Practical completion is a term that is commonly misunderstood by many. Generally, practical completion is achieved when all building work is completed except for minor outstanding works and defects which do not prevent the property from being used for its intended purpose. In other words, if the unfinished items prevent occupation, then practical completion is not achieved.
There are various definitions of practical completion depending on the type of contract that is used. Depending on the project, the principal could ask for additional conditions to be fulfilled before practical completion can be achieved. For more complex projects, it is common for practical completion to be defined so as to include the involvement of the engineer or architect.
How practical completion is defined in a contract is important as it is frequently linked to other clauses such as the accrual of liquidated damages, final payment, payment of retentions, possession by the principal, and commencement of the defects liability period.
Sample clauses
For example, Standards New Zealand (NZS) contracts define practical completion as:
Practical Completion is that stage in the execution of the work under the Contract when the Contract Works or any Separable Portion are complete except for minor omissions and minor defects:
- Which in the opinion of the Engineer, the Contractor has reasonable grounds for not promptly correcting;
- Which do not prevent the Contract Works or Separable Portion from being used for their intended purpose; and
- Rectification of which will not prejudice the convenient use of the Contract Works or any Separable Portion.
The New Zealand Institute of Architects (NZIA) contracts define practical completion as:
Practical Completion means that the Contract Works or a Separate Section of them attain Practical Completion when:
- They are able to be used for their intended purpose without material inconvenience;
- They have generally been built in accordance with the Contract documents;
- They are complete except for:
- Minor defects and minor omissions for completion during the Defects Liability Period;
- Omissions and defects which the Architect becomes aware of during the Defects Liability Period;
- Any undiscovered, latent or other defect or omission which the Architect could not have reasonably discovered;
- Work which the Architect and the Contractor have agreed to defer for completion during the Defects Liability Period, or such later date as agreed between the parties.
In the context of smaller residential projects, the New Zealand Certified Builders’ contract defines practical completion as:
“Practical Completion” means 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.
Relationship with code compliance certificate
Unless the contract states otherwise, practical completion is not contingent upon issuance of a code compliance certificate (CCC) from a local authority. CCC is a certificate issued by a local authority confirming that it is satisfied on reasonable grounds that all building work has been completed in accordance with the building consent issued for the project. The principal is not likely to receive CCC unless practical completion has been reached. However, achieving practical completion does not necessarily mean that CCC will be issued.
Frequently, there is confusion over payments at the practical completion stage as it is common for the principal to wish to withhold some or all of the final payment until all minor outstanding works and defects are completed, or until issuance of CCC. If the principal withholds payment despite the contract stating that that the contractor is entitled to payment upon practical completion, withholding payment may be a breach of contract.
Given that payment is the fundamental obligation of the principal, non-payment would entitle the contractor to terminate the contract and seek damages from the principal.
Conclusion
Practical completion is an important stage of the building process. For principals, they must understand that while the building can be used for its intended purpose, the entire project will not be completed at that time and there will likely be incomplete works for the contractor to perform.
Typically, most contracts would state when the contractor is entitled to be paid its final invoice. If so, principals are unable to withhold payment on the basis that there are minor works to be completed. However, the defects liability period should provide some comfort to the principal in that the principal is able to require the contractor to rectify any defects that become apparent within a certain period after practical completion. This is in addition to the warranties and guarantees provided by the contractor to the principal.
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Brent is the Director of Norling Law. He has a wealth of experience in the District Court, High Court, Court of Appeal and Supreme Court. Brent is passionate about negotiating favourable outcomes for his clients and able to implement this in his daily negotiations.
Anna practices in the area of commercial litigation and has appeared as Counsel in the District Court, High Court and the Court of Appeal, having successes in all Courts. Anna has a special interest in corporate, insolvency and relationship property law.
Wendy has over 20 years’ experience in civil litigation in New Zealand with a main focus on construction, insolvency and debt recovery and security enforcement.