Substantial completion is a crucial milestone on any project. It’s a date that affects everyone’s obligations, payment rights, and starts the clock on important deadlines. Establishing when and how to achieve this on your project can provide useful clarity concerning the project’s completion timeline.
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What is Substantial Completion?
Substantial completion marks the moment in a construction project when the owner can occupy or use the property, but some punch list items remain to be completed. In many cases, it’s used to calculate the deadlines for final payment, mechanics lien claims, and other rights and responsibilities for those who worked on the job.
The American Institute of Architects (AIA) defines substantial completion as “the stage in the progress of the work when the work or designated portion is sufficiently complete in accordance with the contract documents so that the owner can occupy or use the work for its intended purpose.”
However, it can be frustratingly difficult to pin down. In some cases, it’s spelled out in the construction contract. In others, it may be up to the courts to decide. It’s important for contractors and suppliers to understand how substantial completion is determined on their project, so they can take action if they don’t get paid for their work.
Ultimately, when there’s confusion or dispute about the date of substantial completion, it’s a good idea to play it safe and use the earliest of the events that occurred. Letting a deadline pass could mean losing out on your right to secure payment for your work.
Why substantial completion matters
Contractors and suppliers need to know the date of substantial completion in order to calculate future deadlines. It may affect:
- The deadline for payments to the GC and subcontractors (final payment and retainage)
- A contractor’s deadline to file a mechanics lien or bond claim
- The expiration date for liability & warranties
Once the project reaches substantial completion, it will trigger some crucial timelines. Let’s take a look at some key factors.
Payday is coming soon!
Substantial completion means it’s almost time to get paid! Reaching substantial completion entitles contractors to the remaining balance of the contract price, minus any retainage withheld. If a contractor is faced with non-payment after reaching substantial completion, the contractor can choose to cease work. Non-payment could even be considered a material breach of contract by the owner. If the contractor fails to reach this point in their performance, they will likely be barred from attempts to obtain the full contract price.
Substantial completion is great news for subcontractors, too! It means final payment is right around the corner and retainage should be released sooner than later. Generally, when substantial completion has taken place, only minor corrective work and punch list items will remain.
Deadlines begin running
Substantial completion will often trigger deadlines that could have serious implications.
Statute of Limitations & Statute of Repose
Once a project has reached substantial completion, the clock starts ticking for statute of limitations and the statute of repose for claims. These are both legal deadline periods, with a slight difference. Let’s look at a construction defect claims example to help distinguish between these two concepts.
A statute of limitations generally sets a time limit from the time an issue is discovered – once that time limit expires, claims cannot be made. So, where a defect is discovered, a statute of limitations will set a time limit for making a claim based on that defect.
A statute of repose will set an overarching time limit, and after that time has passed, liability will be extinguished. A statute of repose might state that a contractor will only be liable for defects discovered within 10 years of their performance of work. Essentially, it puts a time limit on liability so that contractors and subs aren’t indefinitely liable.
Be sure you know the different deadlines for your jurisdiction! They’ll vary by state.
After substantial completion, the clock also starts running for warranty periods. Remember, warranty periods are not the same as the previously mentioned limitations. Instead, it is a period in which a contractor has a duty to correct defects through supplemental performance. These are more commonly known as the one-year correction period, as in the one provided by the AIA A201 General Conditions. A warranty period does not affect your deadline or bar your potential claim but defines how long contractors are liable to repair any of their defective work.
Prompt payment and retainage deadlines
Prompt payment timeframes and retainage deadlines are different from state to state, and deadlines within the same state may even be different depending on whether a project is public or private. Sometimes, these deadlines and timeframes will be based, in part, on substantial completion. Considering retainage and slow payments are the two most common sources of construction payment disputes, understanding how substantial completion is calculated is invaluable.
Lien and Bond Claims
For example, in Louisiana, a lien claimant has 60 days from substantial completion of the project to file a lien claim. Similarly, states like Missouri and Indiana have a deadline of anywhere from 60 days to 1 year to enforce their bond claim from the date of substantial completion.
For information on your State’s lien rights and deadlines:
State by State Construction Payment Resources
Once a contractor reaches the point of substantial completion they will be released from certain liabilities. One, in particular, is the assessment of construction delay claims and liquidated damages. These typically cannot be enforced past substantial completion. The whole point of a liquidated damages clause is to compensate the owner for late completion of the project. Since the project is close to final completion, delay claims and damages for late completion will not be assessed.
Additionally, reaching substantial completion also alleviates the contractor from liability for material breaches of the contract. If the contractor performed sufficiently enough to reach this point, they could avoid a claim of material breach of contract. However, there still are some non-material aspects left uncompleted on the project, such as punch work.
Defining substantial completion in the contract
Given the inherent difficulties in determining what substantial completion is, many owners and contractors look to minimize their risk by defining the term in their contract. The best option is to make a project-specific definition of what substantial completion is — like a particular milestone.
Certificate of Substantial Completion
Construction projects that use contract documents from the American Institute of Architects (AIA) will often use the AIA Certificate of Substantial Completion. The architect on the project will inspect the site and issue the certificate when the building is ready to use.
Certificate of Occupancy
Another option is to tie substantial completion to the issuance of a Certificate of Occupancy since the AIA definition includes “occupy or use the work for its intended purpose.” Having a straightforward, and precise description of substantial completion will provide clarity to all parties regarding what is expected to be finished.
Notice of Completion
In some cases, if a Notice of Completion (NOC) is filed, the date of substantial completion is irrelevant.
In California, for example, the deadline to file a mechanics lien is 90 days from “completion” of the work. However, if a Notice of Completion is filed on a California project, the deadline to file a lien claim is reduced to just 60 days from the NOC filing.
Only seven states require the property owner to file a Notice of Completion (also called a “Notice of Cessation” or “Affidavit of Completion”):
Some other states have voluntary Notices of Completion.
Notice of Termination
Most construction projects will contain a provision that allows the General Contractor or property owner to terminate a contractor or supplier on the job for breach of contract. In this case, they may be required to serve the contractor with a Notice of Termination.
Depending on your project’s state laws, a Notice of Termination can affect your deadline to file a mechanics lien. In Louisiana, for example, if a Notice of Termination is filed, the deadline to file a lien or bond claim is calculated from that date — rather than from the date of project completion.
However you decide to define substantial completion, specificity is critical! The amount of money and important deadlines that are tied to substantial completion illustrates how important this is. The more ambiguity in your definition, the higher the risk of disputes concerning payments and liability.
Approach substantial completion carefully
Keeping all of the above information in mind, generally, substantial completion will occur when there’s only minor, corrective, or warranty work remaining for the entire project. If the primary obligations of the prime contractor or project manager have been completed and everyone is winding down their work at the site, there’s a good chance that substantial completion has occurred.
Because substantial completion can be so hard to pin down, it’s important to communicate openly with the GC and property owner on the project. Keeping detailed, comprehensive records of your work and your communication with the project’s owners will be critical if there is a dispute about the date of substantial completion in the future.
Ultimately, be conservative about calculating your payment deadlines and the timeline to protect your lien rights. If you’re waiting to get paid for your work, waiting for the deadline to approach could mean losing your rights.