In today’s fragile real estate climate, general contractors are under pressure from developers to reluctantly accept risky “nominated subcontractors” – but proactive early steps can minimise their liabilities
In construction engineering, the use of “nominated subcontractors”, although formally prohibited, remains widespread, often driven by specialised technical requirements or the strong influence of the project developer.
Senior Partner
Wintell & Co.
Tel: +86 138 1755 2995
Email: tony.wang@wintell.cn
General contractors, eager to secure projects, frequently feel compelled to accept such arrangements, exposing themselves to multiple risks including payment disputes and ambiguous contractual liabilities.
The introduction of the 2025 Revision to Regulations on Ensuring Payments to Small and Medium-sized Enterprises (the payment regulations) and Official Reply of the Supreme People’s Court on the Issue of Validity of an Agreement Between Large Enterprises and SMEs That Payment is Contingent Upon Receipt of Payment from a Third Party (the reply) has significantly restricted the enforceability of “back-to-back” clauses, placing general contractors under heightened financial and compliance pressure.
Contentious background
The legal status of nominated subcontracting arrangements has long been contentious. Although multiple regulations – such as the Measures for the Bid Invitation and Bid Tendering for Construction and Engineering Projects and the Measures for the Administration on the Construction by Subcontract of House-building and Municipal Infrastructure Projects – explicitly prohibit developers from appointing subcontractors, these rules lack clear punitive measures.
Meanwhile, judicial interpretations including article 13 of the Supreme People’s Court Interpretation on Construction Project Contract Disputes (I), implicitly acknowledge the practice. As a result, courts generally do not invalidate subcontracts solely due to the involvement of a nominated subcontractor.
This ambiguity creates operational leeway for the use of nominated subcontractors.
Even at the tender stage, many general contractors are required to accept a “recommended subcontractor list” provided by the developer, with non-compliance effectively precluding a successful bid.
Particularly under current pressures within the real estate sector, contractors are often forced to accept these arrangements to secure work, trapping them in a dilemma where winning a project involves regulatory non-compliance and assuming significant payment risks.
Invalidity of back-to-back clauses
Associate
Wintell & Co.
Tel: +86 139 1771 1427
Email: husen@wintell.cn
Traditionally, general contractors transfer the risk of developer non-payment to their subcontractors by inserting back-to-back clauses into agreements, which made subcontractor payment conditional on the general contractor itself receiving payment from the developer.
But since enactment of the payment regulations and the Supreme People’s Court reply, back-to-back clauses between large enterprises and SMEs in construction contracts are now explicitly void.
Notably, this prohibition does not distinguish between standard subcontracting arrangements and those involving nominated subcontractors.
Nominated subcontractors are typically selected by the developer through its own tender process, leaving the general contractor with neither a choice in their appointment nor effective management control.
Consequently, the general contractor derives limited benefit, reflected in the typically low management fee for such arrangements, yet is consistently deemed by courts to be the party liable for payment.
This forces the general contractor to effectively underwrite the developer’s selection decisions and credit risk.
Amid widespread financial distress among developers, this risk of non-payment is accumulating at the general contractor level, imposing severe operational and financial strain.
Preventive measures
When dealing with this nominated subcontractor dilemma, general contractors are advised to take proactive steps across several fronts – from the tender process and contractual terms to payment procedures – to clarify that they act solely as a conduit for funds flowing from the developer to the nominated subcontractor.
This is essential to avoid being legally characterised as the principal party liable for the subcontract works.
Delineating responsibilities in the main construction contract. It should be explicitly stipulated that works performed by nominated subcontractors fall outside the general contractor’s scope, with the contractor merely providing co-ordination and payment agency services – not assuming direct payment liability.
Crucially, any inclusion of such works within the main contract’s scope must be avoided to prevent them from being legally characterised as the general contractor’s own obligation.
Standardising the tender process and fee structure. The developer should directly appoint the nominated subcontractor and issue the letter of acceptance. Any management or co-ordination fees payable to the general contractor should be separately specified within the main contract, with payment made directly by the developer.
It is inadvisable to stipulate such fees in the subcontract, or to structure payment as a discount on sums received from the developer, as this could establish a direct contractual relationship with the subcontractor.
Reinforcing the subcontractor’s delegated relationship with the developer within the nominated subcontract. The optimal approach is to execute a tripartite agreement that clearly defines the roles of the developer, the general contractor and the subcontractor, explicitly stating that the general contractor acts neither as the principal employer nor the party liable for final settlement.
If a bilateral contract between the general contractor and subcontractor is required for administrative purposes, it must be accompanied by a legally binding supplementary or tripartite agreement stipulating that the contractual relationship directly binds the developer and the subcontractor.
Ring-fencing the payment process to cement the general contractor’s role as a conduit for payments. At the invoicing stage, the nominated subcontractor should submit payment applications directly to the developer, with the general contractor only responsible for forwarding it. For payments, the developer must remit funds designated for the general contractor and the subcontractor separately, avoiding combined transfers.
Finally, the final account settlement should be conducted directly between the developer and nominated subcontractor, with the general contractor refraining from issuing settlement documents or confirming amounts owed to the subcontractor.
Tony Wang is a senior partner at Wintell & Co. He can be contacted by phone at +86 138 1755 2995 and by email at tony.wang@wintell.cn
Hu Sen is an associate at Wintell & Co. He can be contacted by phone at +86 139 1771 1427 and by email at husen@wintell.cn
