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Conclusion of a Construction Contract
Part One
A Successfully Completed Contract,
A Gratified Owner, and a Contented Contractor

Arthur O'Leary, FAIA, MRIAI
 


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This is the first of three articles discussing the final outcome of a construction contract in three possible ways. The first is based on the normal expectations of the owner and contractor: that the project has been completed to the mutual satisfaction of the contracting parties and they remain friends. 

The second article in the trilogy considers the situation where the owner finds it necessary to eject a non-performing contractor and terminate the contract. It also covers the case where the owner finds it necessary to cancel the contract for convenience. 

The third article discusses the contractor's decision to discontinue the construction and terminate the contract. 

The second and third options describe situations almost always fraught with controversy, recrimination, disillusionment, assertion of rights, attempted avoidance of responsibility, general dissatisfaction, and usually considerable legal turmoil and unexpected expense. 

Each of these differing circumstances is analyzed from the viewpoint of an architect who would have designed the project, prepared the contract documents, and administered the contract. The multitude of legal implications must be left to the scrutiny and analysis of legal scholars. 

All three contractual situations will be assumed to have been formed substantially from the standard AIA forms of agreement. (Note 1) 

The Normal Expectations
Owners and contractors alike, when entering into construction contracts, usually have lofty and optimistic aspirations. Owners enthusiastically anticipate receiving their contemplated buildings as described in the construction documents on time and for the agreed price. 

Contractors, not unreasonably, hopefully expect that the owner will be cooperative, that the contractor's organization and resources will not be tied up any longer than originally planned, and that the full scheduled profit will be realized. Fortunately, most projects turn out this way, more or less. This is a reasonable expectation when there is an informed, cooperative, and solvent owner and a capable general contractor. In the climate of competent and uncontentious construction projects, subcontractors and suppliers also find their favorable expectations normally fulfilled. 

One of the most important implements for achieving a successful building project is a skilfully prepared and coordinated set of contract documents. Apart from the obvious necessity of competent technical construction documents (the drawings and specifications), probably the most significant part of the contract is the general conditions. This is because it contains the framework for orderly administration of the contract. Although some refer to this document as boilerplate, it should not be thought of merely as irrelevant theoretical verbiage to be routinely bound into each contract and then promptly forgotten. The specified closing out procedures for winding down the construction contract are realistic and practical and should be followed for the mutual advantage of the contracting parties. 

When the End Is in Sight
As construction is gradually nearing physical completion, the architect and the parties should start getting themselves organized to carry out their respective roles in concluding the contract. 

Often the owner is thinking more about the process of leaving the old premises, moving into the new, comfortable, idealistic, beautiful building, and occupying it happily forever after. Similarly, the contractor and subcontractors are more concerned with rapidly completing the physical work, promptly collecting their money, and moving on to the next job. 

Some projects are never definitely and cleanly completed. They seem to drag on forever with the contractors still visiting the premises for bits and pieces of pick up work long after the owner has settled in. The paperwork never really formally ends. People just gradually stop doing it. The contractor's piecemeal bills arrive for weeks until the owner starts to get testy and reticent about paying them. The owner is never sure that all credits have been accounted for and that the billing is following the contract. The contractor is getting sick of billing and rebilling because of the owner's resistance. There is a general undercurrent of dissatisfaction by both owner and contractor. Eventually, both come to realize that there is nothing left to do, although neither is really certain of this. This is not a very satisfactory or efficient way to end a construction contract. 

Substantial Completion 
The first meaningful point in the systematic closing down procedure is when the work has reached substantial completion and has been formally so designated by the architect. A project is considered to be substantially complete when it may be used for its intended purpose, although the contract may not yet be fully performed. There may be numerous items of work still to be corrected or completed. The definition of substantial completion is given in AIA Document A201-1997. (Note 2) 

Prior to the work being declared substantially complete the contractor would have made a list of all known minor corrections, defects to be touched up, and other remaining contract requirements yet to be performed. The architect would usually check the list and supplement it with any additionally observed items. The combined so-called punch list is then attached to the architect's Certificate of Substantial Completion. (Note 3) 

The architect's certificate is to be co-signed by the owner and contractor indicating their agreement to the respective allocations of responsibility for security, maintenance, heat, utilities, damage to the work, and insurance. The certificate also determines the time within which the punch list work is to be accomplished by the contractor. The owner is then entitled to move in and occupy the premises. 

