With the continued growth of the construction market, the number of disputes arising from construction contracts has remained persistently high, characterized by complex factual circumstances and far‑reaching interests. In judicial practice, the tendency to prioritize performance over contractual terms remains widespread in the construction sector. Some contractors, pressured by market competition and lacking a sufficient understanding of legal risks, often accept without question the stringent clauses imposed by the project owner, thereby overlooking the latent legal hazards they entail. Among these, “back-to-back” provisions, inflated cost estimates, and management‑fee clauses constitute three major “minefields” where disputes are particularly concentrated and risks are often concealed. Improper handling of such provisions can directly impede final settlement, result in cash flow bottlenecks, or even expose contractors to substantial liability for damages. Drawing on relevant legal norms and judicial precedents, this paper systematically reviews and analyzes the practical considerations and adjudicatory principles governing these key contractual provisions, with the aim of guiding market participants to enter into contracts in a compliant manner and effectively manage associated risks.

1. Clause Sketch

“Back-to-back” clauses are commonly used in construction subcontracting agreements. They stipulate that the payment terms between the general contractor and the subcontractor make the general contractor’s payment conditional upon the employer’s payment to it; if the employer fails to pay the general contractor, the subcontractor may not hold the general contractor liable for delay‑in‑payment breach of contract. In essence, such clauses enable the general contractor—situated in the middle of the payment chain—to leverage its dominant position to shift the risk of non‑payment by the upstream employer onto the downstream subcontractor.

2. Risk Warning

Some subcontractors assume that receiving payment upon completion of the work is a given, while overlooking the legal implications of contractual provisions such as “payment shall be made only after the owner has paid” or “payment shall be made in proportion to the owner’s disbursements.” When the settlement period arrives, a simple statement from the general contractor—“The owner hasn’t paid me yet”—can leave the subcontractor stranded on an indefinite and protracted quest for unpaid wages.

3. Referee Guidelines

With regard to the validity of “back-to-back” clauses, in the Supreme People’s Court’s Reply Concerning the Validity of Clauses by Which Large Enterprises and Small and Medium-sized Enterprises Agree to Make Payment Conditional upon Receipt of Funds from a Third Party (hereinafter referred to as “…”), Reply Prior to the issuance of the “Reply,” since the clause itself did not fall under any grounds for invalidity arising from violations of mandatory provisions of laws and regulations, and as an expression of the principle of autonomy of will among equal parties, the “back-to-back” clause should be deemed valid. However, following the promulgation of the “Reply,” the validity of the “back-to-back” clause will vary depending on the nature of the contracting parties.

Scenario One: Large Enterprises vs. Small and Medium-sized Enterprises—Clauses “abusing a position of strength to oppress smaller parties” are directly invalid. The Reply states that, in the course of construction project execution or the procurement of goods or services, if a large enterprise agrees with a small or medium-sized enterprise that payment is conditional upon receipt of funds from a third party, such clauses are invalid because their content contravenes the… Regulations on Ensuring Payment to Small and Medium-sized Enterprises In accordance with the provisions of Articles 6 and 8, the people’s court shall, pursuant to Article 153, Paragraph 1 of the Civil Code, declare such contractual clause invalid.

Scenario Two: Between Like‑Kind Enterprises—In Principle, Valid. Where the contracting parties do not fall within the aforementioned “large vs. small” special circumstances, judicial practice generally respects the principle of party autonomy in commercial transactions and holds “back-to-back” clauses to be valid.

Even in the aforementioned scenario II, where the “back-to-back” clause is deemed valid, the general contractor is not entirely free from risk. After the project has been completed, accepted as compliant, and a reasonable period has elapsed, if the general contractor delays settlement and fails to exercise its due claims against the employer, thereby preventing the subcontractor from receiving payment in a timely manner, the subcontractor may assert its right to claim the outstanding project payments from the general contractor.

4. Rights Protection Guide

Signing Phase The subcontractor should, to the extent possible, avoid including purely “back-to-back” clauses and instead seek to agree on a maximum payment‑waiting period. For example: “Regardless of whether the employer has made payment, the contractor shall pay the remaining project balance within X months from the date of successful completion and acceptance of the works,” thereby converting uncertain risks into a fixed time frame.

Performance Phase The subcontractor may monitor the progress of settlement between the general contractor and the owner, and issue regular reminders via official correspondence or other appropriate means.

Dispute stage : In the event of a dispute, the subcontractor shall, without delay, refer to the Law of the People’s Republic of China on the Promotion of Small and Medium-sized Enterprises, the Regulations on Ensuring Payment to Small and Medium-sized Enterprises, and… Regulations on the Classification Standards for Small and Medium-sized Enterprises 》In accordance with the relevant provisions, verify your enterprise’s classification: if the subcontractor meets the criteria for a small or medium-sized enterprise while the general contractor qualifies as a large enterprise, you may, in litigation, invoke the content of the “Reply” to argue that the “back-to-back” clause is invalid.

1. Clause Sketch

“Overestimation and over‑calculation” refers to the practice of inflating project budget estimates or settlement amounts by artificially raising material prices, falsely increasing quantities of work, or applying inflated unit rates, thereby driving up the estimated cost or the final settlement price. To guard against such practices, employers often include in contracts a provision stipulating that if the reduction rate of the contractor’s submitted settlement exceeds a specified threshold (e.g., 3%–5%), the contractor shall bear the audit costs for the excess portion and pay the employer a penalty or fine equal to a certain percentage of the reduced amount (e.g., 5%–20%). This is known as an “overestimation and over‑calculation limitation clause.”

