In Short
- Practical completion occurs when a project is finished except for minor defects, and it is usable for its intended purpose.
- Reaching practical completion affects key contract elements, such as releasing security payments and starting the defects liability period.
- A certificate of practical completion often formalises the completion date, minimising disputes.
Tips for Businesses
When drafting construction contracts, ensure the definition of practical completion is clear and specific. This helps avoid disputes and clarifies when key contract elements, like defect rectification and payment release, should occur.
Practical completion is a key concept in construction projects and an important milestone in the performance of a construction contract. When a project is practically complete, a significant portion of the risk of the project will pass from the contractor to the principal. The issue of when practical completion occurs is often a contentious topic between parties to a construction contract. This article will discuss:
- why practical completion is important;
- what the term practical completion means;
- the use of practical completion certificates; and
- the effect of practical completion certificates.
Why Does Practical Completion Matter?
The concept of practical completion is a key component of the contractual relationship between the contractor and the client. Reaching practical completion often has several consequences under the construction contract. Practical completion is often linked to the:
- Release of Retentions: Retention is a small percentage of the total payment due that the principal (i.e. the person who engages the contractor) keeps until practical completion of the project.
- Bonuses or Claims: Contractors’ award of bonuses for early completion or exposure to claims for delay or breach of contract.
- Limitation Periods: The start of limitation periods on any claims.
- Defects Liability Period: This is a set period of time after practical completion of the project where the contractor has the right to return to the site to remedy any defects.
- Release of Possession: This involves the contractor releasing possession of the works to the principal. This means that legal responsibility for damage and responsibility for insurance will often also pass to the principal.
- Ability to Order Variations: The principal cannot order variations in the work after practical completion.
- Cessation of Liquidated Damages: If the project is delayed, practical completion usually marks the endpoint for calculating liquidated damages.
- Accrual of Time-Related Claims: It marks the end of any time extensions or delays claimed.
What Does Practical Completion Mean?
Unfortunately, a number of slightly different definitions of what practical completion means have emerged from the courts over the years. However, the general definition of practical completion is a time when the works are complete (except for minor defects and omissions) and are reasonably capable of being used for their intended purpose. Whether a project is practically complete depends on the nature of the particular project and the specific requirements of the contract.
The concept of practical completion mitigates the issue that true completion of construction work often involves a period of fixing up a “snag list” of minor items. A defect liability regime keeps the contractor on the hook to repair minor issues. It also releases them from being legally responsible for delay because the works can now be used for their intended purpose.
To deal with the broad and sometimes vague legal definition of practical completion, it is common for construction contracts to provide specific criteria for practical completion. Where a contract defines practical completion, it specifies exactly what it will require.
For instance, a contract might specify that practical completion includes the:
- completion of all major structural elements;
- full functionality of all building systems (HVAC, electrical, plumbing);
- issuance of all required occupancy permits;
- completion of all safety-related items;
- handover of all required documentation (as-built drawings, warranties, etc.); or
- removal of all construction equipment and temporary facilities from the site.
Practical Completion Certificates
Many standard form contracts require that a particular person determine the date of practical completion once they are reasonably satisfied that the works are practically complete. The contract will often require this person to issue a “certificate of practical completion”. Such a certification regime can be helpful as it can make the:
- date of practical completion easily definable;
- determination of practical completion more objective. This is because the certifier needs to make a reasonable decision to certify. In other words, their decision is held to a ‘reasonableness’ standard. In addition, the certifier is neither the contractor nor the client. The certifier may be the principal, a superintendent or an independent third-party certifier; and
- make the determination of practical completion more certain (by, for example, only having limited avenues to challenge the certificate).
Objective vs Subjective Criteria
When drafting or reviewing a construction contract, it is important to ensure that the definition of practical completion is based on objective criteria rather than subjective assessments. Objective criteria provide clear, measurable standards that can be independently verified, reducing the potential for disputes and ensuring a fair determination of project completion.
In contrast, a subjective definition could look like: “Practical completion shall be deemed to have occurred when the works are substantially complete and the building is fit for occupation and use by the principal, to the satisfaction of the superintendent.”
The objective definition provides clear, verifiable criteria that leave little room for interpretation. In contrast, the subjective definition relies on terms like “substantially complete” and “satisfaction of the superintendent,” which could lead to disagreements between parties. By using an objective definition, all stakeholders have a shared understanding of what constitutes practical completion, facilitating a smoother project close-out process.
Certificates Under Standard Form Contracts
Practical completion certificates are commonly a requirement in Australian standard form contracts such as the AS 4000. This is a widely-used construction contract in Australia.
Case Study
H&M Constructions (NSW) Pty Ltd v Golden Rain Development Pty Ltd (No 4) [2023] NSWSC 925 provides a significant legal insight into the consequences of a superintendent attempting to certify “conditional” practical completion in a construction contract.
Golden Rain (the Developer) had engaged H&M Constructions (the Builder) for a complex project on a contaminated site. Under the contract, it was completely the Builder’s responsibility to remediate the contamination. In July 2018, the Builder requested the superintendent to issue a Certificate of Practical Completion as they believed the works were complete. However, the Builder had not removed contamination at the site. The superintendent informed the Builder that practical completion could not be certified under these conditions.
Despite the superintendent’s advice, the Builder insisted on certifying practical completion. In September 2018, the superintendent issued a certificate stating they achieved practical completion on September 7, 2018. This was subject to a list of conditions, including issuing an Occupation Certificate for the works.
The Builder misconstrued the certificate, believing that practical completion had already been achieved and that it was relieved of the obligation to complete the outstanding works and requirements without a variation directive. The Developer argued against this, stating that parties could only achieve practical completion upon fulfilling the conditions specified in the certificate.
The Supreme Court of NSW ruled that the contract did not permit the issuance of a “conditional” Certificate of Practical Completion. Therefore, the conditional certificate had no contractual effect. This case outlines the necessity of meeting the conditions for a project to be practically compelete before issuing the certificate.
This guide will help you to understand your corporate governance responsibilities, including the decision-making processes.
Key Takeaways
Generally, the definition of practical completion is the time at which the works are complete except for minor defects or omissions. Therefore, it is important that there is clarity in the agreement between the principal and the contractor. That could mean including set criteria for when the works are practically complete. It is worth spending time carefully drafting the definition of practical completion in the contract to avoid unnecessary disputes.
For assistance determining whether your project is practically complete, our experienced building and construction lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
Practical completion refers to the point when a construction project is essentially complete and can be used for its intended purpose, although minor defects may still need fixing. This stage often triggers key contractual obligations, like releasing payments and starting the defects liability period.
When a project is practically complete, it often leads to the release of security payments, the start of the defects liability period, and the formal certification of completion, helping to minimise potential disputes between parties.
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