What is Practical Completion in a Construction Contract?
Practical completion is typically defined as the point when a building is complete — save for any minor defects — and the client can take possession or occupation.
Unfortunately, practical completion does not have an industry-wide standard or even a precise legal definition, but it does have significant implications when this point in a construction contract is reached. Most building contracts do not define it.
Because practical completion is something of a moving target within the confines of individual contracts and the construction industry at large, it is a common area of dispute between employers and contractors.
What Does Practical Completion Mean?
The RIBA Plan of Work 2013 defines practical completion as a “contractual term used in the Building Contract to signify the date on which a project is handed over to the client”. A handover typically signals that all work contained in the contract has been substantially completed.
Practical completion is also sometimes known as substantial completion — and that term is perhaps more accurate. The project is mostly finished, and the client can safely occupy or take possession of the site and building, but there may still be minor outstanding items.
Outstanding items may include areas of work that are not yet complete, defects which require remedying, and the payment of retention monies from the employer to the contractor.
Why is Practical Completion Important?
There are numerous reasons why achieving practical completion is essential to both the employer and the contractor.
Releasing Retention Money
Once practical completion is reached, the project owner will usually be obliged to release the first half of the retention money. Retention money is a percentage held back from earlier stage payments to the contractor to ensure they finish the job to the agreed standards.
Ending Contractor Liability for Liquidated Damages
Practical completion signifies the end of the contractor’s liability for liquidated damages. These are damages payable by the contractor to the client or project owner in the event of the contractor’s breach of contract.
Ironically, the most common cause for this type of action is the contractor failing to complete the works by the agreed date.
Put another way, practical completion is also the starting point for calculating any liquidated ascertained damages (LADs) due from the contractor to the employer or project owner.
Starting the Defects Liability Period
The Defects Liability Period (DLP) may well start at the point of practical completion. It represents a defined period where the contractor has a right of access to the site to finish any work and remedy defects.
The length of the Defects Liability Period is stipulated in the contract and is commonly anywhere from six months to two years.
Suppose there is no Defects Liability Clause contained in the agreement. In that case, the contractor is at risk of the client using a third-party company to finish the works and correct any defects for which the original contractor may then be charged.
A contractor has no right of access to the site to complete works and correct errors unless the construction contract contains an express DLP provision to this effect.
Triggering the Final Account Stage
Practical completion will trigger the start of the final account stage.
When Has Practical Completion Been Achieved?
Achieving practical completion can be a grey area and one that is commonly a point of dispute in construction contracts.
In 2019, a significant case went before the Court of Appeal, Mears v Costplan Services (2019) EWCA Civ 502.
This case set out guidance about the position regarding practical completion after a review of all the previous case law. The key points are as follows:-
- Practical completion is easier to recognise than define – there are no set rules
- Latent defects, by their very definition, cannot be used to block practical completion – if defects are latent, they are undetected and unknown
- There is no difference between an outstanding item of work and a patent defect which must be remedied
- Minor defects do not stop practical completion
- Whether a defect is considered minor or trifling is a matter of fact and degree
- Possession or habitation per se does not indicate practical completion just because it is theoretically possible
- An irremediable defect does not preclude practical completion
Delays to Practical Completion
Employers are sometimes reluctant to take possession of a building if they consider there to be too many defects or if the faults are major and beyond the scope of a defined Defects Liability Period (DLP).
In these cases, employers may resist practical completion. This can protect their position and pressure the contractor to complete the works to the required standard rather than rely on the Defects Liability Period.
Because the employer still retains a percentage of the stage payments, the contractor can be forced to remedy substantial defects, get to the point of practical completion, and trigger the release of the retention payment.
Suppose the contract doesn’t contain a provision for a DLP. In that case, the employer may feel that they have no leverage to ensure the contractor addresses major defects and omissions once practical completion has been achieved.
A contractor who believes they have achieved practical completion but finds the certificate is being unfairly withheld can refer the dispute to an adjudicator to decide whether or not practical completion has been achieved
The recent court case in 2019 has provided some clarity in the area of practical completion, but employers and contractors must still rely on a degree of interpretation.
Each situation is different, and the vested interests of the parties are also a crucial driver.
Helix Law’s specialist construction team can provide the expert legal advice you need to navigate any issues or difficulties over practical completion, whether you are a contractor or an employer.
We have years of experience navigating practical completion disputes and helping prevent them from happening in the first place.