In Construction Contracts
Substantial completion is an important milestone in a project when the building can be occupied and used as planned, but may have a few minor loose ends, usually detailed in a “punch list”. The AIA defines a project as substantially complete when “the Work or designated portion thereof is sufficiently complete in accordance with the Contract Documents so that the Owner can occupy or use the Work or a portion thereof for its intended use.”
The contractor usually receives the final large payment upon substantial completion, minus enough to cover any punch list items. Substantial completion is also the trigger for other clauses such as:
- Release of any retainage
- Determination of liquidated damages
- Clock starts on contractor’s warranty period
- Clock starts on statute of limitations
However, when exactly substantial completion occurs is a gray area. Touch-up painting, a missing interior door knob, or a couple of missing heating grilles are clearly punch list items.
But what if one bathroom is fully functional, but one is waiting for back-ordered fixtures? What if some interior doors are missing? Or a skylight is leaking and waiting for repair or replacement? These are all typical sources of disagreement.
This is an especially tricky time in a building project, since the contractor is anxious to get the last big check, while the owner is reluctant to pay in full with a lot of loose ends still remaining. Obtaining a certificate of occupancy (not a provisional one) is an important milestone – since without it, you cannot use the space as intended. Therefore, I recommend making a certificate of occupancy (CO) a requirement of substantial completion.
If an architect is involved, he will certify when the building is substantially complete “in accordance with the contract documents.” He will also certify when the project has reached “final completion” once all punch list items are completed and all contract terms are fulfilled. At that point, the final payment is due.
If you are on your own, you will have to mutually agree with the contractor on when the project is substantially complete. You will want to do a walk-through and thorough inspection before making a decision. You should first do a walk-through on your own with your spouse or friend (someone who knows a bit about construction would help) and prepare a preliminary punch list, listing items that need fixing or completion. Walking through the job without the contractor will allow you examine the work without feeling rushed or pressured to overlook problems.
The contractor should also come prepared with his own punch list. Then walk through together to come up with a comprehensive list of loose ends that need tying up. For example, some doors and windows might be sticking and need adjustment, a cracked tile may need to be replaced, a few pieces of wood siding may be cracked or cupped and need replacement, and so on. If anything substantial is incomplete or needs major repair, it does not belong on the punch list but should be completed before the final large payment.
The contractor will then give you a cost estimate for the items on the punch list. It is common to hold back 200% of the value of the punch list items, under the theory that if the contractor does not complete them, you can hire another contractor. Of course another contractor may charge a lot more than your contractor is allocating to do that work.
To guard against the contractor undervaluing the punch list work, and to provide an incentive for him to get the work done in a timely manner, it’s best to hold back a bit more. Depending on the size of the job, you might want to hold back more than 200% of the punch list value, or 200% plus a fixed amount based on the size of the job, ranging from $1,000 to $5,000. Sample punch list language might read:
A written list of uncompleted work for the Project (the Punch List) shall be established and agreed to by the Contractor and Owner (or Owner’s Representative). The Punch List may be amended from time to time, upon written Agreement of the Parties, prior to Final Completion. The Punch List shall include all deliverables through Final Completion in accordance with the contract documents. The Owner shall hold back two times the estimated value of the Punch List items agreed to by the Parties, plus a fee of $_______. Owner shall pay the Contractor the full amount held back upon completion of all items on the Punch List.