Posts Tagged ‘certificate’

Understanding Practical Completion

October 21, 2010

Understanding the meaning of “Practical Completion”

The term is of key importance to all those in the supply chain as well as subsequent purchasers and tenants. Developers will want practical completion to be certified quickly so that rental payments begin, or so that their profit can be paid in terms of a forward funding agreement. Tenants may not otherwise be able to start fit-out works or open for trading. Contractors will want to avoid or minimise liability for liquidated ascertained damages (LADs) and have the insurance risk transferred back to the developer.

Practical completion may lead to a release of retention monies (normally 50%) to the contractor if that has been agreed beforehand and, depending on its wording, any performance bond may also fall away (although increasingly bonds are extended to the time when all snagging has been completed).

The consequence of achieving practical completion is that this triggers the commencement of the defects liability period (3, 6 or 12 months typically). This narrows the matters which the contractor needs to address to incomplete and defective works that arise during that period. Issuing variations is no longer an option post practical completion and normally amount to the instruction of additional works pursuant to a separate contract.

In practice, practical completion certificates are often issued conditional upon certain snagging items being completed and so this needs to be an amendment to the standard form.  It is often also necessary to include a timeframe for the contractor rectifying such snags as there is no other duty otherwise to do so before the expiry of the defects liability period.

There can be disparity between the definition of practical completion in the Agreement for Lease and the building contract. For example, a developer may agree that the date of entry for a purchaser or tenant can only occur when the local authority has accepted the completion certificate, but this same requirement may not be included in the building contract. The issue of drawings, operation & maintenance manuals and other certificates should, if required, be drafted in as conditions precedent to achieving practical completion so that the developer ensures a smooth transition.

The risk of dispute can be mitigated by ensuring that:

  • All relevant obligations in property documents are mirrored in the building contract;
  • The professional team remains in constant communication in the lead up to practical completion and all are clear about the role they are to undertake;
  • The contract administrator operates the terms of the building contract to the letter and remains impartial (which can be difficult when faced with client pressure);
  • Practical completion is certified subject to certain outstanding snags being completed to motivate the contractor to return;
  • Any further defects are dealt with promptly, both contractually and on site. This avoids disputes festering and not being dealt with until the expiry of the defects liability period, by which time often documents have been archived and memories have faded.
Advertisements