Saul Ewing Top Ten Construction Clauses: Substantial Completion

by Saul Ewing Arnstein & Lehr LLP

Substantial completion is described in AIA Document A201™-2007 as “the stage in the progress of the Work when the Work or designated portion thereof is substantially complete in accordance with the Contract Documents so that the Owner can occupy or utilize the Work, in its entirety for its intended purpose.” The provision often includes a laundry list of tasks that, if incomplete, prevent the work from being declared substantially complete. Substantial completion is the triggering date for payment of retainage or, on the flip side, assessment of liquidated damages.

Legal Pitfalls

The principal triggering event for substantial completion is the owner’s ability to “use and occupy” the premises. Consequently, substantial completion is often tied to the issuance of a Use & Occupancy permit. However, courts are increasingly holding that U&O permits alone do not render the project substantially complete, and owners are contracting around the use and occupancy phraseology in the contract in order to provide themselves with greater discretion in deciding when their projects are substantially complete.

For example, the Fourth Circuit recently affirmed a nearly $4 million liquidated damages award to an owner of a mixed-use residential apartment and retail building. See 2300 Pennsylvania Ave., LLC v. Harkins Builders, Inc., 513 F. App'x 273 (4th Cir. 2013). The case involved the standard AIA substantial completion definition, and the court deemed it sufficiently clear and unambiguous to affirm summary judgment on behalf of the plaintiff owner. Even though a U&O permit was issued in advance of the substantial completion date required under the contract, problems with the window and garage door leaks persisted after that date. Thus, the project architect refused to issue a certificate of substantial completion until several months later, resulting in assessment of liquidated damages. Both the U.S. District Court for the Eastern District of Virginia and the Fourth Circuit considered the date on which the architect issued the certificate as the date of substantial completion as a matter of law, and affirmed the award. 

Minimizing Litigation Risk

  • As a general contractor, do not delay in requesting the certificate of substantial completion for any significant period after a U&O permit is issued, and ensure that the use and occupancy language is not deleted from the definition of substantial completion.
  • As a subcontractor, make sure that payment of retainage and substantial completion of your portion of the work is not dependent on substantial completion of the overall project.
  • As an owner, make sure that your architect or project manager has discretion to issue the certificate of substantial completion and that the contract is clear that the project is not substantially complete until that certificate is issued. Maintain close contact with your architect/project manager to address any major incomplete or defective work and do not issue the certificate until such work is properly performed.

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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