FAQ.17

Question:

The Contractor has requested Substantial Performance. He wants the release of holdback to pay his subcontractors. However, there are many outstanding change orders (+ $190K) that the client has advised verbally that they will pay (most are due to client requests) but they have not approved the COs by signing and returning them.

After multiple requests, I still have not received the signed COs from the Client. We are well within the required percentage of completion at the current contract amount. I could issue a Certificate of Substantial Performance on the current contract amount but the outstanding COs would then be lost in limbo - and likely it would end in court. The majority of the extra work has been completed by the contractor in an effort to meet the completion date without delay. This puts the contractor in peril, I presume, but what about our office?

As payments are certified based on work completed – if I approve the amount based on work completed to date we will be OVER the current contract amount (is that breach of contract?) If the COs do come in, the contract amount will increase by $190K –and we will still be within 5%.

Short Answer:

Standard contracts require a signed CD or CO, not just a verbal instruction, to authorize changes to a contract. If the contractor has in good faith done work which is not in the scope of the contract, based on verbal assurances from the owner, then the contractor has chosen to be at risk. The value of the extra work is outside the scope of the contract (until the COs are signed) and should not be considered as part of the value of the work done to date nor as part of the value of the contract. The architect should not be at risk provided he/she has acted in accordance with the terms of the contract in a fair and impartial manner. If on the other hand, the architect was to certify payment for work not in the scope of the contract, that would attract liability, potentially for the value of the work improperly certified.

Once substantial performance has been determined to have been achieved at some point in time, it cannot subsequently be un-achieved at a later point regardless of the value of additional work or changes added to the scope of Work.

Expanded Answer:

As architects fulfilling the role of prime consultant, we are responsible for administering the construction contract as written and amended, not what the construction contract might become at some point in the future.

The value of a contract is the initial contract amount plus or minus the value of any signed change orders (COs), plus or minus the undisputed value of any change directives (CDs). The value of any change orders not signed by both the owner and contractor does not affect the contract value until they are signed by both parties.

It may even be argued that the extra work; even though requested by the owner and well executed, is a deficiency because it isn’t compliant with the contract. The next step would be to withhold monies on a certificate for payment to cover the cost of correcting the “deficient” work. This would penalize the contractor for trying to be helpful and cooperative, and reward the owner for bad behaviour. If you know that the owner requested all the additional work, then this would NOT be the approach to take.

If the owner doesn’t sign the COs authorizing the work approved verbally, then it is likely that the contractor and owner will eventually end up in dispute. If the architect has dealt fairly and impartially with the parties in interpreting and applying the requirements of the contract, then the architect should not be at risk. If the architect told the contractor to proceed with additional work in the absence of a CD or CO, then there is likely liability. Regardless, the architect will most likely be dragged into the dispute by one or both parties who will look to the architect’s insurer to contribute to a resolution. Make sure you have good phone logs, and email and paper trails to demonstrate your fairness and impartiality.

We regularly encounter situations in which substantial performance is achieved, only to have the owner add significant scope afterwards. This does not affect the fact that substantial performance was achieved earlier. If it did, it would throw the publication of substantial performance and the lien period expiration date into disarray.

As stated, unsigned COs are not part of the contract. Further, the architect is not responsible for the owner’s nor the contractor’s actions or lack thereof. We are not required to babysit either party, although our timely input may help resolve/prevent issues, and avoid formal disputes. Such timely input could ultimately save us a lot of time and expense.

If the contractor has properly (according to the terms of the contract) requested a determination of substantial performance, and based on the architect’s review and calculations, has achieved substantial performance at a given point in time, a certificate of substantial performance should be issued within the timeframe established in the contract and applicable legislation.

If the owner subsequently signs all the COs after you determine that the contract is substantially performed, even if the certificate hasn’t yet been issued, then the Work was legitimately determined to have been substantially performed on the date of the review, and a certificate for payment should still be issued. The key is in determining the project’s completion status and suitability for use at a specific point in time, regardless of what may or may not happen later.