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What Is a Certificate of Occupancy?
So you are near the end of a project, and ready to close out. Great! That means it’s almost time to get paid! However, there may still be a few hurdles before you’re on to your next job. One especially important task is to secure a Certificate of Occupancy. Without one, your building will be deemed legally uninhabitable.
Certificate of Occupancy – the Basics
A Certificate of Occupancy (sometimes referred to as a Use-and-Occupancy Certificate or a “CO”) is a document that proves the building complies substantially with the plans and specifications that have been submitted and approved by the local building or zoning authority. Depending on where your project is located, the requirements can vary. Typically, a Certificate of Occupancy is required for any new constructions, property conversions (i.e. change of use/classification), change of ownership, or major remodeling/construction.
What Does a Certificate of Occupancy Do?
A Certificate of Occupancy certifies the property’s use (residential, commercial, industrial, etc.), signifies that the structure is fit for occupancy, and ensures that the structure complies with all housing and building codes.
Some jurisdictions offer temporary COs as well. What this means is that the structure is generally safe to occupy, but still has some outstanding issues that need to be resolved before a final CO can be issued. They typically last about 90 days but must be resolved before the deadline is up. Temporary COs usually can’t be renewed, and the owner won’t be able to occupy the structure until a final CO has been issued.
Don’t confuse this with a Certificate of Substantial Completion. A Certificate of Substantial Completion is requested by the contractor and issued by the owner. The AIA defines it as “the stage in the progress of the work when it is sufficiently complete in accordance with the contract documents so that the owner can occupy or utilize the work for its intended purpose.” What their definition fails to mention is that, in many cases, an owner will not issue a Certificate of Substantial Completion unless a temporary or final Certificate of Occupancy has already been obtained.
There are various inspections and certificates needed before the local building authority will issue a Certificate of Occupancy. The two most common of which are a general building inspection and fire safety inspections.
The general building inspection will be conducted by a state licensed general inspector. The inspector will review that the electrical wiring, structural integrity, and plumbing all are up to code. Essentially, they’re establishing that the construction is structurally sound for occupancy.
To get fire safety approval, typically, a fire marshal will need to come in and ensure that the structure has adequate smoke detectors installed, fire extinguishers available or sprinkler systems are in place, and they’ll determine the number of people that can safely enter the structure at one time.
Depending on where your project is and the type of structure or business you plan on operating, there may be a number of other inspections that need to be completed. This could include elevator inspections, health code inspections, insulation certificates, Historic Architectural Review Commission approvals, and so on.
Does a CO Affect Project Payments?
Most construction contracts will include language stating that a percentage of the total contract value will be withheld until “substantially completed.” After completion, but before the CO is issued, the owner and contractor determine the final contract amount to be withheld (retainage) until final completion of the punch list items left to finish. If the construction is financed, the lender will probably not release the retainage (5-10%) until the certificate of substantial completion and the certificate of occupancy are both issued. This can affect the flow of payments all the way down the entire payment chain, and become frustrating for lower tiered subs and suppliers. After all, the profit margin on the majority of jobs will often be less than this final retainage amount.
Also, to put it simply, a delay in receiving a certificate of occupancy can also mean a delay in getting paid.
The Bottom Line
Obtaining a Certificate of Occupancy is a critical step in closing out a project. It’s becoming more common practice for owners/project managers to tie final payment with both the Certificate of Occupancy and the Certificate of Substantial Completion. Meaning, retainage, and any outstanding final payments will remain in limbo until both certificates have been issued.