Practical completion is a key concept in construction projects and a key 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 and other forms of security. 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;
- contractors’ award of bonuses for early completion or exposure to claims for delay or compensation for breach of contract;
- start of limitation periods on any claims;
- beginning of the 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;
- 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;
- end of the principal’s ability to order variations in the work; and
- end of the accrual of any time-related claims. In other words, 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.
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).
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.
In a case in 2017, the certifier (the superintendent) had backdated the practical completion certificate to claim that practical completion had occurred at a date well before the issue of the certificate. The Court refused to uphold the earlier date and instead determined that the contract meant that practical completion occurred when the certificate was issued.
This was because the superintendent only had the power to issue that certificate once he was reasonably satisfied practical completion had been reached. Therefore, practical completion could not take place at a time before the certifier formed the opinion and issued the certificate.
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 to carefully draft the definition of practical completion in the contract to avoid unnecessary disputes. If you have questions about practical completion of a construction project, get in touch with LegalVision’s construction lawyers on 1300 544 755 or fill out the form on this page.
Was this article helpful?
We appreciate your feedback – your submission has been successfully received.