Crossing the finish line
The Critical Role of Practical Completion Certificates
Practical Completion (PC) is perhaps the most significant milestone in a construction project. On a non-exhaustive basis, PC has implications for:
Defects Liability Period: PC triggers the start of the defects liability period, during which the contractor/subcontractor is obliged to rectify defects.
Return of Security: PC is usually the trigger for the release of 50% of security / retention held.
Final Claim: PC is often the trigger for the final payment claim (other than a claim for the final release of security).
Insurance and Risk Transfer: Upon PC, the risk of loss or damage to the works will typically transfer from the contractor to the principal (or the subcontractor to the contractor, as the case may be).
Liquidated Damages: The accrual of liquidated damages for late completion ceases at PC.
Security of Payment Rights: Many amended construction contracts will provide for a “reference date” arising at PC and no further reference dates.
Despite several important matters being impacted by the achievement of PC, the industry (particularly as between contractors and subcontractors) takes a surprisingly cavalier approach to formalising PC.
I am going to touch on two common shortcomings which, I must admit, I was guilty of as a Contracts Administrator.
Backdating of PC certificates
The first common mistake I see is the backdating of PC certificates.
This seems innocuous enough and, at first glance, even appears consistent with the procedure of most standard form contracts. First, the subcontractor or contractor gives notice that it considers PC has been achieved. Second, sometime in the following week or so the principal/contractor (as the case may be), attends site and signs off on PC by backdating the certificate to date the notice was given.
The problem is the backdating of PC is not permissible under most standard form contracts. Typically, the “Date of Practical Completion” is defined as something like: “the date evidenced in a certificate of practical completion as the date on which practical completion was reached”.
The Court has held this to mean that it is the certificate itself that is the evidence of the Date of PC, not the date stated in the certificate - Abergeldie Contractors Pty Ltd v Fairfield City Council [2017] NSWCA 113.
In commonly drafted contracts, the difference between the date the notice of PC is given and the date the certificate is issued could be up to 14 days. That could mean 14 days of liquidated damages. It could also mean an invalid security of payment claim, depending on the timing of the practical completion claim.
Contractors and subcontractors should be mindful:
not to accept contractual terms permitting a lengthy period between the request for PC and the certificate of PC.
to engage early with the party issuing the certificate to ensure there are no delays in assessing the status of the works.
Failing to issue a compliant PC certificate
The second mistake is probably more common between contractors and subcontractors and that is the failure to issue a proper PC certificate at all.
I see several approaches to the closing out of subcontracts. Unfortunately, many of the approaches do not follow the roadmap provided by the subcontract and miss the simple but crucial step of issuing a certificate of PC.
This issue has come before the courts in the context of adjudication in J Hutchinson Pty Ltd v Transcend Plumbing and Gasfitting Pty Ltd [2023] VSC 39.
In this case, the subcontract included a very common provision preventing reference dates, and the right to make a payment claim, from accruing between PC and the end of the defects liability period. Despite the work being completed several months earlier and the parties acting as if PC had been achieved, there was no formal certificate issued. The lack of a certificate, in circumstances where the date of PC was defined by reference to the certificate, was sufficient to render inutile the contractual restriction on reference dates from arising.
This case demonstrates the importance of a valid PC certificate. Even in cases where the parties are acting as if PC has been achieved (for example, by releasing retention), the formal trigger of PC relies on the issuance of a valid certificate.
Key take aways
Practical Completion is a key milestone impacting various matters under the contract and at law.
Practical Completion should be formalised by a compliant certificate in accordance with the contract.
Failure to perform basic contract administration functions (like issuing the certificate) can render contractual provisions completely ineffective.
