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Construction & Design Gregory K. Smith, Esq. Substantial Completion— An Owner’s Perspective T he doctrine of Substantial Completion is an unusual characteristic of construction contracts. Virtually no other commercial contracts accept the notion that “mostly performing” a contract is good enough. Many industry groups—most with an agenda—attempt to define Substantial Completion. The American Institute of Architects Document A201 (2007), a standard form widely used in construction projects, reads: “Substantial Completion is 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.” In other words, Substantial Completion is generally defined as that time when the construction of a project is sufficiently far enough along that the owner can use the project for its intended purpose. What Substantial Completion actually means, however, can vary greatly from project to project and thus may have profound consequences for owners. The importance of Substantial Completion, however, is largely not understood by most owners or developers in construction projects. The date of Substantial Completion affects many substantive and procedural rights of the parties in that contract. Among other issues that are affected by Substantial Completion, the following list highlights several important components that hinge on it: • Warranty provisions of contracts usually begin to run then; • If the project has been delayed, and the contractor is subject to liquidated damages, liquidated damages may not be assessed after this point; • In certain states, the lien rights of contractors, subcontractors, and material suppliers may be affected then; • Bond coverage (both regarding claims and defenses) are affected by this date; • Insurance obligations for the project— and the risk of loss—usually pass from the contractor to the owner then; • Generally, issues related to utilities (electricity, water, sewage, etc.) pass from the contractor to the owner at this point; • Responsibility for the maintenance and safety of the project generally shift from the contractor to the owner; • After the date of Substantial Completion, the owner may not terminate the contractor for default or any other reason; • In many states, the statute of limitations (and statute of repose) begins to run on this date; • Regarding the actual construction of a project, the contractor is considered to have completed virtually all of his contractual obligations to the owner; and • Full payment for the project—minus a small retainage for punch list work—is due to the contractor on this date. In most construction contracts, the architect or engineer is solely responsible for determining the date of Substantial Completion. In most cases, the determination of the architect or engineer is binding on the owner and contractor. The American Institute of Architects Document A201 (2007) reads, “The date of Substantial Completion is the date certified by the Architect…”. It is usually very difficult (and often expensive) for an owner/developer to challenge the architect’s or engineer’s determination of this date. If a dispute arises, many courts give the architect’s or engineer’s determination an almost sacrosanct authority. Given the incredible consequences, an owner should be particularly wary of using “standard form” definitions and determinations of Substantial Completion. For many owners (particularly those of resorts and hotels), “close enough” is not good enough: millwork must meet exacting standards, flooring must be exceptional, paint and wall finishing must be first-rate. Under virtually all standard forms of construction contracts, these important details would fall under the “close enough” category. A contractor’s standards for finish and quality may be drastically different than the owner’s standards. Further, what may be considered “close enough” in some projects may be wholly unacceptable in a project or in another part of the same project. For example, the standards of finish for building a parking deck attached to a hotel may be far less exacting than those standards used for the hotel itself. Perhaps more devastating—an owner who demands exacting standards from a contractor can be held liable to that contractor for the “extra” work required. An owner can take steps to protect itself (and the project) from the “close enough” standard. If a dispute regarding the date of Substantial Completion arises, in most cases, courts will look to the parties’ definition of substantial completion. Hence, owners and contractors can agree—up front and before any work begins—on what Substantial Completion will be (and not be), and who will make the determination about whether Substantial Completion has been achieved. Instead of relying on standard form contracts for its projects, an owner should develop its own contracts and clearly define such issues as when Substantial Completion is met. At a minimum, for owners of resorts and hotels, occupancy of a project should not be determinative of Substantial Completion. A hotel or resort owner certainly does not want the contractor’s personnel in a guest’s room continued on page 59 October 2009 • Developments

October 2009 Developments

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