Managing a construction contract: The close-out phase

This is the fifth and final article in a series of articles providing a brief overlook of managing a construction contract. The first article covered the basis and overview for this series of articles. Article 2 provided guidance on the pre-award phase of a contract, which included all steps in the contract negotiation up until contract signature. Article 3 provided a brief overview of the post-award phase of the contract which pertains to the project execution phase from contract signature up until practical completion. In Article 4, the concept of defects liabilities was discussed. In this final article in the series, the close-out phase of the contract will be covered. This phase entails the final account and closing out the contract with only the latent defect liability and guarantee periods to run.

There are a few standard form contracts that are in use. As highlighted previously, there are also bespoke agreements which might be a “once-off” agreement or client-specific agreement. It is imperative to always peruse your contract for the obligations that you are responsible for and to note that sometimes even standard forms of contract are modified. For the purposes of this article, we will make reference to the standard terms of the JBCC Principal Building Agreement, 6.2 – May 2018 (hereinafter referred to as “the PBA”). Furthermore, whilst the general close-out phase may be defined as being from the stage of final account onwards, for the purposes of this article, the close-out phase shall be from certification of practical completion onwards thus outlining the process from when works are winding down. This write-up shall therefore also intertwine with some of the general aspects of patent and latent defects liability, as highlighted in article 4. The selected salient points of the process at this stage are as follows:

1. In terms of clause 21.1 of the PBA, the defects liability period commences on the calendar day following the date of practical completion and comes to an end ninety (90) calendar days from the date of practical completion.
2. Where defects become apparent during this period, the Principal Agent may progressively instruct the Contractor to attend to them, whilst maintaining minimum inconvenience to occupants.
3. The Contractor must inspect the works and forthwith rectify all items on a list for final completion no later than 10 days before the expiry of the defects liability period (Clause 21.3.1)
4. The Contractor shall then give notice to the Principal Agent to inspect the works within five (5) working days of receipt of such notice. (Clause 21.3.2)
5. Where the Contractor fails to attend to the list for completion, the process of clause 21.3 is repeated until all items on the list for completion are attended to. (Clause 21.4)
6. On expiry of the 90 days period and on notice from the Contractor, the Principal Agent shall inspect the works and either issue a list for final completion or issue a final completion certificate. (Clause 21.6)
7. Where the Principal Agent issues a list for final completion, the contractor shall complete the items on the list for final completion and notify the Principal Agent that all outstanding works are complete and all defects rectified. The Principal Agent shall then within 5 days of such notification, inform the contractor that all works on the list for final completion have been completed, or issue an updated list for final completion listing the items not completed, or with additional defects that have become apparent since the last inspection. (Clause 21.7)
8. The process of clause 21.7 is repeated until all the items on the (updated) list for final completion are completed. Thereafter, the Principal Agent shall forthwith issue a certificate of final completion to the contractor and copy the employer. (clause 21.8)
9. Where the Principal Agent has not issued a list for final completion or the updated list within 5 working days after the inspection period mentioned in clause 21.6, the contractor shall give notice to the employer and Principal Agent. Should the Principal Agent not issue a list for final completion within a further 5 working days of receipt of such notice, then it shall be deemed that final completion has occurred and the Principal Agent shall issue a final completion certificate forthwith. (clause 21.9)
10. The latent defect liability period commences at the start of the construction process and comes to an end 5 years from the date of certified final completion.
11. In terms of clause 26.10 of the PBA, the Principal Agent shall prepare and issue the final account to the contractor within 60 working days of the date of practical completion.
12. The contractor shall accept or disagree with the final account within 30 working days from receipt. Where there is non-acceptance from the contractor, the contractor will provide notice together with reasons for non-acceptance within this 30 working days period, failing which the final account shall be deemed to be accepted. (clause 26.11)
13. The PBA further defines how non-acceptance of a final account is handled but these are not covered in this article.
14. The Principal Agent issues the final payment certificate within 7 calendar days of acceptance of the final account.

Once the final completion has been certified and the final account has been agreed upon and paid, the close-out phase of the contract is complete. The contractor may still have other obligations, which include, inter alia, paying their subcontractors and honouring the latent defects liability period where these comply with the requirements of latent defects.

The consequences of practical completion include, inter alia, the Employer taking possession of the works (subject to any lien) and the risk of the works passing to the employer. At this stage of the works, the works are substantially complete and can be used for the purpose intended.

The consequences of final completion include, inter alia, that the works are complete and the contractor has sufficiently discharged his contractual obligations, other than latent defects.

Bilaal Dawood

Head: Membership Services