TAKING OVER CERTIFICATE AND DEFECT LIABILITY/NOTIFICATION PERIOD

Surya Prasad Paudel

Deputy Manager, PDD

1. INTRODUCTION

Taking over is the critical part of any construction project. Issuing of taking over
certificate is major milestone in construction contract. In FIDIC contract, taking
over certificate is generally issued by Engineer or sometime by Employer. The
issuance of taking over certificate means the project or work has been
satisfactorily completed by contractor (except minor defects and outstanding
items of works) and should signify the point that the project or work become
revenue generating asset or the project or work become worthy to be used by
Employer for their intended purpose. The issue of taking over certificate also
means the work or the project has been taken over by Employer. The effective
date of issue of taking over certificate is the commencement date of defect
liability/notification period.

For issuing a taking over certificate, every items of the project or work is not
necessarily to be completed in a micro scale. Minor outstanding works can be
completed in defect liability/notification period. Further, defect liability/notification
period is not added for those items which are completed during defect
liability/notification period except for those which have been performed
intentionally defective by Contractor. Generally, defect liability period of
construction contract is 1 year and it may be two year depending upon the nature
of work.

After completion of defect liability/notification period, Employer, Engineer and

Contractor have to jointly inspect the project. If any defect is found, the cause of
defect has to be determined. The defects are rectified by Contractor if it is due to
his faulty work at his cost. If the defects are not due to Contractor’s faulty work, it
will be rectified by Contractor or Employer through another contractor which shall
be taken as varied items. The project will be terminated after defect liability
period and it is said to be completed. This paper intends to highlight the process
and effect of TOC, defect liability/notification and completion of project based on
FIDIC Red Book 1987 and 1999 version.

2. TAKING OVER CERTIFICATE (TOC)

The Employer is required to take over the works when they are complete in
accordance with the Contract except for minor outstanding works that doesnot

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 affect the use of works or section for their intended purposes when they have
passed the tests on completion. The contractor applies for taking over certificate
by written notice to the Employer/Engineer which may precede the completion
and/ or passing of the tests. The Engineer/Employer either shall issue the taking
over certificate to the contractor stating the date on which the works are
completed in according to the contract( except some outstanding works which
doesnot affect the works or section for its intended purpose of use) including the
passing the tests on completion, or reject the application giving the reasons and
specifying the work required to be done further by Contractor to enable taking
over certificate to be issued: the contractor shall than complete such works
before issuing the further notice. It is stipulated in the contract that upon
submission of contractor’s application of TOC, within 28 days Engineer/Employer
shall give their response. If Engineer/Employer fails to either issue TOC or reject
the contractor’s application within 28 days and if the works or sections are
substantially completed in accordance with the contract, the TOC shall be
deemed to have been issued on the last day of that period (FIDIC Red Book
1999). Provision in FIDIC 1987 is slightly different as it doesnot have criteria of
automatically issuance of TOC in the event of failure of response from
Engineer/Employer on Contractor’s application for TOC within 21 days even if the
works or section substantially completed and precede the test on completion in
accordance with contract.

The TOC can be issued as part or sections where contract allows separate time
of completion for that parts or section or if such parts or section after completion
occupied by Employer or Employer has elected to occupy or use prior to
completion (where such prior occupation or use is not provided for in the contract
or has not been agreed by the contractor as temporary measures) or substantial
completion of parts of the works.

The Employer grand the Contractor possession of the site as per the Clause 2.2.
Taking over certificate brings the possession to the End. If the Employer
expected to take over any part of the Works, it should have been defined, in the
Appendix to Tender, as a Section. Upon issuance of TOC, following sub-clauses
of Contract based on FIDIC 199 Red book will be affected and some of the
clauses will cease. For detail, readers are requested to study the clauses.

