Collecting Final Payment

Every construction project ends with a walk-through – at least it should. Too often, final inspection is the start of something else, such as a legal battle. The owner isn’t going to let the contractor skip out with work yet to finish. The contractor wants payment for work completed.

Here are a few good ways to get past confrontation when the job is nearly done.

Courts recognize an obligation to pay when any construction project is substantially complete. Even if a few items aren’t finished, the owner should pay what’s due less the cost of wrapping up defects. So, when is a job substantially complete?

Occupancy is the best evidence of substantial completion. If the job has passed final code inspection and the owner is moving in, the job is substantially complete. That’s the easy case. Some cases aren’t so clear cut.

Substantial completion doesn’t have to be an all or nothing affair. If the job includes distinct parts, one part could be substantially complete while the other isn’t. In exchange for payment, offer to note what’s accepted and what’s rejected. For example, suggest that the owner exclude some portion of the job (such as appliances or fixtures) from acknowledgement of completion.

Partial completion can be a problem when some equipment serves several parts of the project – some complete and some incomplete. HVAC and electrical systems are obvious examples. By convention, payment is due on any equipment that serves a part of the project that’s complete even if that equipment also serves an incomplete part of the job.

If the owner is eager to take up occupancy, offer to have incomplete work handled as warranty repair to be done later. That’s clearly the best choice when defective equipment is covered by a manufacturer’s warranty.

Your Punch List

Before starting the walk-through, hand the owner a punch list of known issues. By implication, the job will be substantially complete when an owner approves your list. Your punch list should show:

• Each defect. To make corrections easy to find, walk the project with a roll of blue painter’s tape. Stick a short piece of tape on each defect. Write a pencil number on the tape, the same defect number as on your punch list.
• What’s needed to complete the work.
• The subcontractor or trade responsible.
• Your estimate of when work will be finished for each item.
• The estimated cost to complete or correct each defect. Use these estimates to figure how much of the final payment can be withheld, usually 125% of your estimated cost.

If the owner approves your punch list, the next steps are easy.

• Final payment is due, less the estimates on your punch list.
• Later inspections will be limited to items on your list. Everything else is accepted.
• Roles change. The owner can enter and use the site at any time. The contractor loses the right to enter the property at will.
• Get punch list items worked off in a week or two. The longer work drags on, the more time an owner has to accumulate grievances.

A good contract can make project close-out almost automatic. Have a look at Construction Contract Writer. The trial version is free.

The Wrong Way to Close-Out a Project

A few years ago, Eric Novelli, a Tennessee contractor, agreed to have Wagner Heating & Air install the HVAC system in a new 3-story home Novelli had under construction. There was no written contract.

When work was done, Wagner called for final inspection by the City of Chattanooga. The inspector found no deficiencies. Two months passed. Novelli didn’t make a final payment on the job. Instead, Novelli showed up at the inspector's office with pictures showing what he claimed were defects in Wagner’s work. A senior building inspector re-checked the job and found some problems. Wagner made repairs and called for another inspection. This time, the entire system passed. But that wasn’t the end of the story. When Wagner presented his final bill, Novelli wadded it up, threw it away and told Wagner not to come back to the job. With no other option, Wagner filed a claim for $12,000.

Substantial Completion

The case of Wagner v. Novelli (2018 Tenn. App. LEXIS 281) was decided last week. Wagner got his $12,000. But it’s a classic example of what should NOT happen when work is complete. Here’s what should have happened at substantial completion of the Novelli job.

Work is a candidate for substantial completion when it could be used for the intended purpose – even if minor defects remain. The completing contractor should schedule the walk-through inspection. Everyone doing the walk-through needs a pencil and a tablet to make notes. Consolidate these separate lists into a single punch list of items to be completed after occupancy. Wagner said that he never got a punch list on the Novelli job. So we can assume there was never a final walk-through. Call for a walk-through when:

• Installed equipment has been tested and is working, 
• Testing required by the specs has been completed, 
• Manuals, warranties, keys and controls have been delivered, 
• Debris, waste, and excess materials have been removed, 
• Work has passed final inspection,
• Occupancy has been approved by the public authority,
• Utilities and services are connected and working.

Terminate and rescheduled the walk-through if you discover:

•  Anything that would limit the intended use, 
•  Any problem hard to fix when the building is occupied, 
•  Too many items incomplete, regardless of the type,
•  Anything that would take days or weeks to complete.

The owner has to make a decision at the end of the walk-through. Is the job substantially complete? Or should another walk-through be scheduled later? Acknowledging substantial completion means, of course, that the remaining contract price is due less any retainage and maybe 150% of the value of work identified in the punch list. Clearly, the owner can’t have it both ways – denying substantial completion while using the premises for the intended purpose.

The most difficult question during walk-through is discovery of a problem overlooked by everyone, including the inspector. What happens then? Every case has to be decided on its own merit. But one consideration applies no matter the type of defect:

It’s the owner’s building. The owner has to live with the defect. If the owner considers the problem trivial, forget it. If the owner feels the defect has to be corrected, the contractor has to either make the correction or offer a discount. In the Tennessee case cited above, Novelli complained to the inspector and Wagner made the correction. I’m OK with that.

But I’m not OK with doing any significant construction work without a contract. Construction Contract Writer can head off problems such as project close-out issues before they morph into an expensive dispute. The trial version is free.