Tuesday, October 2, 2012

Completion Types in Construction Contracts.

In construction contracting you may define and refer to three types of completion: substantial completion, final completion, and completion of the defects liability period. In many construction contracts to owner will retain a portion of each payment as a form of making sure that the contractor completes the work, or having those funds available it they need someone else to complete the work.

Contractors don’t like to have those funds, which may be substantial, to be retained any longer than absolutely necessary. From that the concept of substantial completion was created is used to allow the release of a significant portion of those retained funds. A common definition of substantial completion is the work is complete with the exception of a small “punch list” or “snag list” of items that still need to be corrected or finished. When substantial completion is certified by a third party such as an architect or engineer or agreed, the contractor will invoice for payment of the amount of funds or percentage to be released at substantial completion. The owner retains the remaining amounts as protection that the contractor will complete the remaining work.

Once all the defects have been corrected and all work is completed, if there is an architect or engineer involved they will issue a certificate of final completion. The final completion does two things. First, it allows the contractor to invoice the remaining amounts withheld, except for any amounts withheld for the defects liability period. The second thing it does is serve as the start of the defects liability or warranty period on the work.

The completion of defect liability period ends the buyer ability to make future defect claims. It does not end the contractors responsibility to correct defects that were identified during the defects liability period. If the buyer was retaining monies during the defects liability period, most agreement do not include anything similar to substantial completion for the defect liability period. The owner would have the right to withhold the remaining amount until the correction of all defects listed defects are complete. Depending upon the relationship, amount withheld, and the value of the defects remaining to be corrected, a Buyer may agree to release further funds and still withhold enough to correct the work if the contractor failed to complete the correction of the remaining defects.

The primary alternative to retaining funds is the requirement that the supplier provide bonds or guarantees given by a third party that guarantee performance by the contractor.

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