*Disclaimer: the content of this blog post is designed to provide information only and do not constitute legal advice. If legal advice is required, legal services should be sought.
Substantial Completion or Substantial Performance of work is one of the most important milestones to be reached during construction.
When a project is substantially completed, the project is completed enough for intended usage except for a few minor deficiencies. This comes to roughly 97% completion of the work outlined in the construction contract.
In accordance with the Construction Lien Act (CLA), 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
(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 $500,000 of the contract price,
(ii) 2 per cent of the next $500,000 of the contract price, and
(iii) 1 per cent of the balance of the contract price. R.S.O. 1990, c. C.30, s. 2 (1).
In Ontario, the substantial completion stage involves a certification process.
When the job reaches the point of substantial completion, the payment certifier (usually the architect), the owner and the general contractor will conduct a final walk-through of the finished project. As a result of the walk through, a deficiency list is produced. Deficiency list is a compiled list of items to be resolved before the owner accepts the project as 100% complete.
The certification process begins with the general contractor. He/she fills out a “Certificate of Substantial Performance” form, also known as a form 6. This form is forwarded to the payment certifier. Once the payment certifier agrees that work had achieved substantial performance as per contract documents and the CLA, he/she signs the form and forwards to all parties within 7 days upon signing.
In Ontario, the Construction Lien Act requires the contractor to publish the certificate in a construction newspaper. Most companies publishes through the Daily Commercial News (DCN). For more information on how to publish a project, click here.
From my experience with Toronto projects, the date of publication on DCN is the date of substantial performance. There are several dates involved in the process, therefore it is crucial to reach an agreement between all parties to determine what signifies the date of substantial completion to avoid disputes.
Substantial performance marks the start and termination of several important events.
Warranty Period & Turn Over
Warranty period starts on the date of substantial performance. On most of my projects, a one year warranty is guaranteed by the general contractor on completed work. Some items such as glass could be covered for a longer period. At the time of substantial completion, the owner takes over responsibility for utilities and insurances for the property.
Payment of Contract
Substantial performance is when the contractor is entitled to payment of the remaining contract balance less any holdback.
Holdback & Construction Lien
The holdback is the last 10% of the total value of the contract. This amount is held back to protect the owner from any construction liens by the contractor, sub-trades, and suppliers against their property. The substantial performance date starts the 60 day lien period* where an individual, not paid for the work performed, can register a lien.
Construction liens are created to protect the sub-trades and suppliers who has not been paid by the contractor for work that has been performed. As a last resort, the unpaid sub-trade or supplier will place a lien on the property as an attempt to retrieve their payment from the owner that are owed by the general contractor. A lien prevents the owner from selling their property until the lien is satisfied or paid off. The 10% holdback allows the owner to clear the lien with money from the original contract.
A sub-trade or supplier has the right to put a lien on the property during the 60 day period lien period. If no lien is claimed against the property after 60 days, the time limit expires. The owner is then obligated to pay out the hold back to the general contractor.
For more information on construction liens, read the Construction Lien Act. *Note: 45 day lien period has been changed to 60 days starting July 1, 2018 on the passing of Construction Lien Amendment Act (Bill 142).
Ontario Association of Architects (OAA) has put together a comprehensive time chart* as part of their “Guide to Project Closeout Procedures“. The time charts are presented below, outlining critical actions to release/obtain final payments and hold back. *Note that this timeline has changed on the passing of Construction Lien Amendment Act (Bill 142), implemented on July 1st, 2018. Please reference the amendment act for more information.