Beneficial Use Construction Contracts: What You Need to Know
Beneficial use construction contracts describe a building that is capable of being used as it is intended but may have a variety of minor defects.3 min read
Beneficial use construction contracts, also known as beneficial occupancy, describe a building that is capable of being used as it is intended but may have a variety of minor defects. This term may be used during the review of the work that has been carried out during a construction contract and may appear in the certificate of practical completion.
Beneficial use may also be used in reference to assessing the liability and cost of a vacant property, either domestic or non-domestic. If the property is acceptable in terms of beneficial occupation, then the rates can be charged. For example, if tenants would be willing to pay rent to live at the property.
What is Practical Completion?
Practical completion, which may also be referred to as “substantial completion” on some forms, certifies that all of the work detailed in the original work contract has been completed. The certificate of practical completion is a very important process that has three main effects:
- It releases half of the contractor's retained payment. Typically, payments owed to the contractor are withheld until it is confirmed that the expected work has been completed.
- It ends the contractor's liability for any liquidated damages that would be payable in the circumstance of a breached contract. For example, if there is a breach of contract, such as not completing assigned work by the completion date.
- It signifies the end of the construction period and beginning of the defects liability period.
Defects Liability Period
Following the certificate of completion is the defects liability period. This period is a time during which a contractor may be called back to fix a defect that has been found after practical completion. This does not include the correction of issues that were apparent before practical completion, which will be handled differently and should be corrected before the certificate of practical completion has been issued.
The term substantial completion may also be used in reference to beneficial use. This indicates the date or time in which the building or product of construction is able to be used for its intended purpose. The date of substantial completion ends the period in which liquidated damages can be assessed. This date is sometimes referred to as the beneficial occupancy date or BOD.
There is no set formula of percentage complete that is used to determine substantial completion. A board must review the project and determine if the building is capable of its intended use, despite the percentage of completion. For example, if a project is 97 percent complete, but the remaining 3 percent requires the input of an air conditioning unit for a company using temperature-sensitive products, the board would most likely determine that the project is not substantially complete.
Construction Contract Provisions
Construction contracts are large and complicated documents and include many provisions and clauses. When reviewing the documents or preparing to negotiate, there are four main contract provisions for that should be given attention.
- Delays: different types of delays can happen for many reasons, sometimes being out of the control of the contractor. These “force majeure” delays may be caused by material shortages, government agencies, etc. The contract should include stipulations for these delays and detail compensation for the contractor if the situations arise.
- Warranties: the contract should include details for when warranties begin. This may be in the form of a set date, or at a set stage, such as substantial completion. Using a set date may be risky if the project is delayed. This may cause a warranty period to be extended, and can impact the budget and/or obligations for other planned projects.
- Scope of Work: this is usually determined in the early stages of the construction project, but becomes at risk later in the project as changes orders are requested. A poorly defined scope or missing details can bring forth disputes between owners and contractors and puts the project at risk.
- Changes to Work: it is very common for changes to arise in the project. Setting the stage for changes by requiring properly drafter change order clauses is crucial to the success of the project and all involved parties.
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