There are so many legal terms used in the field of construction, but most of them are not as important as substantial completion. This term can affect everyone on the job site in one way or another, which is why it should be explicitly explained and clarified for each party.
Definition of substantial
The construction substantial completion is the point when the contractor is no longer responsible for the project and the owner takes over all responsibility. It is at this time that the contractor should receive most, if not all, of the balance of the contract. Basically, in layman terms, substantial completion is when the work has been sufficiently completed.
However, there are quite the opinions of when the work is actually completed. Some states have it worded that the substantial completion is when the owner can either occupy the building or use it for the purpose that they had in mind. Other states have stricter regulations in place, but they all leave loopholes that make it difficult to know the correct answer.
The construction substantial completion is in place to protect both the owner and the contractor. If the project has reached this point by the deadline, then the contractor can state that they finished on time. However, an owner can benefit from this if the deadline has come and gone and the project still hasn’t met the substantial completion yet.
It is necessary for a contractor and owner to agree on when the substantial completion will be met for the current project. This should be in writing in the original contract, so that there are no questions when the time comes for the building to change hands.
Once this date and the specifications have been met, claims, warranties, and final payments can begin for the project. The contractors can collect the rest of the money owed to them and the owners can either place a claim or start the warranty period on the materials and equipment that was installed.
There are three different ways to word the construction substantial completion in a contract and they are as follows:
- Certificate of Occupancy
Most of the time, contractors will state that the construction substantial completion will be in effect as soon as the building has obtained its certificate of occupancy. This basically states that the building can have people inside and that it can be used for the purpose that it was constructed for.
- A List of Items that Need to Be Finished First
The second option that contractors and owners have is to create a list of items that need to be finished before the substantial completion is awarded. This list can be short or lengthy, depending on the contractor and the owner, but each party must agree to those items in advance. The good news for the owner is that the substantial completion cannot be done until every item on the list is finished and the good news for the contractor is that they can sign everything over to the owner before the owner decides that he wants any other work completed.
- Contractor Expertise
Not every owner is going to want to use this option, as they are basically giving their contractor free rein to say when they think that the building is ready for substantial completion. However, this is an excellent option for contractors, as they can then use their expertise to know whether or not the building is ready for use. Some contractors may try to take advantage of this option, but many will take the straight and narrow approach so that they earn the reputation of being fair and thorough.
Some contractors may try to skip listing the substantial completion within their contract with an owner, but that is only going to hurt them in the long term. After all, contractors need to meet their deadlines with each project to make the most money that they can, and a non-agreed upon substantial completion can turn any profit into a loss easily.
It is all the extra fees for lawyers and litigation that make contractors remember to add the substantial completion clause into their contracts with every owner that they work with. While these clauses may be in the contract, every contractor should make sure to re-read it for each project to make sure that it applies for the current one. Since each project is different, one standard substantial completion agreement may not be possible, and contractors will need to be flexible with each one.
Of course, the main goal is to have the substantial completion in writing and agreed upon by everyone involved, so that everyone walks away from the project happy and with what they expected.