Amid the macroeconomic slowdown, real estate industry downturn and mounting fiscal pressures on local governments, contractors are facing escalating risks in recovering payments for completed projects. Key concerns include bad debts from bankrupt developers, delays in government project audits, and sub-contractor arrears in paying migrant worker wages. Providing actionable insights for construction firms, this article proposes risk mitigation strategies for these three challenges.
Bad debts
Sweeping changes in the real estate sector have substantially heightened bankruptcy risks for developers. In cases of developer liquidation, contractor payment claims may end up as bad debts due to lower repayment priority, difficulties in enforcing liens, or a lack of recoverable assets.
Article 807 of the Civil Code grants contractors priority repayment from the proceeds of a construction project’s sale or auction.
Deputy Director, Senior Partner, Director at Beijing Office
City Development Law Firm
Tel: +86 138 1817 0255
E-mail: szc7676@163.com
This priority supersedes mortgage and other creditor’s rights, ranking only below the rights of homebuyers who have paid more than 50% of the purchase price for residential purposes, according to the Interpretation of the Supreme People’s Court on Issues Concerning Applicable Laws for Construction Project Contract Disputes (Part One), as well as the Reply of the Supreme People’s Court on Commodity Housing Consumer Rights.
Contractors should assert their priority rights for construction payments within 18 months of the payment due date (or from project delivery or litigation, if the contract is invalid or lacks a payment schedule). This right must be explicitly claimed when filing creditor claims with the administrator. Failure to do so within the stipulated period results in loss of priority rights, converting the claim into an ordinary creditor’s right.
Contractors are recommended to adopt the following measures to mitigate risks:
Proactive prevention. (1) Conduct comprehensive credit checks and risk assessments of the developer; and (2) specify payment timelines and penalties for late payment in the contract, including a provision allowing the contractor to suspend work if overdue payments reach a certain threshold.
Ongoing management. (1) Keep a close eye on the developer’s operational and financial status; (2) file temporary claims during the developer’s pre-restructuring and apply for asset preservation, focusing on freezing bank accounts and unsold properties; and (3) maintain records such as construction logs, work verification forms and payment reminders to avoid challenges in providing evidence during litigation.
Subsequent remedies. (1) Promptly file claims with the bankruptcy administrator after the developer’s bankruptcy application is accepted, explicitly asserting priority rights; and (2) complete pre-registration for assets used to offset debts.
Audit delays
Some government projects lack time-bound audit procedures, leading to prolonged payment delays and exposing contractors to cashflow risks from upfront funding. Rising financing costs worsen the situation, while deliberate delays or obstructions by project owners in submitting audit documents further stall settlements.
Contractors are advised to take the following actions to reduce risks:
Proactive prevention. Clearly define in contracts the audit timeline, including the start and duration, as well as procedures for addressing delays.
Ongoing management. (1) Ensure proper documentation of process records during construction, such as work verification forms and acceptance check reports; and (2) submit complete settlement documents immediately after project acceptance.
Subsequent remedies. (1) Promptly issue written reminders with deadlines in cases of audit delays; (2) if the project owner intentionally delays or the audit department fails to complete the process, seek court approval to replace administrative audits with judicial appraisal; and (3) if the contract stipulates that delays imply acceptance of the submitted price, file a lawsuit to demand payment accordingly.
Wage arrears of sub-contractors
Wage arrears for migrant workers are not rare in multi-level sub-contracting, where sub-contractors may misuse project funds or struggle financially themselves, leaving workers unpaid.
Under article 30 of the Regulation on Ensuring Wage Payment to Migrant Workers, workers may demand that the general contractor settles any outstanding wages and, if refused, file a lawsuit against the general contractor.
General contractors are advised to tackle this potential issue through the following measures:
Proactive prevention. (1) Implement direct wage payments via a dedicated account set up by the general contractor; (2) stipulate in sub-contracts that the general contractor may deduct unpaid wages from project payments; (3) require sub-contractors to provide wage payment guarantees; and (4) obtain guarantee insurance for migrant worker wage payments.
Ongoing management. Mandate sub-contractors to submit monthly documentation and ensure proper archiving, including migrant worker rosters, attendance records and wage confirmation forms (signed by workers) for archival purposes. Randomly verify wage payments directly with workers.
Subsequent remedies. (1) Respond swiftly to wage complaints by launching an internal investigation and, if confirmed, advance payments from the dedicated account to prevent escalation; and (2) after payment, issue a recovery notice to the sub-contractor and, if the sub-contractor fails to repay, further seek offset against project funds or hold guarantors liable as per contract terms.
Finally, if migrant workers sue the general contractor, request the court to add the sub-contractor as a co-defendant – holding them ultimately responsible – and present evidence such as bank transfers and attendance records to demonstrate the general contractor’s fulfilment of oversight duties.
Song Zhongchun is a deputy director and senior partner at City Development Law Firm, and a director at its Beijing office. He can be contacted by phone at +86 138 1817 0255 and by email at szc7676@163.com
