XIX. Effective Project Close Out
A. Determining Substantial Completion
As the project winds down to a close, particular attention should be paid to establishing and documenting the date of substantial completion. The general rule to be applied is that substantial completion arises when all of the contract work is completed, and the work remaining is work to repair work that is already in place.
The date of substantial completion should be established as a bright line. There are several reasons for this approach. Substantial completion is usually the date upon which liquidated damages cease to accrue. Strategically, substantial completion should be deemed to have occurred after a determination is made of whether there is sufficient retention to complete all of the punch list work in the event of a contractor default.
B. Timely and Effective Recordation of Notice of Completion
Another reason for establishing the date of substantial completion is that the date should be used to ensure timely recordation of the Notice of Completion. A Notice of Completion must be recorded within ten days of completion. Civil Code Section 3093. All of the work must be completed under the contract in order for the Notice of Completion to be considered valid. Lewis v. Hopper (1956) 140 Cal.App.2d 365.
NEW RULE ON GIVING NOTICE TO CLAIMANTS. Recording a valid Notice of Completion was all that was necessary to shorten the lien recording period from 90 days to 30 days after the date of recordation. Under a new law, the owner is obliged to provide notification to all persons who have provided a 20 Day Preliminary Lien Notice within ten days of recording the Notice of Completion. Notification may be made through registered mail, certified mail, or by U.S. Mail with a certificate of mailing. Failure to provide this notification extends the time for recording a lien to 90 days after the date of recording a notice of completion. See Civil Code section 3259.5.
C. Developing and Tracking Punch List Items
Punch lists should be developed with the assistance of the design professionals involved in the project, the owner and the project manager. Punch Lists should be a comprehensive list of all items in need of correction, completion or commissioning. Punch lists should be organized with a numbering system that remains on the list until everything needed to complete or repair the item has been addressed.
D. Timely Completion of Punch List Items
It is extremely important that the project manager be the catalyst to get punch list items finished. It is all too frequently the case that contractors move off to other projects after reaching substantial completion, and punch list items sit until the contractor has some free time to address them. Imposing time limits on contractors to complete punch list items in the project contract, and assessing liquidated damages for a failure to complete punch list items is one approach to dealing with this issue.
E. As Built Drawings, Warranties, Product Literature and Training
At the conclusion of the project, project management should conduct a comprehensive review of the project specifications, and develop a list of products for which Warranties and Product Literature are required to be provided by the Contractor. If the contract fails to provide for the contractor to supply this information, it is a great service to the owner to go ahead and obtain this information from the manufacturers.
During the course of the project, the project manager should be monitoring changes to the work by annotating the project drawings. At the completion of the project, this document can prove to be a valuable tool in checking the as builts prepared by the project contractor.
If training is a part of the contract work, training sessions should be initiated and scheduled as near to substantial completion as possible.
F. Tracking Lien Releases
With every progress payment, the project manager should identify those subcontractors, material suppliers and equipment rental companies that have provided 20 Day Preliminary Lien Notices. On public works projects, only subcontractors, material suppliers and equipment rental companies that are not in direct contract with the prime contractor are required to provide these notices. The notices must be hand delivered, or sent by registered or certified mail, return receipt requested.
With every progress payment request, the contractor should provide the project manager with conditional releases of lien by each subcontractor who performed work during this performance period. A conditional release of lien means that the release is conditioned upon the check provided by the contractor being negotiable.
In each succeeding progress payment request, the contractor should provide the project manager with unconditional releases of liens as to the prior progress payment, and provide new conditional releases of lien as to the current progress payment. See Civil Code section 3262.
At the conclusion of the project, it is essential that the project manager obtain unconditional releases of lien from all subcontractors, material suppliers and equipment rental companies before release of retention. Be sure to review the signed originals before disbursing retention, as there is a space for the contractor to identify unresolved claims for additional work.
The form of the releases should always follow exactly the forms provided by Civil Code section 3262. Forms that provide additional terms may be considered invalid. See Civil Code section 3262 and Public Contract Code section 7100.
G. Handling the Prompt Payment of Retention
In the early 1990's the State Legislature passed a flurry of bills addressing prompt payment of retention to contractors. There are presently some sixteen different statutes that govern the time limitations for payment of progress payments and retention. In general, these laws provide that if payment of progress payments is not made within 30 days from the request of the contractor, then the owner may be responsible for payment of interest that is generally 2 percent per month. Final payment generally must be made within 45 days after completion.
Recent decisions indicate that it is very unwise to withhold retention owed to a contractor. The attorneys fees incurred by the contractor in seeking its right to retention may be sought from the owner. Conversely, the owner may seek attorneys' fees from the contractor if the owner is the prevailing party on the issue of whether money withheld from retention was done in good faith. Taylor v. Van-Catlin Const. (2005) 130 Cal.App.4th 1061, 1070.
Particularly in those instances where retention is modest, and a dispute is likely to occur, it is very risky for an owner to expose itself to liability for the contractor's attorneys' fees by withholding retention.