Perspective | If a construction contract stipulates both a management fee and a settlement procedure, how should this clause be interpreted?
Published:
2025-12-31
Company A and Company B entered into a Special Subcontract for Construction Engineering, under which the scope of the subcontracted works includes all tasks, responsibilities, and obligations stipulated in the bidding documents for installation works, the bill of quantities for installation works, and the construction contract. The payment terms for the project are as follows: 60% of the completed work volume (excluding provisional sums) shall be paid upon completion of the foundation work up to the elevation of ±0.00; 75% of the completed work volume (excluding provisional sums) shall be paid after the project is fully completed; 85% of the completed work volume (excluding provisional sums) shall be paid upon successful acceptance of the project; and within one year after the completion of the project audit and final settlement, 95% of the audited value shall be paid, with the remaining balance serving as the warranty deposit. Subsequently, the two parties signed a supplementary agreement, under which they agreed that Company A would make the final settlement to Company B at 77% of the audited value approved by the auditing entity for this project, while the remaining 23% of the audited value would be retained as management fees for the project.
I. Case Summary
Company A and Company B entered into a Special Subcontract for Construction Engineering, the scope of which covers all work items, responsibilities, and obligations stipulated in the bidding documents for installation works, the bill of quantities for installation works, and the construction contract. The payment method for the project is as follows: 60% of the completed work volume (excluding provisional sums) shall be paid upon completion of the foundation work up to the elevation of ±0.00; 75% of the completed work volume (excluding provisional sums) shall be paid after the project is fully completed; 85% of the completed work volume (excluding provisional sums) shall be paid upon successful acceptance of the project; and within one year after the completion of the project audit and final settlement, 95% of the audited value shall be paid, with the remaining balance serving as the warranty deposit. Subsequently, the two parties signed a supplementary agreement, under which they agreed that Company A would make the final settlement to Company B at 77% of the audited value approved by the auditing entity for this project, with the remaining 23% of the audited value being allocated as management fees for the project.
After the contract was signed, Company B carried out the installation and construction work in accordance with the contract requirements. The project was delivered for use in March 2021, and in January 2023, it underwent an audit by the owner, resulting in the final settlement of the project involved. After both parties reconciled the payments for materials, they ultimately determined that Company B had used materials supplied by Company A during the course of the project in the amount of RMB 5,253,704.37. This material cost shall be treated as part of the project payment made by Company B and thus should be deducted from the total project amount.
The two parties are in dispute over the settlement of the project in question, and Company B has filed a lawsuit in court demanding that Company A pay the project balance.
II. Judicial Views
1. First-instance court
(1) Regarding the question of whether the management fee deduction rate should be 23% as agreed upon in the supplementary contract between the two parties, or 10% as claimed by Company B. The two parties signed a Supplementary Agreement, which bears the official seal of Company B and the contract-specific seal of Company A at the signature line. The agreement stipulates: “Both parties agree that Party A (the defendant) shall make the final settlement to Party B (the plaintiff) at 77% of the audited value of the project determined by the auditing entity, with the remaining 23% of the audited value serving as the management fee for the project.” This Supplementary Agreement is an addendum to the subcontracting contract and constitutes a supplementary arrangement regarding the settlement of project payments. It carries the same legal force as the subcontracting contract, and both parties shall abide by its terms.
(2) Regarding Company A’s claim that the material costs should be calculated based on the material cost prices corresponding to the audited values in the audit report: Upon investigation, it was found that when the hospital and the other party jointly calculated the price of the materials, the quantity of materials was based on the delivery notes issued by Company A. The pricing calculation method was as follows: For materials whose prices were listed on the delivery notes, the prices on the delivery notes were used; for materials whose prices were not listed on the delivery notes or whose prices were ambiguous, the prices specified in the audit report were adopted. Both parties acknowledged and signed to confirm this calculation method. Therefore, the amount payable for the materials should be determined according to the figures jointly verified by both parties.
