Teaching you how to resolve the issue of unresolved final settlement audits

Thread Content

I will show you how to resolve the issue of delays in finalizing settlement calculations. After the contractor submits the settlement report and related documents to the employer, the employer is generally required to complete the review within 30 to 90 days, as stipulated in the contract or by law. However, this is not the case in reality; it’s considered fast if the employer completes the review and settlement within a year. It’s normal to finish the review after two or three years, and it’s not uncommon for the review to still be in progress after four or five years. Why is the employer taking so long to review it? Apart from the reason that the contractor submitted incomplete completion settlement documents, another common reason is that there are disputes regarding some projects ； The internal audit results of the company are not recognized by external appraisal agencies ； The results of the social evaluation are not accepted by the leadership ； The valuation result is approved by the management, but not recognized by the financial audit, etc. However, these are often just excuses; what really matters is that the client wants to take advantage. The settlement amount due after the completion of the settlement review usually accounts for 20%-40% of the total settlement cost; delaying the review process means a delay in payment with almost no interest incurred. These days, the annual interest rate for private financing is at least 25%, and even the overall annual interest rate for loans taken out by local financing platforms from banks is above 15%; it is therefore entirely normal for clients to use various excuses to delay the review and settlement process. Faced with this situation where the employer delays making a decision on settlement, contractors used to endure it in silence. On the one hand, there is concern that offending the client might result in not receiving payment, which could even affect the ability to take on future projects; on the other hand, faced with the client’s plausible excuses, it’s hard to know how to respond. Out of fear of offending the client, during the five years when output value increased by 25% annually, the average profit margin in the construction industry was only 1%. The problem is that with tighter monetary conditions and the consolidation of local financing platforms, the situation of unresolved settlement reviews will continue to worsen. It is foreseeable that settlement review cycles of three to five years or even longer are on the way – can contractors still withstand such pressures? It is time for contractors to say “no” to the persistent problem of unresolved settlements. With this mental preparation, after reading the following counterarguments, the contractor might realize that the employer’s excuse of delaying review is utterly unfounded. Settlement by item – what to do if an agreement cannot be reached on a particular settlement item? 【Claim Confusion】During the final settlement, the contractor and the client have reached an agreement on most items, but there are still a few items regarding which no agreement can be reached, resulting in delays in completing the settlement What should be done? 【Basis for claim】Paragraph 17.5.2(3) of the General Provisions in the \"Standard Construction Bidding Documents (2007 Edition)\” stipulates that: \"If the contractor has objections to the completion payment certificate approved by the employer, the employer may issue a provisional payment certificate for those parts of the completion payment application that have been agreed upon by the contractor.\" For the disputed parts, it shall be handled in accordance with the provisions of Article 24. The 2013 List Pricing Specifications also contain similar provisions. To understand this, consider the following case: [Typical precedent] After a project contracted by the contractor Longyuan Construction for the client Wanbang Real Estate was completed and passed inspection, the contractor submitted a final settlement statement to the client. Several months later, the employer issued a settlement statement to the contractor, stating that the total cost of the project was 46,956,394 yuan. The statement indicated approval of the preliminary calculation and highlighted 5 items on which discrepancies existed between this settlement statement and the one submitted by the contractor. Subsequently, the employer entrusted the Construction Cost Consulting Center to evaluate the cost of the project; the center determined the cost to be 41,535,871 yuan, but did not issue a formal report. Subsequently, the contractor filed a lawsuit at the Shanghai No. 1 Intermediate People’s Court, requesting the employer to pay the undisputed amount of the project cost in the amount of 46,956,394 yuan, as well as the amount related to those parts of the project cost over which there was still disagreement between the two parties. The employer requests an audit of the total cost. (Excerpted from Sobei Network Case 5A0164) [Typical Views] The first view holds that the settlement statement issued by the client was prepared solely for the purpose of commissioning an appraisal, indicating that the project settlement has not been completed. The second view holds that the employer should pay for the undisputed portion of the project cost in accordance with the settlement statement it has issued. 