Determining what is practical completion can be a difficult task to navigate, but is a key milestone in the performance of a building contract. When subcontracting construction works on your premises, such as renovations, additions or removals, a building contract will be created and this will usually specify the date of completion for the project. There are many circumstances which can arise, causing the the work not to be achieved by this date. This may be because major or minor defects are still present or significant problems occurred during the project. The date of when practical completion really occurs may then become a highly disputable topic between the owner and the builder. It is important that an agreement is reached in these circumstances, so a formal certificate of practical completion can be created. When this certificate is finalised, the majority of risks, possessions and additional responsibilities can finally pass to the owner and the premises may be used for the intended purposes. This Legal Kitz blog will discuss the defining characteristics which allow the owner of a premises to obtain a certificate of practical completion and the resulting responsibilities they inherit.
When does practical completion occur?
Many slight variations of the term ‘practical completion’ have emerged from the courts and different contracts. The Housing Industry Association (HIA) is one of the key Australian bodies responsible for issuing residential building contracts, and they have provided a general definition to follow. This definition suggests that practical completion does not strictly require a contractor to finish all of the building works. The HIA defined practical completion as the stage where the work is substantially complete and the premises is reasonably fit to be used or occupied for the intended purpose. Whether a project is practically complete will also depend on the nature of the project and any specific requirements arising from your the building contract. It is also important that the construction work complies with relevant statutory requirements including those published by the Australian Building Codes Board. To clarify what ‘practical completion’ means, many contracts will include their own definition and a comprehensive contract will even include specific criteria to easily determine when it occurs.
What are the responsibilities and risks involved in reaching practical completion?
Once practical completion is reached, several consequences should occur which include:
- the release of any retentions and forms of security which have been kept during the project’s completion;
- the award of any bonuses for early completion;
- any claims for delays or compensations for any breaches;
- the beginning of the defects liability period in which a contractor may be required to return to remedy any defects; and
- the release of construction work possession which is transferred to the owner. This usually passes with responsibilities for damage and insurance.
But do not be fooled into thinking everything is done because it is important that both parties engage in a thorough walk through. Within seven days of practical completion, the HIA requires that the owner and contractor inspect the work cooperatively. Doing this protects each parties interests because they can point out and agree on any existing defects to be fixed or any discrepancies in what was agreed in the contract. It is important to engage in these conversations as from the date of practical completion the owner can no longer order variations to the work aside from what is considered a defect.
Defects which are identified and notified prior to or within three months of practical completion are errors which the contractor remains liable for and must fixed within a reasonable time. This is a liability that should not be escaped and many warranties exist under Australian state laws to evoke these contractor obligations. For example, the Building Work Contractors Act 1995 (SA) applies a liability to fix defects for up to 5 years from practical completion. This is commonly known as the defect liability period. Any defective or incomplete work which is agreed upon, is usually written down in a defects document or in the certificate of practical completion. Make sure that these defect documents are signed by both parties so that they can be relied upon post practical completion.
To achieve a thorough inspection, a day should be agreed upon by the owner and contractor which allows enough time to scope out the work and particular issues that could reasonably be encountered. Once both parties are satisfied, the finances owed should be paid fully and the owner is not permitted to set-off or reduce this amount.
Why do I need a certificate and who do I get it from?
Many Australian standard form contracts, (which are agreements that have standardised, non-negotiated provisions and are usually available in pre-printed forms), will require a date of practical completion. Some may legally require a particular party to issue this formal certificate of practical completion. In both circumstances, a practical completion certificate makes the date of completion easily identifiable and makes the decision reasonable and certain so that the premises can progress and be used for its intended purposes. The particular person who is the certifier may be the principal, a superintendent or an independent third-party certifier. This certifier cannot backdate the date of completion and can only issue a certificate on the day that they have inspected and are reasonably satisfied that practical completion is achieved.
Practical completion is an important stage of construction and can be a stressful time for all involved. It is important that both parties inspect the work, compile a signed defects agreement and hand over the necessary funds for the work. Remember to write down any defective or incomplete work identified during your walk-through and be prompt in fixing those issues. It is vital that both contractor and owner remain open and honest in communicating so that a certificate can be easily obtained.
Moving forward with your building contract can be intimidating and confusing. If you are struggling to obtain a certificate of practical completion or you are confused about how to make one, Legal Kitz is here to help. We offer FREE 30-minute consultations to assist you with any queries or concerns. Book here now for your free consult.