The contractor would then continue with the work of the punch list, completing all remaining contract requirements within the agreed time. The contractor is not relieved of responsibility for correcting or completing any contract requirement inadvertently omitted from the punch list. (Note 4)

Notice of Completion
Whereas the architect's certificate of substantial completion is a part of the AIA contractual procedure, a notice of completion is a part of the state's mechanics' lien law system. They are not the same things. The notice of completion, signed by the owner, should be recorded in the office of the county recorder in the same county as the construction, within 10 days after completion of construction. (Note 5) The date of substantial completion is not necessarily the proper date to be used in the notice of completion, although generally they often do coincide. 

The Contractor's Final Submissions
As the punch list corrective work is progressing and the project is nearing final completion in the field, the contractor should be accumulating the specified final submittals. Each contract specification is different but generally the final submittals would consist of the specified written warranties, operating instructions for the mechanical and electrical equipment, parts lists, spare parts and materials, keys and keying schedules, record drawings, and excess contract documents. Some of these will have to be obtained by the contractor from subcontractors and suppliers. The final submittals are specified as a contract requirement and are a condition of the final payment. 

Final Completion
Upon completion of the punch list work, the contractor should notify the architect that it is time for the final inspection. The contractor can simultaneously submit the final payment request. It should indicate 100 percent completion of all work and include all change order billings and a reconciliation of all purchase allowances and unit price portions of the contract. 

The architect, usually accompanied by the contractor or its superintendent, will make a final inspection to determine that the punch list has been satisfactorily discharged and that the physical part of the contract has been fully performed. Some architects, as a matter of courtesy, invite the owner to attend the final inspection. 

The Architect's Final Certificate
Upon the architect's satisfactory final inspection and favorable review of the contractor's final payment request, the architect will issue a certificate indicating that the final payment is due. This constitutes the architect's certificate of final completion. Although it is referred to as the final payment, there is usually at least one more payment to release the retainage required by most contracts. If any sums had been temporarily held back to guarantee completion of punch list work, they would be certified for payment when that work is satisfactorily completed. 

According to the AIA general conditions (Note 6), the contractor must submit a number of documents as a condition precedent to the final payment. These consist generally of proof that construction bills have been paid from previous payments, that specified insurance is in effect and will be renewable, consent of surety (if any) to the final payment, and data providing lien indemnification. Although the architect will usually facilitate the collection of these documents from the contractor, it is the owner's responsibility to engage legal and accounting consultation to review their adequacy. 

Liquidated Damages
In contracts with liquidated damages provisions, the architect must make a determination of whether or not the contractor has incurred any liability for such damages. The contractually stipulated completion date must be adjusted for all agreed extensions, for inclement weather, and for any other justifiable extensions approved by the architect. Any assessed liquidated damages should be deducted from the final payment certificate.

Owner's Final Payment to the Contractor
The owner is required to pay the architect's final certificate within 30 days thereafter unless stipulated otherwise in the agreement. (Note 7) 

Architect's Final Decisions
In the process of concluding the contract, all pending claims and differences of the parties should be resolved. The architect should endeavor to obtain the complete position and viewpoint of owner and contractor on each claimed or contested item. The architect's decision should be consistent with the requirements of the contract documents and should be fair and equitable, showing no favoritism to either party. The decision should be promptly rendered so that the next step in the contract's dispute resolution procedure, mediation and possibly arbitration, may proceed, if necessary. (Note 8)

Amicable Conclusion of the Contract
After the owner has made the final payment, the retainage payment, and any other sums that had been held back pending completion of punch list work, the owner's and contractor's paperwork is virtually completed.

The contractor has no further duties on the jobsite other than responding to requests for adjustments, corrections, and repairs during the specified warranty periods. It has now become the owner's responsibility for day to day maintenance of the building and grounds. 

