The Dotted Line: How effective contracts can 'drive the train' of the project closeout process
This feature is a part of "The Dotted Line" series, which takes an in-depth look at the complex legal landscape of the construction industry. To view the entire series, click here.
Moving on from a construction project — whether that job was successful or challenging — can be a great feeling. The job is done, and there are just a few details to wrap up before a contractor can officially turn the work over to the owner or general contractor and close the books on it for good. However, before walking away from any project, construction managers must deal with a handful of issues, or else they could find themselves revisiting the project again and again.
Thinking about closeout before the project begins
The most effective tool a contractor can utilize in the closeout process presents itself at the beginning of the job — a full review of the contract documents. Foregoing this step, according to Steven B. Lesser, shareholder and chair of the construction law and litigation practice at Becker & Poliakoff in Florida, often prevents the contractor from understanding the full scope of their closeout responsibilities.
For example, he said that at the point of substantial completion, some companies assume their primary obligations under the contract are complete when, in reality, they still have to perform certain tasks like making sure all the permits have been closed out or training the owner on installed equipment or mechanical systems.
Some owners consider a project closed out at substantial completion, according to John Patrick Curran, partner at Sive, Paget & Riesel in New York, while others don't consider it complete until every piece of work is in place. When exactly a project is complete is important, he said, if for no other reason than it often determines when the owner must make final payment.
The ambiguity of when a project is complete
It's important for contractors to note and understand the terms of final payment and exclude any conditions that aren’t their responsibility or within their control, Lesser noted. For example, even though the prime contractor may have completed their work, the owner might have hired another contractor who also pulled a permit and hasn't completed their scope of work. If closeout of all permits is a condition of final payment, the unrelated contractor's work could delay payment to the prime contractor.
Disputes over change orders also need to be resolved before a project is deemed officially closed. Standard construction contract requirements mandate that a contractor notify the owner — or a general contractor in the case of a subcontractor — of any changes within a specified period of time, Curran noted. Still, he said there are some owners, such as government agencies, who insist on negotiating change orders at the end of the project. Nevertheless, it's up to the contractor to make sure all of the change orders are resolved in accordance with the requirements of the contract.
Hand in hand with that final payment are lien waivers, or written attestations from suppliers of labor and material that they've been paid, according to Curran. If a supplier or contractor who has not completed a lien waiver remains unpaid and files a claim of lien against the project, that action could interfere with the owner's ability to refinance or sell the property.
Other factors at play in the closeout process
Lesser said that in Florida, a contractor has to provide a final payment affidavit in order to collect their last monies due. With this document, the contractor affirms that all project subcontractors and suppliers have been paid but also lists the ones that remain unpaid. If contractors or suppliers don't provide notice to the owner that they've started work on the project within the certain timeframe as prescribed by Florida law, they lose their right to file a lien. This, however, does not stop them from suing for any amounts due.
In a state like Florida, it's easier to keep track of who actually supplied materials or labor to the project because of the state's notice system, according to Curran. However, in New York — at least on commercial projects — once all work is complete, contractors have eight months to file a lien. As in Florida, just because someone lost their lien rights doesn't mean they've lost the right to pursue payment, Curran added.
Unlike lien waivers, performance and payment bonds can't be signed and collected at the end of a project. When a contractor furnishes a performance bond to the owner, Lesser said, it guarantees all the contractor's obligations to the owner, even beyond closeout. If the contractor "goes south," the owner then has recourse through the bonding company for any warranty obligations. Release of a payment bond requires documentation that all people who are potential claimants on the bond have been paid.
In addition to legal instruments, there are plans, warranties and other manuals and documents that must be submitted to the owner at the end of the project. Digital media options have replaced much of the paper that used to be exchanged during project closeout, Lesser said, and it's not uncommon today for a contractor to hand over a thumb drive rather than boxes of project paperwork and records. Building information modeling (BIM) has also changed the way information about the building is presented to the owner. "These are all things that are supposed to make our lives less complicated in terms of managing the project," he said.
The importance of the punch list
Perhaps no other element of project closeout has the potential to derail the process more than the punch list. A punch list is a list created by the owner, typically during a walk-through with the contractor, that identifies deficiencies that need to be remedied before the owner moves in. A contractor should ensure the contract provides for only one punch list delivered by the owner within a specified number of days after substantial completion, and ensure that it gives the contractor enough time to address the necessary repairs before the owner begins to move into the space, according to Lesser.
If not, the contractor runs the risk of owner damage being included on the punch list. The one "surefire" way to ensure that only legitimate items make it onto the list, he said, is not to allow the owner to occupy the space until the punch list is completed. Multiple punch lists can delay the project and the closeout process.
Work done in phases creates more of an issue when it comes to punch lists, Curran said. How to treat circumstances of partial occupancy, however, is something that can be included in a contract. "A smart contractor is not going to let anybody occupy the space until there has been a walk-through," he said, "and a meeting of the minds and an understanding as to what the conditions are at turn-over."
Mallorie Brodie, CEO and co-founder of software startup Bridgit and co-creator of punch list app Closeout, said the biggest mistake contractors make when it comes to punch lists is waiting until the end of a project to start putting it together. In the pen-and-paper era, compiling one big list at the end made sense. However, with today's technology, she said a "rolling punch list" is significantly more efficient.
"It's much more of a living document, which allows the items to get resolved," Brodie said. Making time for quality control reviews during the course of the project can result in a much smaller punch list by the time the owner and contractor do their final punch list walk-through.
Everything comes back to the contract
Lesser emphasized that the secret to a smooth project closeout starts with a thorough review of the contract, with the critical requirements passed down from management to onsite supervisory personnel. On-the-job staff, Lesser said, should know delay and notice provisions "inside out" in order to preserve the company's rights under the contract.
Nevertheless, he said there are contractors on jobs of all sizes that "stick the contract in a drawer" and don’t bother to look at it once it's been signed. "You can have the best contract in the world. It means nothing if you don’t administrate it," Lesser said. "Read and understand what the contract requires because that's going to drive the train."
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