Substantial Completion: What Owners & Contractors Should Know

Substantial completion is the point in any project timeline. It offers significant benefits to owners and contractors alike.

What is Substantial Completion?

Substantial completion is a contractual obligation between contractors and property owners. It refers to the point at which a building or structure is suitable to be used.

The American Institute of Architects defines substantial completion as follows: “The stage in the progress of the Work when the Work or designated portion thereof is sufficiently complete in accordance with the Contract Documents so that the Owner can occupy or utilize the Work for its intended use.”

substantial completion explained

Substantial completion is an important legal term in construction management for several reasons. It designates a minimum amount of work that is needed for a contractor to be paid. The customer/owner can withhold payment to cover what is left to be done, including punch list work or any needed repairs.

Substantial completion often requires a release of any service-based withholdings. As such, reaching this point delivers a sizable payment to the contractor.

The date of substantial completion also indicates an end to many contractual obligations for a contractor. This includes material liabilities, final completion dates, and performance issues.

Substantial completion transfers responsibility from contractor to owner. It indicates:

  • The start of pertinent warranties
  • Statute of limitation periods
  • The transference of insurance and utility liabilities

In construction law, clearly defining the details of substantial completion is crucial. Property owners will use substantial completion to begin to occupy the building for its intended purpose. Contractors will use it to ensure prompt payment and free themselves from liabilities.

Each contract is unique. So, the details of substantial completion can be determined by both parties to ensure a fair contract.

How is Substantial Completion Determined?

Determining substantial completion is always done on a case-by-case basis. It is defined by a level of completion at which the owner can use the building, or a designated portion of the building, for its intended use. This will differ from project to project.

Not every contract defines substantial completion. However, that isn’t necessarily good practice. Contracts should list tangible benchmarks that indicate substantial completion. It can also be marked by a certain date or time passed since the beginning of the project.

All parties should use substantial completion to ensure the project moves along on time, and that it is completed to satisfaction. It incentivizes construction companies to perform the best work as fast as they can. This is spurred by the availability to receive payment, plus the reduction of liabilities once the goals are met.

Reasonable goals must be used to come up with these deadlines and all parties must be in communication to ensure their specific “substantial completion” goals are met.

What Comes After Substantial Completion?

what happens after substantial completion

As substantial completion is defined based on the project, the subsequent steps can vary as well. Sometimes, a certificate of occupancy is used to mark the beginning of substantial completion.

Not every project will specify the need for a certificate of occupancy to trigger substantial completion. However, local municipalities require a certificate of occupancy (CO) for any building. CO inspections are often done before substantial completion forms are signed. This ensures that the property is ready for use.

After substantial completion, the contractor’s work isn’t finished. Final punch list items will need to be finished before final completion is attained. These punch list items are often minor, ranging from paint touch-ups to replacing cracked siding. These items will be determined after a walkthrough by both owner and contractor.

From there, the contractor will provide this list and the cost of completing it. Once those have been achieved, final completion comes next.

As the name implies, final completion indicates that all items within a contract have been fulfilled, the punch list has been completed, all titles have been transferred to the owner, the contractor has paid for any delays or other liquidated damages, and the contractor has received final payment for the work done.

What is an AIA Certificate of Substantial Completion?

Simply indicating substantial completion milestones isn’t enough. In the United States, an AIA Certificate of Substantial Completion must be completed and agreed upon by the owner and the contractor.

The AIA, or the American Institute of Architects, is a national association of architects. It defines industry standards and creates contract documents used throughout the construction industry.

The AIA’s Certificate of substantial completion is used as standard documentation across the country. It will list:

  • Work that still has to be completed (punch list items)
  • Timeframes for contract completion
  • Remaining maintenance, utilities, and insurance requirements
  • When various warranties are set to begin
  • When the owner will occupy the project

From there, the certificate is given to the project architect. The architect will walk through the project and verify that it has reached substantial completion. They will also ensure the remaining work that needs to be done to achieve final completion. Finally, they will address issues that need to be fixed before substantial completion can be verified.

Once the architect has verified that the work is substantially complete, it is signed by the architect, the contractor, and the owner. Then, the project can move to the final stages.

Certificate of Substantial Completion vs. Certificate of Occupancy

It is important to note that a Certificate of Substantial Completion is between the contractor and owner. Contractors request the certificate and the owners issue it if the appropriate contractual requirements have been met.

