Best Practices – Close Out Procedures – The top 7 Items You MUST Do At Close-Out.

A few weeks ago, we discussed strategies for how to manage payments.  One of the key sections in that article was call Close-out and Final Payment.  We discussed that you should follow strict close-out procedures before releasing final payment, but we did not dive deeply into what close-out procedures should include.

Contractors and Owners alike tend to treat close-out with lax and even dismissive regard.  I have observed many organization who’s projects never actually completely close-out.  This leaves several open items between the parties exposing Owners and Contractors alike.

During close-out, we are transferring control of the job-site from the Contractor to the Owner.  We are also transferring warranties and ownership of all equipment from the Contractor to the Owner.  Transfers of money are occurring and insurances are being closed or transferred from one party to another.

Given the importance of this final step, I wanted to touch on a few of the key tasks you should observe and be sure to follow.

Substantial Completion

In a previous post, I went into details on how and why we want to pay special attention to Substantial Completion.

Once you have determined and agreed that the project has reach the stage of substantial completion, then you have officially entered the close-out phase.

You should not start any of the following tasks until the project meets the standards of being substantially complete.

Punch List

Substantial Completion generally refers to a space that can be occupied, but that does not necessarily mean that every little detail is right.  Imperfections can appear anywhere at anytime for any reason.  Sometimes it’s a poor paint job, others it’s a careless mover, other times it could be a faulty fixture.  These miscellaneous imperfections are items you should be looking for during your punch-list process.

A proper punch-list process begins with the Contractor.  He should perform his own walk-through and have a running list before you arrive.  You should then have your Architect walk through the job-site reviewing the items identified by the Contractor and looking for additional items that may have been missed.  If you don’t have an Architect, be sure to engage someone else with technical expertise who is familiar with the project to walk alongside you.  An Architect is preferred as they will have the breadth of knowledge to inspect all of the systems inside the space.

After the walk-through you should allow the Contractor a few days to correct the items and then do a final walk-through with the list in hand.  It’s best practice to have the same people on the final walk-through as you had during the punch-list walk-through.  If anything from the original list has not been corrected, you need to repeat the process all over again.

Warranties

As part of close-out your Contractor and his subcontractors need to collect and present you with a list of warranties.  These are warranties you are entitled to from the equipment and products that were installed.  This is a very important step in the close-out procedure and should be made a condition of final payment.

You should ask for a binder with each of the written manufacturer’s warranties in the binder.  This helps organize the documents and check them off from your list.  You can use the specifications from your Architect’s drawings as a guide to know which products should have a warranty.

If you have complex equipment or very high end finishes that have specific cleaning, operating, or maintenance requirements, this is when you should ask your contractor to request a manufacturer’s training on care and maintenance.

Insurances

At this stage, you need to pay attention to insurance.  There will be some policies that you or your contractor opened at the start of the work that will need to be closed or cancelled.  You may also need new insurances or may need to make revisions to existing policies moving forward.

Builder’s Risk policies are insurances taken out by the Contractor to protect existing structures from damage during construction.  This policy is paid for and carried by the contractor and should be closed once the project reaches substantial completion.

Some state’s laws require a statute of repose which require Contractors to carry general liability for a period of time following substantial completion of a project.  You should know your state laws and document the period of repose that applies to you.  In fact some third party contracts include language requiring that the Contractor, “maintain completed operations liability insurance for one year after Substantial Completion“.  This means that if anyone gets hurt because of faulty or improper installation for a period of up to 1 year from Substantial Completion, the Contractor is liable.

Property Insurance (aka Home Owner’s Insurance) is a form of insurance Owner’s use to protect their property from damage.  If you have made improvements to your property, you need to contact your insurance provider and increase the protection limits of your policy.  This will ensure that any damage that occurs to the improved areas are also covered.

Bonds

If you required a Payment and Performance Bond, you will need the Contractor to provide a Release of Retainage from the Bond company before you may release the retained fees from the contractor.

This is an important step because it signals to you that the Bond Company is satisfied that the work has met the standards of substantial completion and that they are ready to release the Contractor from the Bond.

Final Completion

Your project is not complete unless all of the punch-list items have been completed.  You may have to perform multiple rounds of inspection, but be sure you are satisfied with every detail before you deem the work complete.

Final Payments

You should hold all of the retained amounts until all of the above items are satisfactorily complete.  It is at this stage that you should also require an unconditional lien waiver releasing you from the full value of the contract.

If you were collecting lien waivers all along, those waivers will be for each milestone payment (equal to the amount of each invoice).  Technically they should all add up to the same value as your contract (plus any change orders that were approved along the way).

This final payment lien waiver should be a single waiver for the sum total of the contract.  Some may find this to be redundant because if you have all of the other lien waivers, you are covered, but I like to ask for a final one in case you have misplaced any of the waivers.

Special notes and considerations

Equipment Tags

If you are a facilities manager and need to tag equipment this is the time to do so.  It’s actually best to have each trade contractor tag their own equipment and add that to their contract as a condition of final payment, but you can make this a requirement of the Contractor (who should trickle down this requirement to the trades).

Either way, if you have this in your contract, then you should also expect to receive a log of all tagged equipment.  If you used RFiD tags or Bluetooth proximity sensors, you should also expect to have a paper read-out of each tag.

Performance Ratings and SLA tracking

If you have an advanced procurement system and your contracts include service level agreements and key performance indicators, this is a great time to require the Contractor to complete self-assessments and self-reporting.

I like to add these requirements into my contracts and tie the final payment to this because it ensures that this step will not be skipped.  Self-reporting is not ideal, but I have found that Facilities Manager skip this all the time unless the Contract is self-reporting.  If the Contract overstates their performance, the Facilities Manager will undoubtedly correct that.  This ensures that your procurement team has tangible evidence of performance when it is time for contract review.

Closing

After a long period of constantly dealing with the noise and stress of a project, it is easy to understand why everyone wants to move on (especially if you are off starting your next project), but taking the time to close-out a project fully is essential.

There are a lot of key hand-offs and critical items that must be attended to in order to protect all parties.  Structure your close-out procedure as a close-out meeting where all parties are required to attend.  This will make the task less cumbersome and will help spread the responsibilities across all parties.

Whatever approach you take be sure to give this as much attention as everything else.

What about you?  How do you handle close-out of your projects?  Are there any items I failed to mention?  Tell me your stories.

Thanks for reading.  If you enjoyed this content, please feel free to browse my previous articles and please like, share, comment, and subscribe.  This helps promote my content and is greatly appreciated.

 

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