Discussion on Several Issues Concerning the Priority Scope of Contractor's Compensation- Zhiheng Law Firm

Introduction/Introduction

Article 40 of the Interpretation of the Supreme People's Court on the Application of Law in the Trial of Disputes over Construction Contracts for Construction Projects (1) stipulates that the scope of priority compensation for contractors' construction project prices shall be determined in accordance with the provisions of the relevant administrative departments of the State Council on the scope of construction project prices. If a contractor claims priority compensation for interest, liquidated damages, and damages for overdue payment of construction project prices, the people's court shall not support it.

Based on the above provisions (hereinafter referred to as the provisions of this article), this paper briefly discusses the relevant issues related to the scope of priority compensation for contractors from the four perspectives of the scope of priority compensation for construction project prices determined by the relevant administrative departments of the State Council, whether interest, liquidated damages and damages do not belong to the scope of priority compensation for project prices, whether project quality deposits belong to the scope of priority compensation for project prices, and the issues that should be paid attention to in practice.

The scope of the priority right to compensation for the project price enjoyed by the contractor is the scope of the construction project price determined by the relevant administrative department of the State Council. To understand the scope of the priority right to compensation for the project price, we can grasp it from the following two aspects: First, the purpose of establishing the priority right to compensation for the project price is to protect the wage interests of migrant workers and other construction workers, which is superior to mortgages and other claims.

Therefore, its scope should not only consider the wage interests of migrant workers and other construction workers, but also balance the interests of mortgagees and other creditors. Second, the project price is the input that the contractor materializes into the building during the construction process. Therefore, interest, liquidated damages, damages, etc. do not belong to the scope of the priority of the project price.

Regarding the scope of construction project price determined by the relevant administrative department of the State Council

The Ministry of Housing and Urban-Rural Development and the Ministry of Finance issued the "Construction and Installation Engineering Cost Project Composition" Article 1, Item 1 stipulates that construction and installation engineering costs are divided into labor costs, material costs, construction equipment use fees, enterprise management fees, profits, fees and taxes according to the cost components. That is, the scope of priority compensation for construction project prices enjoyed by contractors is divided from the perspective of cost components, including labor costs, material costs, construction equipment use fees, enterprise management fees, profits, fees and taxes, which are discussed one by one below:

Labor costs refer to various expenses paid by contractors to production workers in construction operations, including wages, allowances, employee welfare fees, labor protection fees, social insurance premiums, housing provident funds, trade union funds, employee education funds, and wage expenses under special circumstances. Because the purpose of establishing the right of priority compensation for project prices is to protect the wage interests of migrant workers and other construction workers, labor costs belong to the scope of priority compensation for project prices and can be paid first.

Material cost refers to the cost of various raw materials, work in progress, components, engineering equipment, etc. consumed in the construction process of the construction project, as well as the amortization and rental costs of turnover materials. Among them, engineering equipment refers to the mechanical and electrical equipment, metal structure equipment, instruments and other similar equipment and devices that form or plan to form part of the permanent project.

Because the material cost is the contractor's input for materializing materials into the building, the material cost belongs to the scope of the project price and can be compensated first.

Third, the construction equipment usage fee refers to the construction machinery, instrumentation usage fee or rental fee incurred by the construction operation, including the construction machinery usage fee and instrumentation usage fee. The reason for its priority compensation is the same as the second point above.

IV. Enterprise management fees refer to the expenses incurred by the contractor in organizing construction, production, and operation and management, including management personnel salaries, office expenses, travel and transportation expenses, fixed asset usage fees, tool usage fees, labor insurance and employee welfare fees, labor protection fees, inspection and testing fees, trade union funds, employee education funds, property insurance premiums, financial fees, taxes, etc.

Because the enterprise management fee belongs to the cost that the contractor needs to bear during the construction process, the enterprise management fee belongs to the scope of the project price and can be compensated first.

