Builders Beware: Substantial Completion May Vary for Subcontractors!

March 28, 2017

Substantial Completion May Vary for SubcontractorsAs recently held by a Colorado appeals court, construction defect claims may be barred at different times for different contractors. While this is good news for construction professionals involved in the early stages of a project, for example, excavation contractors, concrete contractors, and framers, it is not favorable for construction professionals involved through the end of the project, such as developers, general contractors, and home builders.

As most home builders know, a state’s statute of repose sets a cut-off date after which no defect claims may be asserted against construction professionals. In Colorado, as in many other states, the statute of repose for construction defect claims begins to run upon “substantial completion” of an improvement to real property. In residential construction, “substantial completion” is typically deemed to occur when a certificate of occupancy, or its equivalent, is received for the residence. As shown in the Colorado Court of Appeals’ decision in Sierra Pacific Industries, Inc. v. Jason Bradbury, d/b/a Bradbury Construction, Inc., 2016 COA 132, the “substantial completion” date under the statute of repose may be different for each contractor. Specifically, a subcontractor’s substantial completion date may occur when it completes its work on the project, i.e., the home being constructed.

Sierra Pacific involved residential construction, specifically the work of a subcontractor hired by the developer to install windows in a condominium structure. The window installer completed its work some years before a certificate of occupancy was issued for the condominium. When the condominium units sustained water infiltration damage involving the windows, the developer sued the window installer within the period covered by the state’s statute of repose as it applied to substantial completion of the project by the developer. The window installer argued that claims against it were barred by the statute of repose as applied to its window installation work. The Court of Appeals agreed, concluding that “substantial completion” by a subcontractor occurs when the subcontractor has finished working on the improvement at issue in the case (here, window installation).

Substantial Completion for Subcontractors

It is likely that many home builders assume that if they must respond to a construction defect claim, they may, in turn, recover against a subcontractor who actually performed the defective work. As Sierra Pacific demonstrates, this may not be the case if courts in their state apply their statute of repose as running from the time when each subcontractor finishes its “piece” of the home construction project. The repose period for the subcontractor’s liability to the builder may have expired before the statute applicable to the builder’s liability to the home buyer has run its course. If that is the case, the builder can be stuck with litigating or settling defect claims without recourse against the subcontractor who performed the work

PWSC Program builders should consult their legal counsel to determine whether they should include a “flow down” provision in their subcontractor agreements wherein the subcontractor would be bound to the builder by the same terms and conditions, including the same warranty periods, as the builder is bound to the home buyer under its Builder’s Limited Warranty.

The foregoing is provided as general information and it not intended, and should not be construed as legal advice. Always consult your own legal advisor before adopting changes to your business documents or contracts.

 

Written by Terence Cooke, PWSC General Counsel