2. Second-instance court
(1) Whether deducting management fees at a rate of 23% violates the principle of fairness. The second-instance court held that, both in terms of the timing of its execution and its content, the Supplementary Agreement represents the mutual agreement reached by the parties regarding how the project payment should be settled. The first half of the agreement—“The parties agree that Company A shall make the final settlement to Company B at 77% of the audited value of the project determined by the auditing entity”—and the second half—“23% of the audited value of the project shall be retained as management fees for this project”—should not be interpreted in isolation. Rather, they should be viewed as Company B’s consent to settle the project payment at 77% of the audited value of the project. As a commercial entity engaged in the construction industry, Company B possesses the experience and capability to assess and control costs, profits, risks, and other relevant factors inherent in the construction sector. Therefore, Company B should be bound by the terms of the agreement it has affixed its official seal to; otherwise, such conduct would violate the principle of good faith and fair dealing.
(2) Regarding the issue of how to deduct the amount for materials supplied by Party A. Company B argues that the construction materials were purchased and controlled for use by Company A, and that the invoices for these materials were issued directly by the material suppliers to Company A. Consequently, the deduction method applied by the court of first instance regarding the “materials supplied by Party A” (i.e., project audit value × 77% - amount already paid - amount of materials supplied by Party A) is incorrect. Even if a 23% management fee were to be deducted, the amount of materials supplied by Party A should first be subtracted from the base used to calculate the total project cost and the management fee—that is, (project audit value - amount of materials supplied by Party A) × 77% - amount already paid. In this regard, this Court holds that: First, according to the agreement in the Supplementary Agreement, the settlement method agreed upon by both parties is 77% of the project’s approved audit value, which represents the settlement price audited and approved by the owner. The calculation method advocated by Company B is inconsistent with both the terms of the agreement and common understanding. Second, the project’s approved audit value—the recognized project cost—is an accounting of all expenses required for the construction project, including labor, materials, machinery, and other costs. The audit value of the project cost already includes the cost of construction materials. The subcontracting contract signed by both parties stipulates that all materials and equipment used in the construction of this project—including those needed for safety protection and civilized construction—shall be supplied by the subcontractor itself, and their costs are already included in the contract price and will not be charged separately. However, during the course of construction, it was changed such that Company A began supplying construction materials to Company B. Under these circumstances, the amount of materials supplied by Party A should be regarded as the amount already paid by Company A.
III. Relevant Regulations
1. The Building Law of the People’s Republic of China (Revised in 2019)
Article 29: The general contractor for a construction project may subcontract part of the contracted work to subcontractors that possess the requisite qualifications; however, except for subcontracting arrangements specifically provided for in the general contract, such subcontracting must be approved by the project owner. In the case of general contracting, the construction of the main structural components of the building must be carried out entirely by the general contractor itself.
2. “Interpretation (I) of the Supreme People’s Court on the Application of Laws in Handling Disputes over Construction Project Construction Contract Cases”
Article 26: If the parties have agreed on the standard for calculating interest on unpaid project payments, such agreement shall prevail. In the absence of an agreement, interest shall be calculated based on the prevailing interest rate for similar loans at the same period or the prevailing market quote rate for loans at the same period.
Article 27: Interest shall begin to accrue from the date on which the project payment is due. If the parties have not agreed on the payment time or the agreement is unclear, the following dates shall be deemed as the due dates: (1) If the construction project has been actually delivered, the due date shall be the date of delivery; (2) If the construction project has not been delivered, the due date shall be the date on which the completion settlement documents are submitted; (3) If the construction project has not been delivered and the project payment has not yet been settled, the due date shall be the date on which a party files a lawsuit.
IV. Insights from Case Handling
1. A settlement agreement signed outside the scope of the construction contract has independent validity; the validity of the construction contract does not affect the validity of the settlement agreement, and the settlement agreement can serve as the basis for determining the project payment amount.
2. General contracting service fee The general contractor provides general contracting services to the specialized construction contractor directly appointed by the project owner. Consequently, the fees payable by the project owner (i.e., the construction entity) to the general contractor shall not be further charged by the general contractor to the specialized construction contractor in the form of general contracting service fees or management fees.
3. If the subcontract agreement or any supplementary agreement stipulates a management fee, the validity of such stipulation on the management fee needs to be assessed holistically. If the agreement on the management fee is accompanied by an agreed-upon settlement method, the court may treat this stipulation as part of the settlement agreement during the trial process.
V. Practical Experience and Recommendations
In the actual construction process, subcontractors often have no choice but to sign unreasonable management fee agreements with general contractors in order to receive project payments as soon as possible. When signing such agreements, it is crucial to carefully assess and strictly control factors such as project costs, profits, and risks to avoid unnecessary losses.
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