by Steven G. Shapiro

In their article “Substantial Completion, Where Art Thou?”, James B. Atkins, FAIA, and Grant A. Simpson, FAIA, address the fundamental issues applicable to the substantial completion of a project. The authors describe substantial completion as the “holy grail” of successful project delivery and detail the disparate interests among the principal participants. They do not address, however, the issues of: (i) the ability to negotiate the terms and conditions of a substantial completion clause in the owner contract; and (ii) what can happen when an owner faces the completion of a project in a suddenly depressed market.

In the article, the authors cite the definition of substantial completion from AIA Document A201-1997, General Conditions of the Contract for Construction, in Section 9.8.1, and from AIA Document G704-2000, Architect’s Certificate of Substantial Completion, as:

“the stage in the progress of the Work where the Work or designated portion is sufficiently complete in accordance with the Contract Documents so that the Owner can occupy or utilize the Work for its intended use.”

The authors thoroughly analyze the tensions among the principals to a commercial project, namely the owner, designer, and contractor. Unlike most other areas of construction, though, there are circumstances that create aligned interests for the contractor and architect in the certification of substantial completion. For both the contractor and architect, the statute of limitations begins to run at substantial completion and certain payments are tied to substantial completion.

Simpson and Atkins focused exclusively on Roget’s Thesaurus and Black’s Law Dictionary to define the meaning of “substantial completion.” In the U.S., though, there are abundant court cases and commentary that provide a vast body of history and precedence to define the finer issues relating to substantial completion at the state and federal level. In this deeper view, case law examines and decides the myriad issues of substantial completion under many conditions. I focus here on the duty of the owner to act in good faith.

Substantial completion is negotiable
Like most provisions of a contract between the owner and architect and the owner and contractor, “substantial completion” is a term that is fully subject to negotiation by the parties. Although the AIA produces its standard form of agreement, which is widely adopted, the parties are not bound to those terms. Instead, the parties are able to negotiate and modify the terms of their engagement, including the definition and conditions of substantial completion.

Separate from the ability to negotiate the terms of substantial completion, a slumping economy can be a significant factor that can impact the acceptance of a project. For more than a decade, commercial real estate in the United States has enjoyed almost uninterrupted growth and success. Among commercial projects, office buildings and retail centers have been designed and built with great success and financial reward.

It is sometimes easy to forget the cycles of the economy. In the period of the late 1980s and early 1990s, many real estate projects were in financial default and many more were in economic distress. For a period of time, there was limited design and construction of commercial projects and some projects that were planned during boom times were suddenly met with a downturn during construction.

During periods of an economic downturn, the economic forces can inspire seemingly irrational behavior by the owner. In a robust market, the owner is typically eager to take control of its building and commence operations. In a slump, the owner may be willing to stall its acceptance of a project to delay the added cost of building operations or avoid reporting high vacancy in a completed building.

As a result, in a down market the owner may act in bad faith to refuse to accept the building and create unnecessary and unwarranted hindrances to substantial completion. With the understanding that substantial completion is a negotiable term, contractors and architects have been sometimes able to revise the AIA form of definition of substantial completion, an option you may wish to discuss with your lawyer and professional liability insurance carrier.

The objective is to negotiate an agreement that will clearly prevent an unmerited delay in acceptance by the owner. In the event that the owner fails to occupy or use the facility for reasons that are not the fault of the architect or contractor (or beyond their control), then the date of substantial completion is deemed to be the date that the facility was capable of being occupied or used for its intended purpose.

In other words, the inspections and certifications to attest substantial completion may not be delayed or avoided because the owner has economic reasons or reasons not bearing on the design or construction of the project. It is a point to remember when negotiating with owners in uncertain economic times. Then again, economic times are almost always uncertain.

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