Introduction – The Law on Sub-Contracting
The PRC Construction Law and the PRC Contract Law lay down certain restrictions on a main contractor’s right to subcontract his work. Article 28 of the Construction Law prohibits a contractor from assigning to a third party the entirety of the work that he has contracted to carry out. It also prohibits the contractor from dividing up the work and letting the same to third parties as subcontractors. Article 29, while allowing subcontracting with the employer’s agreement, provides that the main contractor is required to complete the main part of the construction project himself, and Article 272 of the Contract Law is similar in effect.
The legislative intent of Articles 28 and 29 of the Construction Law and Article 272 of the Contract Law is quite clear. It is intended to ensure that the main contractor, who tenders and contracts to do the work, is the party who is primarily responsible for carrying out and completing the work. The PRC government has identified the practice of extensive subcontracting and assignment to contractors who are not qualified to carry out the work, coupled with little or no management or supervision from the contractors up the line, as the root cause of many of the quality problems encountered in construction work in the PRC. The restrictions on subcontracting and assignment, mentioned above, were introduced to curb this practice.
The Administration Measures
In order to further enhance the quality and safety of construction in China, the PRC Ministry of Construction issued the "Administration Measures on Subcontracting of Building Construction and Municipal Infrastructure Works Construction" (the "Administration Measures") on February 3, 2004. The Administration Measures came into force on April 1, 2004 and have been promulgated in line with the Construction Law, the Bidding Law and the Ministry of Construction Quality Regulations.
Article 1 states that the intention of the Administration Measures is to regulate subcontracting activities in connection with building construction and municipal infrastructure works, to maintain order in the construction market and to ensure project quality and construction safety. According to Article 2, the Administration Measures are applicable to subcontracting activities and the supervision and management thereof, in connection with building and municipal infrastructure works construction in China.
Specialty Works and Labour Services
The Administration Measures apply to subcontracting by one contractor to another of specialty works or labour services in relation to building construction and municipal infrastructure works. The Administration Measures encourage the development of specialized contractors and labour service subcontractors. This represents a relaxation of the restrictions on subcontracting imposed under the Construction Law and the Contract Law and will be welcomed by many foreign construction companies, particularly those who are specialist contractors providing specialist skills and expertise that domestic contractors do not possess.
As is provided under the Contract Law and the Construction Law, unless otherwise agreed under the contract, the subcontracting of specialty works must be approved by the owner, and the specialty works subcontractor must complete the specialty works on its own. In relation to labour service subcontracting, this must be undertaken by way of a labour service contract and the labour service subcontractor must also complete the works on its own.
The Administration Measures also make it clear that all subcontractors must have proper qualifications and that individuals are not permitted to undertake subcontracted works.
The Administration Measures stress that the process of nomination is not permitted in China. In other words, owners are not permitted to directly designate subcontractors. This is in line with Article 66 of the Measures for the Bidding of Construction Project Work Execution, which came into force on 1 May 2003 and which provides that a procuring entity cannot directly specify particular subcontractors.
Written Subcontracts Required and Must be Filed with the Appropriate Authorities
All subcontracts entered into for specialty works or labour services must contain provisions expressly dealing with payment schedules, payment methods, and provide for measures to ensure the timely payment of subcontractors. The subcontract must be . led by the contractor with the administrative department in charge of construction within seven days of its execution, and where there are any changes to the subcontract, the original copy together with amendments must be filed.
Prohibition on Transferring the Works
Consistent with the Construction Law and the Contract Law, a contractor is not permitted to subcontract the entirety of the works or divide up the works and subcontract out pieces of the works. Such subcontracting or dividing up will be regarded as "transferring the works," and transfer of contract works is forbidden.
The contractor is required to establish a project management organization to manage and organize the construction activities. The project management organization must be staffed with technical and managerial personnel commensurate with the scale and complexity of the contract works. The project manager, technical manager, accounting manager, quality manager, and safety manager must all be members of the contractor’s staff and employed by the contractor. Where the contractor fails to set up a site project management organization, this will constitute transfer of the works.
The subcontractor may be requested to provide a performance guarantee, and the contractor may be requested to provide a payment guarantee if the subcontractor has provided a performance guarantee. This conforms to the requirements of the Bidding Law.
Qualification Certificates Cannot be Transferred
This is a very important issue for the construction industry in China. The borrowing of "qualifications" by one contractor from another is a common practice, and the Ministry of Construction is determined to crack down on this. The Administration Measures provide that qualification certificates are forbidden to be transferred, lent, or otherwise made available for use by others to undertake projects. Similarly, in the event that a contractor elects to carry out the entire contract works without engaging in subcontracting, and the project manager, technical manager, project accounting manager, quality manager ,and safety manager working for the site project management organization are not the contractor’s personnel, this shall be deemed as allowing others to undertake construction in the contractor’s name.
Illegal Subcontracting is Forbidden
Illegal subcontracting of contract works is forbidden. The Administration Measures specify the following activities as constituting illegal subcontracting:
- The contractor subcontracting specialty works or labor service to unqualified subcontractors
- In cases where there is no agreement in the main contract, a contractor subcontracting some specialty works to others without approval from the owner.
Fines Fines of between RMB10,000 and RMB30,000 will be imposed on subcontractors engaged in illegal subcontracting. Severe fines are also imposed under the Construction Law for construction enterprises undertaking subcontract works without appropriate construction enterprise qualification certificates, including outlawing that enterprise and confiscation of all illegal income.
The Administration Measures are a very important extension of the Construction Law as it relates to subcontracting. The blanket restriction on subcontracting has been relaxed specifically in relation to specialty and labour only subcontractors. The concession to enable contractors to subcontract to labour services subcontractors is a welcome development for foreign construction companies in China, which do not usually maintain a substantial domestic work force, and it will help them to bid for projects much more competitively. Similarly, specialty contractors will be pleased to see that the restrictions on subcontracting have been eased in respect of their specialist works. Foreign specialist contractors usually only provide the specialist technical expertise and knowledge and supply of materials and equipment on projects, and the Administration Measures recognize that this is a major contribution that foreign contractors can make to the construction industry in China.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.