Profit refers to the profits obtained by the contractor from engaging in construction activities. Some people hold that profits belong to the commercial interests of the contractor, not the wage interests of migrant workers and other construction workers. They do not involve the construction workers' right to subsistence and should not be compensated first. According to the provisions of this article, profits belong to the scope of the project price and can be compensated first.

The construction industry is a low-profit industry. If the profits are not protected first, it may cause the contractor to be unable to pay the wages of migrant workers and other construction workers, which does not meet the purpose of the establishment of the right of priority compensation for the project price. The exception is that if the contractor claims priority compensation for the project price in accordance with the provisions of Article 39 of the Construction Engineering Interpretation, the expected benefits do not belong to the project price and should not be paid first.

Because in the case of uncompleted construction projects, the expected benefits belong to the scope of breach of contract by the person in the code packet of the released version, and the contractor is liable for breach of contract. According to the provisions of the second paragraph of this article, the claim of priority compensation is not supported.

Fees refer to the fees that the contractor must pay or calculate in accordance with regulations, including social insurance premiums and housing provident funds. Among them, social insurance premiums include endowment insurance premiums, unemployment insurance premiums, medical insurance premiums, work-related injury insurance premiums, and maternity insurance premiums. Because the fees belong to the costs that the contractor needs to bear during the construction process, the fees belong to the scope of the project price and can be paid first.

Taxes refer to value-added tax. The reason why it belongs to the scope of the project price is the same as the above-mentioned sixth point, and it can be compensated first.

In addition, if the relevant administrative department of the State Council amends the provisions on the scope of construction project price, the scope of priority compensation for the project price enjoyed by the contractor should also be changed accordingly.

Regarding the issue that interest, liquidated damages and damages do not belong to the priority scope of the project price

According to the provisions of Article 389 of the Civil Code, the security scope of the security right should include the main creditor's right and its interest, liquidated damages, damages, custody of the secured property and the cost of realizing the secured property.

Therefore, interest, liquidated damages, and damages should belong to the scope of priority compensation. The above point of view is not adopted in this article, mainly because: 1. According to the "Construction and Installation Project Cost Composition" issued by the Ministry of Housing and Urban-Rural Development and the Ministry of Finance, the scope of the project price does not include interest, liquidated damages, and damages, which do not belong to the contractor's materialized investment in the building.

Second, interest, liquidated damages, and damages do not involve the wage interests of migrant workers and other construction workers, and there is no need for priority protection. The following are further classified and discussed:

I. With regard to interest, including interest on the unpaid project price and interest on advance funds. (1) Interest on the unpaid project price. Article 26 of the Construction Engineering Interpretation stipulates that if the parties have agreed on the interest calculation standard for the unpaid project price, they shall be dealt with in accordance with the agreement. If there is no agreement, interest shall be calculated according to the interest rate of the same type of loan in the same period or the quoted interest rate of the loan market in the same period.

Interest owed on the project price is legal fruit, not the actual cost of the contractor for the construction project. It has not been materialized into the building and is not an integral part of the project price. Moreover, according to the provisions of the first paragraph of this article, profits can be paid first, which has been biased to protect the contractor. At this time, the interests of the mortgagee and other creditors should be balanced.

Therefore, interest on the unpaid project price should not be paid first. (2) Interest on advance funds. Article 25 of the Construction Engineering Interpretation stipulates that if the parties have agreed on advance funds and interest on advance funds, and the contractor requests to return the advance funds and interest according to the agreement, the people's court shall support it, except that the agreed interest calculation standard is higher than the interest rate of the same type of loan at the time of advance funds or the quoted interest rate of the loan market for the same period.

If the parties have not agreed on the advance payment, it shall be dealt with according to the arrears of the project. If the parties have not agreed on the advance payment interest, and the contractor requests to pay interest, the people's court will not support it. Because the advance payment interest does not belong to the actual expenditure of the contractor for the construction project and does not belong to the component part of the project price, the advance payment interest should not be paid first.

