along Miami Beach’s Collins Avenue will confirm the statistics from a recent report that nonresidential and residential construction contracts are up 62% for the year to date throughout greater Miami and Ft Lauderdale.  Total contracts for the year to date have reached $4.73 billion, up an astounding $1.82 billion from the same period in 2011.  With figures reminiscent of South Florida’s pre-2009 market, there is no question that, as we have reported in the past several months, demand is increasing and supply is not far behind.

Defining substantial completion

Our team’s prior postings have covered topics such as construction change orders, construction bonds, and more recently, liquidated damages. We’re now going to tackle another critical ingredient to a successful construction project: the point of “substantial completion.”  As discussed below, knowing what substantial completion means in your construction contract and how/when it is achieved will help spell out and manage the parties’ expectations for the project.

Most construction contracts are variations of forms prepared by the American Institute of Architects (“AIA”).  Section 9.8 of the 2007 edition of the AIA A201 document entitled “General Conditions of the Contract for Construction” defines substantial completion as “the stage in the progress of the Work when the Work or designated portion thereof is sufficiently complete in accordance with the Contract Documents so that the Owner can occupy or utilize the Work for its intended use.”  Puzzled?  So are we.

Our solution to the standard AIA definition of substantial completion is to create our own variation on the definition.  Given that most construction projects—especially throughout South Florida—are unique, the standard AIA definition of substantial completion is not likely sufficient.  Thus, having a clear and tailored definition of “substantial completion” is critical for several reasons.  For example, determining when a project is substantially complete versus when it is finally complete may trigger different responsibilities (i.e., release of retainage, etc.) and legal implications (i.e., commencement of the warranty period or accrual of liquidated damages).

Concepts to include in substantial completion definition

When crafting a project-specific definition of “substantial completion,” it is important to take into consideration the parties’ goals and potential obstacles the project may face.  The following are some concepts you may want to weave into your definition of “substantial completion,” where applicable:

(i) the construction work is completed consistent with the plans and specifications;

(ii) the owner has issued a final punch list to the contractor, and the cost to correct such punch list items does not exceed a sum-certain;

(iii) the contractor has delivered to the owner all maintenance manuals and warranty information;

(iv) the contractor has complied with the requirements of the construction lender, if any;

(v) the contractor has completed its site cleanup; and/or

(vi) a temporary certificate of occupancy has been issued by the appropriate governing body.

The challenge of determining when substantial completion has been achieved can result in serious consequences: liquidated damages, delay damages, and retainage releases are almost always tied to substantial completion.  One way to avoid aggravation with your next construction project is to have a clear and precise definition of “substantial completion” from the start.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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