Documenting when a contractor has finished work on a project is important for many reasons. During a project the contractor takes on a lot of responsibilities, including paying for utilities, providing insurance, and protecting the site from theft and vandalism. At a certain point these responsibilities shift to the project owner. That point is called substantial completion. We’re going to look at what substantial completion is, why it’s important, who decides when it happens, and how it’s determined.
What is substantial completion?
Substantial completion is a contract term defined as the point in time when the project is fit for the owner to use it in its intended purpose. It is the date the owner can start moving in and take over the building or space. There may be some work remaining, like punch list items, but it is usually minor or unrelated to the owner taking occupancy, like off-site or road work. On some projects it may occur simultaneously with the issuance of a certificate of occupancy from the local jurisdiction.
Substantial completion may apply to an entire project or just or portion. For example in an apartment complex, some of the units may be substantially complete while others are still being worked on. The completed units can be occupied even as work continues on the rest of the project.
The difference between substantial completion and final completion is subtle, but important. Final completion is when all work on the project is complete. At this point the contractor pulls off the job and is only on site for minor issues that may come up as the owner is moving in or first occupying the space. Final completion triggers the release of final payment to the contractor, including held retention.
Why is substantial completion important?
Substantial completion is important for contractors because it shifts responsibility for the site and the project to the owner and starts the clock on important timelines related to payments and claims.
- At substantial completion the contractor is no longer responsible for future project delays as their work is mostly complete.
- The owner takes over the operating costs for the project, including utilities, insurance, and security.
- In most cases, the one-year warranty and manufacturers’ warranty periods start.
- The timeline for claims, including bond claims, begins. In some states these timelines can be as long as ten years.
- Final payment is due to the contractor and all subcontractors and suppliers.
Who determines when substantial completion is reached?
Substantial completion is reached when the owner, contractor, and possibly architect decide that the work is complete enough for the owner to move in. This may be tied with issuance of a certificate of occupancy from the local jurisdiction. A certificate of occupancy states that a building or space has completed all inspections and is safe to occupy.
It’s important for contractors to review their contracts as there are often clauses that define substantial completion for a specific project. There may be specific items that the owner wants completed before occupancy that will influence when substantial completion is achieved.
How is substantial completion determined?
Substantial completion is not the same on every project, just as the types and amount of work is different. Usually, the contract between the owner and the contractor will spell out what has to happen to trigger substantial completion. Generally, it is based on a checklist determined by the owner and contractor, the issuance of the certificate of occupancy, or the architect or engineer determining that the work is substantially complete.
Once the project stakeholders have agreed that it has been reached, they may issue a document called a certificate of substantial completion that documents the date and signals the start of the claims and warranty periods.
A certificate of substantial completion is an official document that states the date of substantial completion, says that the owner is taking over responsibility for the project or the portion of the project that’s complete, and details any remaining work, if there is any. It’s common for a few remaining items to be left over. This may be in the form of a punch list that the contractor has yet to complete. These items are usually minor in scope and don’t interfere with the owner moving in.
Some states or localities have a specific form for the certificate of substantial completion, so it pays to research. Otherwise, the American Institute of Architects has a form you can use.
A certificate may be required by the bank or lending institution to trigger the close out of the project loan and ensure that all contractors and suppliers have been paid for the work they provided.
It also starts the clock on the statute of limitations, statute of repose, mechanics line deadlines, warranties, defect claims, and bond claims. That’s why it is important to document the date and the remaining work. If the date of completion is in dispute, it can make winning a claim more difficult.
Contractors need to know about substantial completion because it affects their liability and the ability to get paid. Make sure that the date is clearly defined and documented, and the remaining work is listed on the certificate to avoid problems down the line.