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Practical completion – the great divide

The concept of practical completion is much spoken about, but what does it actually mean?

Construction contracts are generally thought to be split into two periods, the “construction period” and the “defects liability period”. The construction period begins with the contractor being given access to site and continues until he’s completed the works to the satisfaction of the contract administrator. The defects liability period is the subsequent period during which the contractor must make good any latent defects that arise. Dividing the two periods is the concept of practical completion.

What is practical completion?

Like an elephant, practical completion is easier to recognise than to describe.

According to Keating on Construction Contracts:

  1. Practical completion means the completion of all the construction work that has to be done;
  2. A certificate of practical completion may not be issued if there are patent defects;
  3. The works can be practically complete notwithstanding that there are latent defects;
  4. The contract administrator has a discretion to certify practical completion where there are very minor items of work left incomplete.

In other words, the contractor has finished the job and the employer can take up occupation, but there may be some small insignificant items left undone.

Importantly, practical completion has either taken place or it hasn’t. Architects should avoid issuing “conditional” practical completion certificates (ie subject to completion of various listed defects), even if under pressure from the employer or the contractor to do so. If there are patent defects (ie defects known to the contract administrator or which would come to light on a proper inspection), the works are not practically complete and the contract administrator could be negligent if he certifies that they are.

Why does it matter?

Practical completion matters because a construction contract is an “entire contract”, which means that only complete performance of the whole contract will fulfil the contractor’s obligations and entitle him to payment. His obligation is to “carry out and complete” the works by a certain date, so technically he’s in breach if he doesn’t do that. The result is that you need to know when completion has happened and an employer shouldn’t be allowed to use very minor defects to say it hasn’t.

It also matters because practical completion signals the happening of a number of important events:

  1. Possession of the site, and therefore the obligation to insure the works, shifts from contractor to employer;
  2. The six or twelve year limitation period for actions in contract and tort commences;
  3. The contractor’s liability for liquidated damages ceases, as does the employer’s liability for loss and expense;
  4. The works can no longer be varied;
  5. Half the retention becomes due;
  6. The defects liability period commences;
  7. Performance bonds and guarantees may no longer be enforceable;
  8. Tenants or purchasers may have rights of occupation.

It’s right at the time that the parties’ commercial relationship is coming to an end that their competing interests come to a head.

What happens next?

The construction contract then enters its second phase, the “defects liability period”, during which the contractor makes good any latent defects that arise.

A latent defect is a defect that was hidden on practical completion, but which then comes to light. The contractor is obliged to rectify latent defects at his own cost, but does he have a right to do so?

There’s some uncertainty over this. If you read the standard forms, you’d think that the contractor has no such right because the forms speak of the contract administrator being able to instruct him not to. However, recent case law suggests that the contractor has a right to mitigate his loss by fixing the problem himself and thereby preventing the employer from recovering from him the extra cost of getting someone else to do it. Employers should therefore be slow to get others in to fix latent defects unless their relationship with the contractor has broken down to such an extent that they can argue that the necessary trust and confidence has evaporated. By preventing the contractor from mitigating his loss, the employer may find himself unable to recover everything he’s paid out.

And finally…

The defects liability period ends with the certificate of making good defects and subsequently the final certificate. Under the JCT suite of contracts, the final certificate is conclusive evidence that all items that are to be for the approval of the contract administrator are to his reasonable satisfaction, that all amounts that are to be added to or deducted from the contract sum have been so added or deducted and that all extensions of time and loss and expense have been properly granted. Again, therefore, the contract administrator needs to be wary of acceding to a request to issue the final certificate until he’s happy that all latent defects have been rectified and all other obligations under the contract have been addressed and dealt with.

Consistent with our policy when giving comment and advice on a non-specific basis, we cannot assume legal responsibility for the accuracy of any particular statement. In the case of specific problems we recommend that professional advice be sought.

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