On the other hand, Certificates of Occupancy are mandated by local governments. They are needed for any construction, major remodeling projects, and even ownership changes. COs are judged based on whether the existing work is suitable for the specified uses, but they must be approved by zoning boards and building authorities. In other words, COs state that a structure adheres to local zoning laws and building codes.

There are both temporary and final Certificates of Occupancy. Temporary certificates last up to 90 days. They also allow the structure to be occupied, but with the stipulation that existing issues be fixed before the temporary certificate expires.

Final COs are issued after all pertinent building inspections have been completed. These include general inspections, fire inspections, health code inspections, and more. State-licensed inspectors conduct all inspections, and a fire marshal completes the fire inspection.

There is one major operational difference between the two. Certificates of Substantial Completion are a proactive tool for the contractor. It shows that work has been completed to the level at which payment can be made according to the contract.

Certificates of Occupancy, by comparison, are legal, government-defined determinations. These follow laws and mandates to be sure the work has been completed to an occupiable level. COs are often used as a contractual requirement for obtaining a Certificate of Substantial Completion.

Who Signs the Certificate of Completion?

As all Certificates of Substantial Completion will vary from project to project, the signers will also vary. Typically, it is signed by at least the contractor and the owner. Often, third parties will be brought in to verify that substantial completion has been reached. These third parties can be architects, engineers, project managers, or other professional inspectors.

These certificates often contain specific legal language. This ensures that the best interests of all parties are being met. These certificates can stipulate:

  • Specific deadlines for the contractor
  • Dates for the beginning of warranty periods
  • Starting and ending dates of statute of limitations
  • Starting and ending dates of statutes of repose

They will list payment terms (including withheld funds) and penalties for missing the stated dates. They also state which liabilities the contractor is no longer beholden to.

Owners will often give a pertinent third party the authority to grant these certificates based on their expertise. Though these documents aren’t required by law, they are treated as binding documents in court settings. This is why defining milestones, goals, dates, payment amounts, and other obligatory project details is essential.

Why Reaching Substantial Completion is Important

Substantial Completion is important for both the owner and the contractor. Some of the most impactful reasons are:

  • It creates mutual expectations between owners and contractors
  • It creates a timeline for the entire project
  • It ensures payments to contractors
  • It decreases the chances of project risk
  • It specifies how and when project ownership will transfer to the owners

Owners want to begin using the project as soon as possible. Substantial completion designates the specific building requirements that must be met for it to be used as intended, and a date by which the project completion should occur.

Meeting the contractual goals for substantial completion is important as it leads to payment. In construction, buildings still technically “under construction” can be deemed usable. Substantial completion gives the contractors the right to be paid.

These payments will typically be a majority of project costs. However, there may be further funds withheld to finish the final list of items or to repair faulty work.

It is important to understand the term “retainage.” This refers to the funds that the owner withholds from the contractor during the project. Most construction costs, such as equipment rental and materials, are covered by the construction company. Building owners rarely pay anything until substantial completion has been met.

The dates specified in substantial completion are often more important than the work specifics. These certificates are legally binding contracts. Failing to meet dates can lead to penalty fees, replacing contractors, and even costly litigation. Breach of contract penalties are nonexistent or minor after substantial completion is triggered.

Substantial Completion vs. Final Completion

substantial completion vs. final completion

Substantial completion refers to achieving all project goals for building occupancy. It is employed during home renovations to ensure the project is done in time to sell a house by a certain date or it can be used to ensure a new commercial building is ready to operate to align with business goals.

Final completion is the total completion of all specified jobs throughout the project. It will only occur once the remaining punch list items are completed, and all other stipulations of the construction contract have been met.

Final completion occurs after the architect has verified the completion of the project. They will perform a final inspection to verify the work.

The contractor must also submit all proof of payroll, material expenses, and additional costs to the owner. This will release any further funds. Finally, it also verifies that all insurance, permits, licenses, and ownership are in the owner’s name.

Conclusion

Substantial completion is an important aspect of any construction project. It defines the project timeline by setting a completion date. It also ensures that contractors are held to these dates, and that they are paid when they meet the goals.

As a legal contract, clarity and agreement of stipulations between all parties are essential. A substantial completion agreement isn’t required. However, it allows all parties to ensure their own goals are met to the highest standards.

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