In construction, especially large-scale projects, the relationship between the main contractor and the subcontractor is a critical factor in ensuring the project’s success. However, the issue of delayed payments from the main contractor to subcontractors is a common occurrence, often leading to significant negative consequences. This article will examine the causes of the subcontractor being delayed in payment by the main contractor and provide legal and practical solutions to mitigate this issue.
1. Definition of a Subcontractor
Pursuant to Clause 27, Article 4 of the Law on Bidding 2023, subcontractor means an organization or individual that is subcontracted by the contractor to perform construction tasks; provide consulting or non-consulting service; provide any part of the related services of the supply of goods package; or perform tasks of a mixed package.
Accordingly, a subcontractor is an individual or entity engaged by the main contractor to carry out a part of the work or project that the main contractor has committed to with the project owner. Subcontractors typically specialize in a specific field or a particular aspect of the work, such as electrical, plumbing, mechanical, construction, or other specialized tasks within an overall construction project. Subcontractors operate under the supervision and management of the main contractor and are obligated to complete the work in accordance with the contract signed between them and the main contractor.
2. Causes of delayed payments by main contractors
• Financial issues of the main contractor: One of the primary reasons for delayed payments to subcontractors is the main contractor’s financial difficulties. The main contractor may encounter financial problems due to delayed payments from the project owner or ineffective financial management. When financial resources are limited, the main contractor may be unable to make timely payments to subcontractors, leading to prolonged debt.
• Delayed payments by the project owner: Delayed payments from the project owner to the main contractor is an indirect cause of the main contractor’s inability to pay subcontractors on time. When the project owner fails to make payments, the main contractor may lack the financial resources to pay subcontractors. This creates a chain of delayed payments, significantly impacting the project’s progress and quality.
• Contractual Disputes: Disputes over the contract between the main contractor and subcontractor are another reason for delayed payments. These disputes may involve the work performed, the quality of the work, or payment terms in the contract. In cases of disputes, the main contractor may reserve payment until the dispute is resolved.
• Changes in design or scope of work: During project execution, changes in design or scope of work are often unavoidable. Such changes may require adjustments to the contract and payment terms. While waiting for these adjustments, the main contractor may temporarily withhold or delay payments to subcontractors to ensure the accuracy and fairness of payments.
• Inefficient project management: Poor project management is another common cause of delayed payments to subcontractors. Issues such as inadequate planning, progress monitoring, and financial management can lead to payment delays. Inefficiencies in project management often result in payments not being processed on time, affecting the entire payment process.
3. Legal solutions
• Clarify and Specify the Contract: A contract with clear and specific terms, particularly payment provisions, will play an important role in preventing disputes and payment delays. The contract should detailize payment terms, the scope of work, project quality, and conditions for contract adjustments. The parties should agree on and clearly understand the contract terms before signing.
• Establishing a Payment Monitoring System: Implementing a stringent payment monitoring system ensures that payments will be made on time. The main contractor should develop a financial plan and monitor payment progress scientifically and reasonably. This will help in the early detection of financial issues and timely resolution.
• Negotiation and Dispute Resolution: In the event of a contract dispute, the parties should engage in negotiations and mediation before resorting to litigation or arbitration. Negotiation and mediation can quickly and effectively resolve disputes, avoiding prolonged payment delays. The parties should adopt a cooperative and amicable approach to reach a mutual agreement. This not only saves time and costs but also maintains a good relationship between the parties.
• Use of Bank Guarantees: A bank guarantee is a financial instrument that ensures payment to the subcontractor. When entering into a contract, the subcontractor may require the main contractor to provide a bank guarantee to secure payment. A bank guarantee gives the subcontractor greater assurance of payment and mitigates the risk of delayed payments.
• Enhancing the role of Legal counsel and legal teams within enterprises:
– Consulting in drafting Contract: Legal counsel and legal teams play a critical role in advising and drafting contracts between the main contractor and subcontractor. They help the parties understand the contract terms, ensuring it is clearly and comprehensively drafted. This reduces the risk of disputes and delayed payments in the future. Legal counsel may also propose measures to protect the subcontractor’s rights.
– Dispute resolution: In the event of a dispute, legal counsel and the enterprise’s legal team will assist the parties in resolving the dispute. They may represent the parties in negotiations, mediation, and particularly during litigation before competent authorities. With extensive knowledge of the dispute resolution process in courts or arbitration, legal counsel will help expedite the process and facilitate the recovery of debts more quickly.
– Legal Consultation on a regular basis: Legal counsel and legal teams also provide continuous legal advice to the main contractor and subcontractor throughout the project. They help the parties understand relevant legal regulations, ensuring compliance. This not only helps avoid legal risks but also ensures that the parties fulfill their contractual obligations.
– Risk management support: Another important role of legal counsel and legal teams is to assist the main contractor and subcontractor in managing risks. They help identify potential legal risks and propose preventive measures. This includes evaluating risks related to design changes, scope of work, and payment conditions. Legal counsel’s support helps the parties better prepare and mitigate the risk of delayed payments.
Delayed payments from the main contractor to the subcontractor are a complex issue with multiple causes. To address this issue, the parties must clearly understand and comply with legal regulations, as well as implement effective financial and project management measures. Cooperation and goodwill between the parties are key factors in resolving disputes and ensuring timely payments.
This concludes the article ” Causes of the subcontractor being delayed in payment by the main contractor” by TNTP. We hope this article is helpful to our readers.
Sincerely.
