An earlier article on procedure and jurisdiction under the Construction Act discussed the various strict timelines to be followed when preserving and perfecting a construction lien. The date when the “clock starts ticking” on these timelines is a crucial question, but it is not always easy to determine.
Certificate of Substantial Performance
Construction contracts sometimes include provisions for the issuance of a Certificate (or Declaration) of Substantial Performance (“CSP”). In such cases, the contractor can apply to have a CSP issued when their work is substantially performed. The contract may name a “payment certifier” – often the architect – to respond to the contractor and issue the CSP. However, if the contract does not specify a payment certifier, then the contractor can apply to the owner directly, and the owner and contractor can jointly sign the CSP if they agree that the work is substantially completed.
Once the CSP has been signed, it will not take effect until it has been published in a “construction trade newspaper”. The definition of a “construction trade newspaper” was broadened in 2019 to include online publications, so there are now various options for CSPs to be published in Ontario, usually for a fee. The purpose of requiring the CSP to be published is to afford an opportunity to any subcontractors involved in the project to become aware that the clock has started ticking on the release of the holdback amount that the owner or financer is retaining (for the benefit of subcontractors).
Determining Substantial Performance
Whether the payment certifier (or owner and contractor jointly) will recognize work as being substantially performed is not a subjective question – the Construction Act contains a formula for determining substantial performance. This formula specifies that a project is substantially performed when the project, or a substantial part of it, is ready for use or is being used, and if the project is capable of being completed at a cost of no more than:
- 3% of the first $1,000,000 of the contract price,
- 2% of the next $1,000,000 of the contract price, and
- 1% per cent of the balance of the contract price.
Thus, in practice, all projects worth $1,000,000.00 or less are deemed to be substantially performed at 97%. Projects worth more than $1,000,000.00 will have a higher benchmark, but the exact amount will depend on the value of the contract. Two example cases will usefully illustrate this formula in practice:
- A project worth $3,000,000.00 would be deemed to be substantially performed when it
could be completed for no more than:
3% of $1,000,000.00 (=$30,000.00), plus
2% of $1,000,000.00 (=$20,000.00), plus
1% of $1,000,000,00 (=$10,000.00)
Total: $60,000.00
- A project worth $8,000,000.00 would be deemed to be substantially performed when it
could be completed for no more than:
3% of $1,000,000.00 (=$30,000.00), plus
2% of $1,000,000.00 (=$20,000.00), plus
1% of $6,000,000,00 (=$60,000.00)
Total: $110,000.00
Completion Date Absent a CSP
Some construction contracts – particularly smaller-value ones – do not contain provisions for the issuance of a CSP. In these cases, the clock starts ticking when the project is completed, or when it is abandoned or terminated. A project is deemed to be completed when the price of completion or last supply is less than the lesser of $5,000 or 1% of the price of the contract.
Effects of Completion Date
The completion or substantial performance date has several effects for participants in a given project. Most importantly, it starts the clock ticking on the expiry of construction liens. However, since the owner or financer’s holdback must be released after the expiry of any potential liens, the completion date is also important in determining when these held back funds will be released.
All participants must be careful to correctly determine when the clock begins to run as a result of a project’s completion or substantial performance. Timely advice from experienced counsel can be helpful in making such a determination.
This blog post was written by Brett Hodgins, a member of the Commercial Litigation team. He can be reached at 613-369-0379 or at brett.hodgins@mannlawyers.com.
