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Practical Completion – What Does It Mean?

May 28, 2012 | Construction Contracts, JCT Contracts, NEC3 Contracts

The concept of “practical completion” is a frequent source of dispute on construction projects. Parties often disagree about what the term “practical completion” means and whether or not practical completion has been achieved.

What does it mean?

One of the main reasons why disputes about practical completion arise is that the term does not have a specific legal meaning.

Over the years, the courts have considered the concept of practical completion on many occasions, resulting in a large number of different definitions, including:

  • Practical completion means completion of all the construction work that has to be done (Jarvis and Sons v Westminster Corp).
  • Practical completion can be certified where there are very minor, ‘de minimis’ items of work left incomplete (HW Nevill v William Press).
  • Practical completion is a state of affairs in which the works have been completed free from patent defects, other than ones which can be ignored as trifling (Mariner International Hotels v Atlas).

Tying the threads of the different cases together, it is generally accepted within the construction industry that practical completion is achieved when all the necessary construction work is completed. Practical completion cannot be achieved when there are patent defects in the works, unless those defects are very minor.

However, whilst it might be possible to agree on a broad definition of what the term “practical completion” means, deciding whether or not practical completion has been achieved on a particular project is decidedly more difficult and will always have to be decided on a case by case basis.

Why does it matter?

Practical completion is a critically important stage in any construction project, particularly for the contractor.

Failure to complete the works by the specified completion date means the contractor is in breach of contract, which could result in the deduction of liquidated damages or, if liquidated damages are not applicable, a claim from the employer for general (unliquidated) damages for delay. In addition, practical completion triggers the passing of major risks from the contractor to the employer.

Once practical completion is achieved…

  • the employer is able to take possession of the works;
  • the employer’s right to instruct variations to the works will cease;
  • claims for delay on the part of the employer and for loss and expense/extension of time on the part of the contractor cease to accrue;
  • the first part of the retention can be released to the contractor;
  • the defects liability period begins;
  • responsibility for damage to (and insurance of) the works passes to the employer; and
  • the legal limitation period for claims begins to run.

For all these reasons, it is extremely important to be able to identify precisely when practical completion has been achieved.

How is practical completion dealt with in standard form contracts?

The difficulties associated with identifying when practical completion has been achieved arise partly due to the failure by many standard form construction contracts to define exactly what practical completion is considered to mean.

JCT contracts, despite being extremely widely used, do not define practical completion at all. Instead, it is left to the discretion of the architect, contract administrator or employer to determine whether they think practical completion has been achieved. Clearly, this can lead to differences of opinion in cases where the contractor considers the works to be complete and the person responsible for certifying practical completion does not agree.

It is fairly common for JCT contracts to be amended to include a definition of practical completion. Although this can shed some light on when practical completion can be considered to have been reached, it will nevertheless usually be left to the discretion of the employer or his representative to determine when practical completion has occurred.

NEC3 contracts do provide a little more clarity by using the term “Completion”, which is defined as occurring when the contractor has done all the work the works information in the contract requires him to do by the completion date, and corrected any defects which would prevent the employer from using the works. It is the project manager who must decide when the definition of “Completion” has been satisfied by the contractor.

Hurdles to achieving practical completion

It is becoming increasingly common practice to specify a number of detailed conditions precedent which must be met by the contractor before practical completion can be certified.

This approach may be considered to be beneficial to the parties because it provides certainty as to exactly what final tasks the contractor must carry out before practical completion is certified.

However, it can also potentially be detrimental to the contractor, as failure to comply with one or more conditions, no matter how minor, can allow the employer to legitimately refuse to certify practical completion. It is worth bearing in mind that in this economic climate, employers may be keen to delay practical completion for as long as possible if they have no tenant or purchaser lined up for the completed development.

A contract which contains conditions precedent to practical completion should be reviewed carefully by the contractor, who must ensure that he is able to comply with all the specified conditions.

Contractors must also ensure that they have procedures in place to enable all specified conditions to be satisfied as quickly as possible. All too frequently, practical completion cannot be certified because the contractor has left administrative matters such as the signing of collateral warranties and the preparation of operation and maintenance manuals until the very end of the project. This is a risk which can easily be avoided by taking a pro-active approach.

 

This article contains information of general interest about current legal issues, but does not provide legal advice. It is prepared for the general information of our clients and other interested parties. This article should not be relied upon in any specific situation without appropriate legal advice. If you require legal advice on any of the issues raised in this article, please contact one of our specialist construction lawyers.