After concluding the contract in this methodical, uneventful, and amicable manner, the owner and contractor should still be on terms of friendship and mutual respect. The contractor should not be at all apprehensive about referring prospective customers to view the work and to talk to the owner. The owner would be more than pleased to recommend the contractor to friends and associates. This type of contract ending is good for the construction business. (Note 8) 

NOTES
1. The general contract would have been formed from the following AIA standard form documents:

Standard Form of Agreement Between Owner and Contractor (where the basis of payment is a Stipulated Sum), AIA Document A101-1997, or

Standard Form of Agreement Between Owner and Contractor (where the basis of payment is the Cost of the Work Plus a Fee with or without a Guaranteed Maximum Price), AIA Document A111-1997, and 

General Conditions of the Contract for Construction, AIA Document A201-1997. 

The architect's services would have been contracted for by the owner using the standard AIA form: 

Standard Form of Agreement Between Owner and Architect, AIA Document B141-1997. 

2. AIA Document A201-1997, Subparagraph 9.8.1: Substantial Completion is the stage in the progress of the Work when the Work or designated portion thereof is sufficiently complete in accordance with the Contract Documents so the Owner can occupy or utilize the Work for its intended use.
3. Certificate of Substantial Completion, AIA Document G704. 
4. AIA Document A201-1997, Subparagraph 9.8.2. 
5. The time for recording the notice of completion is in the mechanics lien law and differs from state to state. 
6. AIA Document A201-1997, Subparagraph 9.10.2: Neither final payment nor any remaining retained percentage shall become due until the Contractor submits to the Architect 

(1) an affidavit that payrolls, bills for materials and equipment, and other indebtedness connected with the Work for which the Owner or the Owner's property might be responsible or encumbered (less amounts withheld by Owner) have been paid or otherwise satisfied, 
(2) a certificate evidencing that insurance required by the Contract Documents to remain in force after final payment is currently in effect and will not be canceled or allowed to expire until at least 30 days' prior written notice has been given to the Owner, 
(3) a written statement that the Contractor knows of no substantial reason that the insurance will not be renewable to cover the period required by the Contract Documents, 
(4) consent of surety, if any, to final payment, and 
(5) if required by the owner, other data establishing payment or satisfaction of obligations, such as receipts, releases and waivers of liens, claims, security interests or encumbrances arising out of the contract, to the extent and in such form as may be designated by the Owner. 

If a Subcontractor refuses to furnish a release or waiver required by the Owner, the Contractor may furnish a bond satisfactory to the Owner to indemnify the Owner against such lien. If such lien remains unsatisfied after payments are made, the Contractor shall refund to the Owner all money that the Owner may be compelled to pay in discharging such lien, including all costs and reasonable attorneys' fees. 
7. AIA Document A101, Article 6 or A111, Article 13. 
8. AIA Document A201, Subparagraphs 4.3, 4.4, and 4.5. 
9. For those interested in additional information about the closing out process based on AIA documentation, see "A Guide to Successful Construction - Effective Contract Administration," by Arthur F. O'Leary, Chapter 14, Closing Out the Job. 

 

 Milestones in Closing Out a Construction Contract

Contractor prepares punch list
- Checked and supplemented by architect
- Contractor starts punch list work

Substantial Completion
- Date determined by architect
- Architect issues certificate, co-signed by owner and contractor

Owner occupies building
- Contractor continues punch list work

Notice of Completion
- Signed by owner and recorded

Contractor's final submittals
- Reviewed by architect for completeness 
- and by owner's attorney and 
- accountant for sufficiency

Contractor's final completion of work
- Completion of punch list work
- Architect's final inspection

Final payment
- Contractor's final payment documentation
- Contractor's final payment request
- Architect's final payment certificate
- Architect's determination of liquidated damages
- Architect's final decisions on owner's and contractor's claims
- Owner makes final payment

Retainage payment

Warranty period



“A Guide to Successful Construction: Effective Contract Administration” by Arthur F. O’Leary, FAIA, MRIAI or “Construction Nightmare Jobs From Hell & How To Avoid Them” by Arthur F. O’Leary and James Acret are available from bookworkz.com or call DCD at 800-533-5680.


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