Sub-Clause 1.1.3.5 (Definitions - “Taking-Over Certificate”)

Sub-Clause 1.1.3.7 (Definitions - “Defects Notification Period”)

Clause 4.1: Contractor’s General Obligation

Clause 4.8: Safety Obligation

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 Clause 4.21: Progress Report

Clause 4.23: Contractor’s operation on site

Clause 6.1: Records of Contractor’s Personnel and Equipments

Clause 8.2: Time of Completion

Clause 8.4: Extension of Time of Completion

Clause 8.7: Delay Damage

Clause 9.2: Delayed Tests

Clause 9.4: Failure to pass tests on completion

Clause 11.1: Completion of Outstanding works and Remedying Defects

Clause 13.1: Right to very

Clause 14.2: Advance Payment

Clause 14.3: Schedule of Payment

Clause 14.6: Issue of Interim Payment Certificates

Clause 14.9: Payment of Retention Money

Clause 14.10: Statement at Completion

Clause 14.14: Cessation of Employer’s Liability

Clause 17.2; Contractor’s Care of the works

Clause 18.2: Insurance of work and Contractor’s Equipments

It is important to note that upon the issue of TOC, the possession of risk in the
work transfer from Contractor to Employer. It is therefore vital that the Employer
ensures that it has adequate insurance for the works (i.e. in respect of loss of
use, damage and destruction) as upon the issuance of TOC the Contractor’s
insurance obligation will also be ceased. Taking over May also has very
significant impact on the performance security and retention under the contract.
The value of performance bond may be reduced to 50%, while percentage of
retention money (i.e. usually up to 50%) needs to be paid to the Contractor.

Another important fact is that if Contractor suffers a loss as result of Employer

taking over a part of work, it is taken as loss and claimed under Clause 20.1. The

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 Contractor is liable to be compensated to those losses. However, there is not
mentioned expressly about the extension of time due to delay of taking over as
part or section but Contractor may claim as per related clauses.

One practical situation about issuance of TOC and outstanding works is

illustrated here. A Hydropower Project which is substantially completed and
started generation. All the tests on completion have been passed in accordance
with the contract. Major civil works and EM/HM/TL works have been completed
and all are in operational. However, minor works such as repair of powerhouse
plasters, tiles in powerhouse rooms, maintenance of access road, repair of
damaged pipes, repair of gabion work of tower foundation etc. were ongoing
after start of generation. We can issue the taking over certificate (TOC) with
attached list of outstanding works as it don’t affect the generation the remaining
works can be completed within agreed time period in defect liability/notification
period.

3. DEFECT LIABILITY/NOTIFICATION PERIOD (DLP/DNP)

Defect liability/notification period starts on the date stated in taking over

certificates. The period may be one or two or more years based on type of
contract and nature of works. The defects that appears due to works attributable
to Contractor’s activity; the remedy shall be liability of Contractor. However, if the
defect appears due to Employer’s/Engineer’s activities or force majeure, the
Contractor shall not be liable for remedying works and such remedial works shall
be the responsibility of Employer and taken as variation.

The Contractor has to complete outstanding works as listed in TOC and remedy
any defect due to his action or inaction within the DLP/DNP and execute all the
works as instructed by Engineer/Employer. The definition of contract period is the
period from commencement to the period a year or period mentioned in contract
after taking over. Before completion of DLP/DNP, a joint site visit shall be made
and Contractor shall be notified any defects to be rectify before expire of
DLP/DNP. The DLP/DNP may also be extended to some period under the
situation that if for a work or section that cannot be used for the purpose for
which they are intended by reason of defect or damage after issuing TOC. It is
stated in FIDIC 1999 red book that DNP shall not be extended by more than two
years. The Contractor has to remedy any defects or damages within the
reasonable time within DLP/DNP. The Employer/Engineer shall notify the
Contractor a date by which the defects or damages are to be remedied. If
Contractor fails to remedy the damages or defects, such remedy may be carried
out at the cost of the Contractor. The expiration of DLP/DNP is the completion of

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 project or contract. Upon accepted DLP/DNP the contractor shall be discharged
and all his securities will be released.

4. CONCLUSION

The taking over of the project and defect liability/notification period is the major
event of the project. While issuing the taking over certificate careful assessment
has to be made for project’s components which are completed and outstanding
list has to be prepared. An agreement may be made with contractor for time
period to complete the outstanding work during DLP/DNP. Any defects that occur
during defect notification/liabilities have to be assessed well and remedial work
has also to be carried out. The Engineer/Employer has to play a vital role for
successful completion of project and effective discharge of contract to avoid
unnecessary disputes in that period.