Practical Completion - easier to recognise than define?

There is no precise legal definition of 'Practical Completion' and it is often undefined in construction contracts, yet its consequences are significant.

Our Disputes Team has considered a recent decision of the English Court of Appeal which has provided helpful guidance on when building works can be regarded as practically complete and we take a look below at some of the main consequences which are triggered by Practical Completion and share some tips when it comes to preparing a 'Practical Completion Checklist'.

Practical Completion _ what are the implications?

When Practical Completion occurs:

• Works are handed over to the Client _ the Client "takes over" the Works.
• The risk of loss or damage to and responsibility for the Works transfers from the Contractor to the Client. If the Contractor has insured the Works, the insurance risk transfers from the Contractor back to the Client.
• The defects liability or rectification period will commence, so the clock will start ticking _ normally the rectification period will be 12 months.
• Typically one half of the retention monies will be released to the Contractor (with the other half released at the end of the defects liability period). Other financial consequences such as the final account process are triggered under some forms of Contract.
• The Client's right to the prescribed amount in the Contract for Liquidated and Ascertained Damages ceases.
• Usually the Performance Bond which the Contractor has procured in favour of the Client from a third party surety or bank in respect of the Works will expire at Practical Completion so it is released. There is no right for the Client (or contract administrator) to instruct the Contractor to carry out any variations.
• It may trigger other consequences _ for instance, it may trigger the Client entering into a Lease or payment of the purchase price under a forward purchase arrangement.

Practical Completion - Checklists

For many contracts, particularly when dealing with JCT/ SBCC, where the term "practical completion" is not defined, bespoke "Pre-Practical Completion checklists" are written into the terms. It can be dangerous to seek to precisely define "practical completion" in a Contract, however check-lists can help the parties agree some parameters and what deliverables must be provided as a pre-condition to Practical Completion.

Of course, the party responsible for certifying Practical Completion needs to be acutely aware of what all of these requirements are and ensure they have been fulfilled prior to certification. If any of these prescriptive requirements are not fulfilled and certification is given, that leaves the certifier (be it Employer's Agent/ Contract Administrator or Architect) potentially exposed.

It is therefore crucial that at the outset of a project, the certifier is entirely clear on the requirements for Practical Completion _ it needs to be familiar with the exact terms of the contract amendments and make no assumptions as to what is to be delivered or fulfilled.

Typical pre-conditions to Practical Completion can include:

• No incomplete works which would prevent beneficial occupation. This means nothing could exist which would prevent the Client being able to use and occupy the Works for their intended use.
• An express acknowledgement that minor patent defects or 'snagging' items would not prevent Practical Completion with a corresponding obligation upon the Contractor to return to rectify these _ although snagging lists are common place in the industry, there are no contractual provisions in e.g. JCT/SBCC dealing with these (as distinct from defects which arise after Practical Completion).
• The Site needs to be left in a clean and tidy condition.
• The Contractor has carried out a satisfactory demonstration for the Client of controls of all Mechanical & Electrical equipment.
• All test certificates are issued _ it should be clear within the Contract Documents what test certificates are required in respect of with references to elements of the Works.
• Conditions in other "Third Party Agreements" are fulfilled _ this is probably renowned as one of the most controversial and onerous conditions to place on a Contractor. There may be agreements which relate to a project or are dependent on the Works being carried out in a certain way or to a certain standard _ for example, agreements for lease _ under which the Client has obligations to a third party. The Client seeks to transfer those obligations to the Contractor via these types of provisions.
• Delivery of all Sub-Contractor Collateral Warranties and manufacturers guarantees etc.by the Contractor. On larger developments, management of the Sub-Contractors and procuring their warranties as a pre-condition to Practical Completion can be a real challenge. Some savvy Contractors will include a right to withhold monies from Sub-Contractors for non-delivery of warranties to incentivise Sub-Contractors but even still, the threat of non-delivery is very real for Contractors and they need to do all they can to manage this task from a very early stage.
• Delivery of Health & Safety File, Operation & Maintenance Manuals and other documents or drawings.
• Project specific deliverables - i.e. the NHBC guarantees for each residential unit.

So, whilst practical completion may be "easier to recognise than define" (according to Keating, a leading construction law authority), there can be merit in a carefully considered and drafted checklist of pre-conditions to Practical Completion, forming part of the Contract. Care should be taken to ensure that such drafting does not have unintended consequences for other provisions in the Contract in question or other third party agreements and appropriate legal advice should be sought.