Article 803 and 804 of the Civil Code provide that if the code packet of the released version fails to provide the raw materials, equipment, site, funds and technical information according to the agreed time and requirements, the contractor may postpone the project date and has the right to request compensation for the loss of work stoppage and work stoppage.

If the construction of the released version of the project is stopped or delayed due to the reasons of the code packet of the released version, the code packet of the released version shall take measures to make up for or reduce the losses, and compensate the contractor for the losses and actual costs caused by the shutdown, lack of work, reverse transportation, transfer of machinery and equipment, backlog of materials and components. There is a view that liquidated damages and damages should be paid first, and the reasons are similar to the reasons why interest should be paid first, based on the provisions of Article 3

89of the Civil Code.

The provisions of this article do not adopt the above point of view, and exclude liquidated damages and damages from the scope of priority compensation, mainly because: liquidated damages and damages are not the contractor's labor, materials, machinery, etc. in the construction process, but because the code packet of the released version violates the contract and other reasons, the civil liability to the contractor is no essential difference from ordinary creditor's rights, and it is meaningless to protect the wage interests of migrant workers and other construction workers.

On whether the project quality guarantee belongs to the scope of priority compensation of the project price

According to the provisions of the first paragraph of Article 2 of the "Measures for the Administration of Construction Engineering Quality Deposit", the project quality deposit refers to the code packet of the released version agreed by the contractor and the contractor in the construction project contract, reserved from the payable project payment, to ensure that the contractor will repair the defects in the construction project during the defect liability period.

There is a view that the project quality bond does not belong to the scope of priority payment of the project price, the main reason is: the project quality bond is paid by the contractor to the code packet of the released version, used to ensure that it is in the defect liability period of the construction project defects to repair the funds, belong to the nature of the guarantee funds, not the materialization of the building input, does not belong to the project price, should not be paid first.

Another view is that the project quality bond belongs to the scope of priority payment of the project price. The main reason is that the function of the project quality bond guarantee cannot change the essence of the project price, but the payment time is attached with a time limit. When the return period agreed by the parties expires, the code packet of the released version shall return the project quality bond.

The "Judicial Interpretation of the Supreme People's Court's New Construction Project Construction Contract (I) " (People's Court Press, 2021 edition, page 417), edited by the First Civil Trial Division of the Supreme People's Court, also tends to this point of view, arguing that the project quality bond belongs to the scope of priority payment for the project price.

When applying the provisions of this article, the following points should be noted

First, in addition to the interest, liquidated damages, and damages for overdue payment of the project price that do not fall within the scope of priority compensation for the project price, common ones that do not fall within the scope of priority compensation for the project price also include: compensation for shutdown losses, finished product protection fees, factoring interest, taxes payable for factoring interest, appraisal fees, etc.

Second, the project quality bond is different from the erformance bond. The project quality bond belongs to the scope of priority compensation of the project price. The erformance bond is not the project price and does not belong to the scope of priority compensation of the project price. Third, the loss of work stoppage does not belong to the scope of priority compensation of the project price, which is due to the breach of contract of the released version, force majeure or other reasons not attributable to both parties caused by labor costs, construction equipment use fees and other on-site stagnation losses, not the contractor in the construction process of labor, materials, machinery and other materialized into the building, according to the provisions of the second paragraph of this article, does not belong to the scope of priority compensation of the project price.

Disclaimer: The views in this article are for exchange and discussion only, not as a basis for handling cases. Please criticize and correct the deficiencies in this article.

About the Author

Shi Wenhui Lawyer

Deputy Director of Zhiheng Haikou Management Committee

Zhiheng Haikou Equity Senior Partner

Director of Zhiheng Haikou Construction Engineering Department

Commercial mediator of Hainan Free Trade Port

Hainan Lawyers Association Construction Engineering and Real Estate

Deputy Director of Professional Committee

Contact number: 18689665886

Unit Address: Binhai Avenue, Longhua District, Haikou City

17th Floor, Block B, Baifang Plaza, No. 105

ZHIHENG

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