What use is a certificate of practical completion?

Certificates of Practical completion serve a useful function because they are written
confirmation that the builder has reached that particular stage in the project, and has
qualified for another progress payment, plus the release of any retentions that are due at that
time. For the purposes of the Halo guarantee, it also signals the point in time when the
guarantee changes from being a completion guarantee to a 10 year defects guarantee. And
it marks the start of the one year period after which the underwriter’s “waiver of subrogation”
kicks in (ie. the insurer can’t go after the builder any more).

In commercial projects, they are usually signed by the engineer to the project – the expert
appointed by the Owner to review the builder’s payment claims and either approve them for
payment, or dispute various aspects of them. The engineer to the project is supposed to act
fairly and impartially, and the builder usually follows his directions. It is logical that certificates
of practical completion be signed by the engineer, because the certificate is simply a
confirmation by him that the builder has achieved that particular milestone and has qualified
for another progress payment plus the release of any retentions that are due at that time.

It is not quite so straightforward in residential projects where typically there is no engineer to

the project. Instead, the builder simply submits his progress claim to the Owner, and the
Owner either approves them for payment, or disputes various aspects of them. There is no
neutral third party who serves as a referee between the two of them. Consequently there is
more scope for argument, particularly since residential owners typically don’t have any
expertise in project management, and are much more emotionally involved.

Often the final sign-off by the Council is used as the de facto date for practical completion.
However, whether you have in fact reached practical completion of a project is a matter of
judgment, because it depends on the definition of “practical completion”. In our NZCB
contracts, it is defined as “both the point in time, and the stage in the progression of the
Building Work, when the Building Work is so far advanced that the Building can effectively be
used by the Owner for its intended purpose, notwithstanding that certain non-critical or
aesthetic features are yet to be completed or minor omissions or defects are yet to be
rectified.”

The date of practical completion is, of course, different from the date when the Code
Compliance Certificate is issued. On rare occasions the CCC might be issued before
practical completion, but usually it is after. In some projects it can be a long time after, for
example where the builder has done all of his work but the owner or the owner’s direct
contractors still have to complete some work which is required before the CCC will issue, like
exterior painting, landscaping or paving. That is why the NZCB contracts say that final
payment is due on practical completion, not on issue of the CCC.

The date of practical completion is important to the builder because under the NZCB
contracts he is then entitled to payment of the final progress payment, and it starts the clock
ticking down towards the expiry of his 12 month period of exposure under the guarantee. It is
also important to the Owner because he/she is then entitled to possession of the building (in
the case of a new build) or possession of the renovated part of the building (in the case of a
renovation). It also marks the point in time when the defects notification period commences.
So there are incentives for both the builder and the owner to agree that practical completion
has occurred. The certificate of practical completion is useful because it resolves any
uncertainty as to when that date might have been, and therefore avoids arguments later.

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That is all very well where the project has not been controversial and the Owner and the
Builder still have a cordial relationship. The Owner will generally be prepared to part with all
the money and take the risk that the Builder will promptly finish off the non-critical or
aesthetic features and rectify all minor omissions or defects.

The situation is quite different, however, when the relationship has deteriorated and a dispute
has emerged. In that situation the owner will be determined to hold some money back, and
will find a way of taking possession of the building (or the renovated portion), for example by
getting the locks changed and physically moving in. Consequently the Owner will have no
incentive to sign the certificate of practical completion at all. In fact, from the point of view of
the Halo guarantee, he/she would be better off delaying the date of practical completion for
as long as possible, because he/she is still covered by the completion guarantee, and it
simply pushes out the expiry date of the 10 year defects guarantee.

In those situations, the certificate of practical completion isn’t going to get signed, probably
ever. But it is important to remember that that does not mean that practical completion never
happens. Practical completion happens when the building contract says so - in other words
when the definition of “practical completion” in the building contract is satisfied. If the parties
can’t agree on when that was, then an independent third party such as a judge, arbitrator,
adjudicator or Disputes Tribunal referee can give a ruling, based on the available evidence.

If a certificate of practical completion gets signed, that is just a record of when practical
completion occurred. If one doesn’t get signed, then the ruling issued by the judge, arbitrator,
adjudicator or Disputes Tribunal referee becomes the written record instead.

Sometimes, the parties never sign a certificate and never get a ruling either. That simply
means that practical completion still occurred, it’s just that the precise date will always
remain uncertain. The guarantee company doesn’t like that uncertainty, but if there is no
certificate and no ruling, there is not a lot the company can do about it other than to choose
an arbitrary date, as best it can. It is for those reasons that it is always preferable to get a
certificate signed, but life still goes on if you don’t.

© Geoff Hardy July 2017.

This newsletter is not intended to be relied upon as legal advice.

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