Is subcontracting permitted?
Construction (2nd edition)
Yes. There are no statutory restrictions on subcontracting, however had contract contracts may restrict the amount or type of work that can be subcontracted or require prior authorisation to subcontract.
Yes. Parties (e.g. client or (main) contractor) can contractually limit subcontracting. Very often contracts stipulate that subcontracting the whole of the works is not allowed. Also, in certain circumstances, the client may require the contractor to enter into subcontracting agreements with specific subcontractors (so-called nominated subcontractors).
Subcontracting an engineering construction project is allowed in China with certain limitations to the range of projects. According to applicable laws and regulations, the construction of the main structure (excluding steel structure) shall be completed by the general contractor singlehandedly and shall not be subcontracted. What’s more, subcontractors may further subcontract the labour works to others but are not allowed to subcontract any other non-labour works and shall complete such non-labour works on their own.
Subcontracting is permitted by the Civil Obligations Act, the Public Procurement Act and the Special Construction Practices. The Special Construction Practices regulate in detail the legal relationship between the contracting authority and the contractor. The Public Procurement Act prescribes that, if a tenderer in the phase of submitting its bid already knows that it shall subcontract part of the contract, it is obliged to notify the public entity thereof (percentage, share or value of the public procurement contract). The public entity will exclude the proposed subcontractor if it has not paid any due and payable tax liabilities and pension and health insurance obligations. The selected tenderer can, with the approval of the contracting authority and during the performance of the public procurement contract, subcontract a part of the contract, however not more than 30% of the value of the public procurement contract.
Subcontracting is a widely used practice in the construction industry. However, most public contracts require the customer’s agreement beforehand. In case a subcontractor is hired, the project's general contractor continues to have full responsibility for project completion within the parameters and deadlines stipulated in the main agreement. Many contracts contain subcontracting clauses that define precisely the requirements a subcontractor has to fulfil.
As a principle, unless the parties have expressly agreed otherwise, the contractor is under the obligation to personally perform the assigned construction works and therefore has no right to further subcontract any of its works to a third party (684 GCC). That said, in practice, a typical construction or EPC Contract provides for the contractor's right to subcontract any part of the works but not the whole of the works, which would lead to substitution. Further to the above, when it comes to large-scale projects, it is quite common for a construction or EPC Contract to specify certain categories of subcontractors, the appointment or replacement of which requires prior approval by the Employer.
As far as the public contracts are concerned, subcontracting is not only permitted but also encouraged, aiming to improve access of SME's to public procurement. In this context, in its procurement documents, the contracting authority asks the tenderer to indicate any share of the contract it may intend to subcontract to third parties and to specify any proposed subcontractors (Article 58 of Public Procurement Law). The above requirement notwithstanding, the contractor may request the contracting authority to approve a subcontract during implementation of the project, provided, however, that the main contractor continues to perform at least 70% of its scope of works (Art. 165 of Public Procurement Law). In this respect, it is noted that, as a principle, any subcontractors engaged in public projects must comply with the eligibility and qualification criteria set out under the respective tender documents (Art. 131 para. 3 of Public Procurement Law).
Sub-contracting is generally permitted. However, pursuant to article 364 para. 2 CO, the contractor is obliged to carry out the work in person or to have it carried out under his personal supervision, unless the nature of the work is such that his personal involvement is not required. In other words, subcontracting is permitted if the nature of the work does not require the personal involvement of the contractor. As the nature of the work is rarely viewed as “personal” in the context of construction works, sub-contracting should generally be permitted. The parties may, however, contractually restrict or exclude the right of subcontracting, and may, in particular, grant the principal the right to oppose to the choice of the subcontractors (veto right) or to propose/impose certain subcontractors (proposal right).
Subcontracting in the United States is permitted and frequently utilized. Most general contractors lack experience or expertise in a specific trade for which it must provide services as part of the overall project. Subcontracting also provides a way to reduce costs or to mitigate risk. Among the benefits, subcontractors are generally less expensive than hiring full-time employees, subcontractors warrant the services they provide, risk can be transferred through a subcontract, and subcontracts can be easily terminated. Subcontracts often contain “flowdown” provisions, allowing the terms of the principal contract to flow down through the subcontract to the subcontract. This makes the subcontractor liable to the contractor for the same things for which the contractor is liable to the owner.
There are only restrictions in respect of public procurement. Where contracts are awarded by private clients, the only way restrictions on sub-contracting can be imposed is by contract.