2. Risk Warning

At the settlement stage, many contractors often harbor the侥幸 mentality that “it’s okay to overstate a bit—at worst, they’ll just have it cut,” or, due to disorganized internal management, include change orders and claim amounts—based on insufficient evidence and without the employer’s valid confirmation—directly in the cost submitted for review. Once the “limitation on overestimation and speculative calculations” clause is triggered, contractors may face hefty liquidated damages and audit fees, leading to the predicament of “losing money even after completing the work.”

3. Referee Guidelines

Judicial practice generally holds that the “limitation on overestimation, overstatement, and miscalculation” clause is, in essence, a liquidated damages provision. In accordance with the principle of party autonomy, if the parties have expressly stipulated such a clause in the contract and the clause does not contravene any mandatory provisions of laws or administrative regulations, it is, in principle, deemed valid. A contractor’s assertion that the clause is invalid solely on the grounds that it is “excessively stringent” or “manifestly unfair” will typically not be upheld.

Even if the clause on “capping excessively high or speculative liquidated damages” is valid, it does not necessarily mean that the employer will be entitled to recover liquidated damages in the proportion or amount stipulated in the contract. This is because the contractor will typically seek a reduction of the liquidated damages on the ground that the agreed amount is disproportionately higher than the actual losses incurred. In such cases, the court will conduct a substantive review of the employer’s “actual losses.”

4. Rights Protection Guide

Signing Phase The contractor may proactively seek to appropriately raise the reduction rate threshold for liability for “overestimation and miscalculation,” thereby allowing reasonable leeway for normal settlement discrepancies.

Review stage Before formally submitting the final settlement, the contractor shall conduct a rigorous internal review to ensure that quantities and unit prices are supported by original documentation, including contracts, change orders, meeting minutes, and construction logs, thereby avoiding the inclusion of change negotiations or claim amounts that are subject to significant disputes or lack sufficient supporting evidence in the total amount submitted for approval.

Dispute stage If the contractor does not accept the audit results unilaterally commissioned by the employer, it shall promptly file an application in the litigation. Construction Cost Judicial Appraisal Furthermore, if the contractor requests the court to reduce the liquidated damages, they must submit sufficient evidence to demonstrate that the contractual liquidated damages are excessively higher than the losses actually incurred as a result of the breach.

1. Clause Sketch

In the construction engineering sector, particularly in cases of subcontracting, illegal subcontracting, or reliance on a shell company (i.e., borrowing qualifications), the subcontractor, the illegal subcontractor, or the party whose qualifications are lent—often referred to as the “lender”—frequently agrees with the downstream contractor—the actual constructor—that the latter shall pay the former a “management fee” calculated as a certain percentage of the project’s contract price. While such clauses ostensibly constitute consideration for management services, they often serve as a vehicle for lending qualifications and reselling projects for profit. Their true purpose is to circumvent the mandatory provisions of laws and regulations, such as the Construction Law of the People’s Republic of China, that govern qualification management and prohibit subcontracting and illegal subcontracting.

2. Risk Warning

Some actual construction workers, in order to secure contracts, are forced to accept the exorbitant fees imposed by subcontractors, illegal sub‑contractors, or entities under which they are registered. Management Fee Clause “as long as they can secure the work, paying a management fee is standard practice in the industry.” However, when project profits are meager or losses occur, disputes over management fees can easily arise, and the actual contractor may find it difficult to recover the management fees already paid.

3. Referee Guidelines

Pursuant to Article 1 of the Interpretation (I) of the Supreme People’s Court on Several Legal Issues Concerning the Adjudication of Disputes over Construction Project Contracting, any construction project contracting agreement entered into by a contractor with another party—where the contractor has borrowed qualifications, sub-contracted, or engaged in illegal subcontracting—is void. With respect to an agreement whereby the actual constructor pays a management fee to the upstream contractor or the entity that lent its qualifications, if such management fee constitutes part of the project price and the contractor or the qualification‑lending entity has indeed participated in the organization, management, and coordination of the construction work, the matter may be handled in accordance with the contractual provisions. However, if the contractor or the qualification‑lending entity merely collects the management fee without actually participating in the construction process—neither contributing funds nor assuming risks—such management fee shall be deemed an unlawful profit and will not be upheld.

4. Rights Protection Guide

Signing Phase The actual contractor shall comply with applicable laws and avoid entering into contracts that, for the purpose of lending qualifications, subcontracting, or illegally assigning subcontracts, stipulate a fixed‑percentage management fee. Such contracts are void and entail extremely high legal risks. The actual contractor should instead execute lawful and valid labor‑subcontracting or specialized‑subcontracting agreements. If it is nevertheless necessary to include a management‑fee clause, the contract should clearly set forth the specific management duties and responsibilities of the contracting party corresponding to that fee. With respect to management‑fee rates that are manifestly excessive, the contractor may raise objections and request written justification for the basis of such charges.

Performance Phase The actual contractor should carefully review and verify settlement documents, remain vigilant regarding deductions for management fees, and refrain from signing off on unreasonable deductions in reconciliation statements or settlement schedules. The contractor should also ascertain whether the subcontractor has indeed assigned management personnel, participated in construction organization, management, and coordination, and committed managerial resources, while diligently preserving relevant evidence.