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.