Yes. It is common for the main contractor to subcontract the majority of his obligations to third parties. In general, the main contractor will remain liable to the employer under the main contract for any default arising from subcontractors’ performance. The main contractor, however, is not vicariously liable in tort for the performance of his subcontractors.
In private projects, typical subcontracting clauses would only allow such practice by the contractor, when previously approved by the Owner. Some clauses would include a limit to subcontracting without previous approval, or even a list of predetermined subcontractors.
In public projects, the Brazilian Legislation (article 7.2 of Lei 8.666/93) allow subcontracting only up to the limit previously set forth by the public administration. The idea is that a "substantial portion" of the works shall not be subcontracted.
Yes. There are no statutory restrictions on subcontracting.
There is not a legal provision that reject the subcontracting in any scenario (public and private contracts). However in both cases will depend on the Owner if they permit or not, to subcontract some works.
Yes. It is common for the main contractor to subcontract the majority of its obligations to third parties. Generally, the main contractor will remain liable to the employer under the main contract for any default arising from subcontractors’ performance. However, the main contractor is not vicariously liable in tort for the performance of its subcontractors. The employer is generally not entitled to sue a subcontractor unless it has a claim in tort or a direct third party right (see question 20).
In the construction of buildings, it is possible to subcontract bids always within the limits established in the construction contract signed between the developer and the builder.
In the construction of infrastructures, given their public nature, they are subject to Law 9/2017, of November 8th, on Public Sector Contracts, whose articles 214 and 215 regulate the transfer of the contract as well as subcontracting. In order to subcontract, it must be stipulated in the specifications which governed the award of the work.
In practice, the employers permit subcontracting subject to a prior approval procedure. It is also a common practice to include a list of permitted subcontractors / vendors as an attachment to the contract. On the other hand, in theory, since the nature of construction works does not strictly require personal involvement of the contractor, contractors are allowed to engage subcontractors unless otherwise provided under the contract.
Subcontracting is permitted in South Africa. In the private sector, the employer and contractor usually negotiate and agree the contract amount or the type of works that can be subcontracted.
The PFMA 2017 Regulations regulate subcontracting in the public sector. The PFMA Regulations provide that a bidder cannot subcontract more than 25% of the contract value to another party if that party does not have at least the same or better transformation accreditation, known as a 'BBBEE' score or grading. [Section 6(5) of the PFMA Regulations]
For public contracts, the subcontracting of the entire scope of the contractor agreement is prohibited, and the partial subcontracting of the essential parts of contractor agreement can be prohibited by the public authorities;
For private contract, the project owner can freely prohibit or authorize subcontracting by the contractor.
Subcontracting is in any case subject to a strict and mandatory body or rules laid down inter alia by a law dated 31st December 1975, aiming to protect subcontractors.
These rules provide notably for the obligation for the main contractor to have the names and the payment terms of the subcontractors approved by the project owner and to provide a guarantee of payment to the subcontractors.
These rules bind the main contractor but are also a source of obligations and of potential liabilities for the project owner towards the subcontractors. For instance, under certain conditions, the subcontractors will benefit from a direct right of payment by the project owner in case of a default by the main contractor.
Subcontracting is permitted and very common.
Under the AB Standards, unless otherwise agreed sub-contracting is permitted to the extent that it is common or natural to delegate the work. This will very often be the case.
Most sub-contractor agreements are currently based on AB 92 and are often drafted to ensure back-to-back terms (that are the same as the terms of the main/turnkey contract).
- Subcontracting is permitted and utilized in most construction and engineering projects.
- The Fair Transactions in Subcontracting Act regulates subcontracting with the aim of protecting subcontractors that, by virtue of being smaller enterprises, may otherwise be compelled to accept unfair contractual terms by a contractor. The act regulates unfair pricing, unreasonable contract terms, unjustified refusals to accept delivery, etc.
- Certain types of subcontracting are prohibited. Article 29 (1) of the Framework Act on the Construction Industry prohibits a contractor from subcontracting the entirety or a major portion of its work to a single subcontractor (Article 31 of Enforcement Decree of the Act establishes the range of what is considered to be a major portion in such cases).
- Article 29 (2) of the same Act prohibits a contractor from subcontracting a part of its work to a subcontractor that is registered to conduct the same business as the contractor, except where the employer has given its written consent to such subcontracting.
- Article 29 (3) of the Framework Act on The Construction Industry also prohibits a subcontractor from further subcontracting its work, unless such subcontracting meets the very limited exception criteria set forth by the article, namely that such further subcontracting is done to carry out specialized work or is carried out in order to improve the quality or efficiency of the construction work, with prior approval from the contractor.