Substantial Completion…The Haze at the End of the Tunnel

The Notice to Proceed clearly marks the start of construction. If nothing else, it determines when the clock starts ticking, counting off the time to the contract completion date. At the other end of the project, however, the demarcation is often not so clear, resembling more haze than light at the end of the tunnel.

The construction start date is easier to determine and more clearly defined because it is measured objectively. On most projects, the contract states that the project start date is the Notice to Proceed date. At the other end of the tunnel, however, most contracts rely upon a subjective evaluation to determine the project’s completion. Couple this subjectivity with the ways of defining completion and the source of the haze becomes apparent.

What Is Substantial Completion?

Usually, completion is defined two ways. The first measure is substantial completion. AIA Document A201 defines this phase as follows:

9.8 SUBSTANTIAL COMPLETION 9.8.1 Substantial Completion is the stage in the progress of Work when the Work or designated portion thereof is sufficiently complete in accordance with the Contract Documents so the Owner can occupy or utilize the Work for its intended use.

Note the words “sufficiently complete”. On many projects, sufficiently complete cannot be defined objectively. It cannot be measured with a yard stick. It is not usually identified by the completion of a single activity or the flip of a switch. Instead it is defined by the Owner’s determination that the project can be occupied or used for its intended purpose. In many cases, this is a subjective evaluation.

The second date defining a project’s completion can be measured more objectively. The terms usually employed are “final completion” or “final acceptance.” This term is defined by the date that the Owner determines the project to be complete in all respects, including punch list work. It should be noted, however, that even the final acceptance date can be difficult to pin down. For example, if the Owner prepares repetitive punchlists, the Contractor may find it impossible to extricate itself from the project. Also, if the Owner moves in at substantial completion, but much work still remains, occupancy itself may generate punchlist items like nicks and dents in walls, etc.

Why Bother With Substantial Completion?

Given the objectivity typically associated with final acceptance, why bother with that slippery beast, substantial completion, at all? The answer to this question lies in the realm of construction law and the assessment of liquidated damages. Regardless of the contract language, the courts will not always allow the assessment of liquidated damages beyond the project’s substantial completion date. Thus, the assessment of liquidated damages depends upon the determination of a substantial completion date.

Before proceeding further with this discussion, a word of caution is due. Contractors should not assume that the courts will automatically rule that the assessment of liquidated damages stops at substantial completion. In one Pennsylvania case, the court ruled that liquidated damages could be assessed beyond the substantial completion date. This was allowed even though the Owner occupied the facility and the work remaining was relatively minor. This ruling was subsequently overturned on appeal, but the message is clear – Contractors ignore provisions tying the assessment of liquidated damages to the final acceptance date at their peril.

Contractors should also bear in mind that the Owner’s contract administration costs probably will not stop at substantial completion. These costs will continue as long as the Owner has to maintain an on-site representative or staff while the Contractor finishes the project. Thus, even after substantial completion, a basis for the assessment of liquidated damages remains. Some of the more elaborate liquidated damages provisions recognize this fact.

For example, some specifications provide for a reduction in the liquidated damage amount once the project is opened for use. Also, a Contractor’s contractual obligations remain in place after determination of the substantial completion date. The remaining contract work must proceed at a reasonable pace. In fact, failure to pursue even punchlist work diligently places the Contractor in default of its contract. It should be noted that while the Owner might even terminate the contract in this instance, termination is probably not necessary. Retainage may be available for the Owner to complete on its own any punchlist work remaining.

Determining The Date of Substantial Completion

The determination of the date of substantial completion is a right retained by the Owner and is typically performed by the Architect, Engineer, Construction Manager, or other designated representative of the Owner. Because it is subjective, it is important that all parties understand the prejudices brought to this determination.

In most cases, fortunately, the Owner, the Architect, and the Contractor are eager to have the project substantially completed as early as possible. For example, the Owner wants to start collecting rent, the Architect wants to wrap up its involvement and minimize further administrative expenditures, and the Contractor wants to avoid the assessment of liquidated damages and begin demobilizing its forces.

Change any of these objectives, however, and a party’s eagerness to identify an early substantial completion date disappears. For example, if the facility, once opened, will operate at a loss, the Owner’s incentive to declare the project substantially complete is significantly reduced. In another example, if the facility cannot be operated due to code violations resulting from design errors, the Owner has little incentive to declare the project substantially complete.

Also, if the Owner has substantially delayed the project, its incentive will be to declare the project substantially complete as early as possible even though months of work might remain for the Contractor. By this means, the Owner will attempt to decrease the apparent impact of Owner-caused changes. Given this same scenario, but now from the Contractor’s perspective, the incentive would be the opposite—to postpone the issuance of the substantial completion certificate in hopes of magnifying the perceived magnitude of the Owner’s delays.

Substantial Vs. Final Completion

The difference between a project’s substantial and final completion dates might be many months. Since the project schedule is usually designed to define work through final completion and not substantial completion, the Owner’s identification of an earlier substantial completion date will not necessarily protect it from the Contractor’s delay damages attributed to Owner-caused delays.

Perhaps the most difficult projects are projects with no clearly defined completion date. These types of projects are found in limitless variety. Most commonly, however, these types of projects are characterized by multiple buildings constructed at the same time. In such situations, completion is often a rolling affair, with the Owner taking possession of buildings as they are completed. It is imperative that substantial completion dates for each building, as well as the overall project, be identified in these instances. Also, problems with these types of projects can be alleviated by establishing milestone completion dates for each building in the facility. In essence, treat each building as a separate construction project.

The haze at the end of the project tunnel results from the subjectiveness inherent in the determination of the date of substantial completion. Parties must recognize this subjectivity and strive to protect themselves from the biases inherent in the determination of the substantial completion date.

Scott Lowe is a Principal of TRAUNER and is an expert in the areas of critical path method scheduling, construction claim preparation and evaluation, and specification writing. He can be reached at scott.lowe@traunerconsulting.com.

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