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Substantial Completion: Construction Project Performance
Question: When is a construction project considered to be substantially complete?
Answer: A construction project is deemed substantially complete when it is usable for its intended purpose, with only minor work remaining, as defined by the negotiated contract terms and the guidelines set forth in the Construction Act, R.S.O. 1990, c. C.30. Understanding this milestone is crucial, as it triggers final payment obligations and the release of holdbacks, which helps ensure clarity and compliance in the project completion process.
Understanding When Substantial Completion of a Construction or Renovation Project Will Likely Be Deemed As Achieved
Generally, a construction project is deemed substantially complete when only minor work, such as defect corrections or final finishing touches, remain undone and outstanding. The specific details of what will define substantial completion will be set as as an express contract term in accordance to agreements established during negotiations between the project owner and the general contractor.
The Law
Although what will be deemed as the substantial completion milestone arises as a contractual term concern that may, generally, be freely negotiated between the project owner and the general contractor, the Construction Act, R.S.O. 1990, c C.30, also sets out conditions that apply to the determining of when, or if, substantial completion is achieved. Specifically, the Construction Act states:
Contracts, substantial performance and completion
When contract substantially performed
2 (1) For the purposes of this Act, a contract is substantially performed,
(a) when the improvement to be made under that contract or a substantial part thereof is ready for use or is being used for the purposes intended; and
(b) when the improvement to be made under that contract is capable of completion or, where there is a known defect, correction, at a cost of not more than,
(i) 3 per cent of the first $1,000,000 of the contract price,
(ii) 2 per cent of the next $1,000,000 of the contract price, and
(iii) 1 per cent of the balance of the contract price.
Same
(2) For the purposes of this Act, where the improvement or a substantial part thereof is ready for use or is being used for the purposes intended and the owner and the contractor agree not to complete the improvement expeditiously, the price of the services or materials remaining to be supplied and required to complete the improvement shall be deducted from the contract price in determining substantial performance.
Adjudication amounts
(2.1) For the purposes of this Act, if an adjudicator makes a determination under Part II.1 in relation to a contract before the certification or declaration of the substantial performance of the contract under section 32,
(a) any amount determined by the adjudicator to be payable by a party to the contract shall be added to the contract price in determining substantial performance; and
(b) any amount determined by the adjudicator to have been overpaid by a party to the contract shall be deducted from the contract price in determining substantial performance.
Same
(a) the adjudicator’s determination ceases to be binding on the parties to the adjudication under section 13.15; or
(b) the determination of the adjudicator is set aside on judicial review.
When contract deemed completed
(3) For the purposes of this Act, a contract shall be deemed to be completed and services or materials shall be deemed to be last supplied to the improvement when the price of completion, correction of a known defect or last supply is not more than the lesser of,
(a) 1 per cent of the contract price; and
(b) $5,000.
Multiple improvements under a contract
(4) If more than one improvement is to be made under a contract and each of the improvements is to lands that are not contiguous, then, if the contract so provides, each improvement is deemed for the purposes of this section to be under a separate contract.
When substantial completion is achieved and a Certificate of Substantial Completion is issued, legalities beyond the terms within the negotiated contract arise. Beyond the substantial completion milestone, being the point at which the project is deemed usable or occupiable, the substantial completion milestone also sets the point at which final payment, minus statutory payment holdback, may become due and payable. In regards to payment and holdback upon substantial completion, the Construction Act, R.S.O. 1990, c. C.30, states:
Holdbacks
Basic holdback
22 (1) Each payer upon a contract or subcontract under which a lien may arise shall retain a holdback equal to 10 per cent of the price of the services or materials as they are actually supplied under the contract or subcontract until all liens that may be claimed against the holdback have expired or been satisfied, discharged or otherwise provided for under this Act.
Separate holdback for finishing work
(2) Where the contract has been certified or declared to be substantially performed but services or materials remain to be supplied to complete the contract, the payer upon the contract, or a subcontract, under which a lien may arise shall retain, from the date certified or declared to be the date of substantial performance of the contract, a separate holdback equal to 10 per cent of the price of the remaining services or materials as they are actually supplied under the contract or subcontract, until all liens that may be claimed against the holdback have expired or been satisfied, discharged or otherwise provided for under this Act.
When obligation to retain applies
(3) The obligation to retain the holdbacks under subsections (1) and (2) applies irrespective of whether the contract or subcontract provides for partial payments or payment on completion.
Permissible forms of holdback
(4) Some or all of any holdbacks may, instead of being retained in the form of funds, be retained in one or more of the following forms:
1. A letter of credit in the prescribed form.
2. A demand-worded holdback repayment bond in the prescribed form.
3. Any other form that may be prescribed.
Personal liability
23 (1) Subject to subsections (2), (3) and (4), an owner is personally liable for holdbacks that the owner is required to retain under this Part to those lien claimants who have valid liens against the owner’s interest in the premises.
Limitation
(2) Where the defaulting payer is the contractor, the owner’s personal liability to a lien claimant or to a class of lien claimants as defined by section 79 does not exceed the holdbacks the owner is required to retain.
Same
(3) Where the defaulting payer is a subcontractor, the owner’s personal liability to a lien claimant or to a class of lien claimants as defined by section 79 does not exceed the lesser of,
(a) the holdbacks the owner is required to retain; and
(b) the holdbacks required to be retained by the contractor or a subcontractor from the lien claimant’s defaulting payer.
How determined
(4) The personal liability of an owner under this section may only be determined by an action under this Act.
Conclusion
In determining whether substantial completion is achieved, it is important to consider both the physical state of the project and the contractual obligations between the parties. Substantial completion generally means that the project is sufficiently finished, allowing use of the project for the intended purpose, even if minor deficiencies remain. Courts will consider factors such as the remaining work, the impact on usability, and the reasonable expectations of the parties. Proper documentation, clear communication, and attention to the specifics of contractual definitions will help to ensure that disputes regarding substantial completion are minimized.
