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 Constitutes “Substantial Completion”?
Closing out a construction project is a two-step process: substantial completion and final completion. This can be troublesome because there’s no uniform definition for “substantial completion.” Many states, however, have decided to model their statutes off of the AIA definition:
“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.“
Unfortunately, this definition isn’t particularly clear, itself. How do you know when a project is “sufficiently complete”? What if it’s hard to nail down a building’s ultimate “intended purpose”? At the same time, failing to define this date accurately could result in both contractors and the owner assuming unnecessary financial risks or other obligations.
Why Substantial Completion Matters
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 statue of repose for claims. These are both legal deadline periods, with a slight difference. Let’s look at 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:
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.
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.
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 or disputes concerning payments and liability.
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. Typically, it’s better to err on the side of caution when substantial completion will trigger a deadline or create some requirement.