【Sobei Analysis】I agree with the second view for the following reason: the settlement statement prepared by the employer and issued to the contractor is divided into undisputed and disputed parts, with the cost of the undisputed part specified, to which the contractor has no objections. This indicates that the two parties have reached an agreement on all matters except those that are undisputed, and such agreement is legally binding on the employer. The employer may fully pay the undisputed amount based on this, without the need for a separate valuation. As for the cost of the disputed portion, it must be confirmed through an appraisal before payment can be made. In the case law, the Shanghai First Intermediate People’s Court also supported this view. 【Sobei’s Tips】When an agreement has been reached on most of the settlement items, the contractor should: first, request the employer to sign a partial settlement statement outlining the areas that have been agreed upon without dispute and those regarding which there are still disputes over the costs. Secondly, the contractor can first request the employer to pay for the undisputed portion of the work ； Finally, after the payment of the undisputed portion of the price, negotiations are held with the employer regarding the disputed portion; if no agreement is reached, litigation or arbitration is pursued, and an expert assessment of the cost for the disputed portion is requested. No recantation allowed — what if the client requests corrections after approval? 【Claim Confusion】After a settlement agreement has been reached with the employer regarding the cost of some or all of the work, what should be done if the employer requests changes or corrections on the grounds of errors such as double counting, overestimation, or incorrect calculations? 【Basis for claim】Article 8 of the Contract Law stipulates: “A contract established in accordance with the law is legally binding on the parties involved.” The parties shall fulfill their obligations as agreed, and shall not unilaterally modify or terminate the contract. A contract established in accordance with the law is protected by law. To understand this, consider the following case: [Typical Judgment] During the construction of a project undertaken by the contractor Qihang Jian Gong for the employer Great Wall Development, additional projects beyond the original scope included pipe supports, work platforms, and cofferdam construction. After the project passed the completion acceptance, and following an assessment conducted by the China Construction Bank commissioned by the employer, the cost of the work outside the scope of the contract was 2,665,688 yuan. The employer signed the project settlement review and approval document to agree with the CCB’s audit opinions, but still failed to make the payment. Despite the contractor’s repeated requests, the employer demanded that the settlement statement be revised on the grounds of double counting and inflated amounts in the work outside the scope of the contract. After more than a year of unsuccessful negotiations between the two parties, the contractor filed a lawsuit in court. (Excerpted from Suopei Network Case 5A0165) [Typical views] The first view holds that once the employer signs to confirm the settlement statement, they cannot request any corrections thereafter. The second view holds that if there are errors in the settlement statement, the employer still has the right to request corrections, even though they have signed and sealed it to confirm it. [Suobei Analysis] I agree with the first viewpoint. The reasons are as follows: According to legal provisions, the settlement statement represents an agreement reached between the contractor and the employer regarding project settlement. Once such an agreement is legally established and takes effect, it becomes legally binding on the employer, who may not unilaterally alter it. Even if there are instances of miscalculations or double-counting, given that more than one year has elapsed, these do not fall under the category of material misunderstandings, manifest unfairness, fraud, coercion, or taking advantage of another party’s vulnerable situation—circumstances under which revocation can be sought within one year from the date when the party became aware or should have become aware of such situations. Therefore, the employer has no right to unilaterally amend the settlement statement. In the precedents, the Supreme Court also supported this view. 【Sobei’s Tips】During project settlement, the contractor should conduct a thorough verification to avoid omissions and calculation errors due to their own mistakes ； After the settlement statement is signed, if the employer requests corrections on the grounds that there are errors in the settlement, the contractor may rightfully refuse. Irrelevant to auditing – What if the client wants to audit the valuation results? 【Confusion regarding claims】 In the final settlement of projects funded by fiscal or state-owned funds, it is common to encounter situations where: although the employer has already approved the settlement statement, an audit is still demanded ； Or, before the settlement is completed, the client requests that the audit findings be used as the basis for settlement ； What should be done if the audit conclusion is unreasonable? 【Basis for claim】The Supreme People’s Court’s ‘Telephonic Reply on Issues Concerning the Application of Law in Cases Involving Construction Contract Agreements Where the Amount Agreed upon by the Parties and the Amount Determined through Audit by the Auditing Authority Differ’ stipulates that: ‘In cases related to construction contract agreements, the agreement reached by the parties shall serve as the basis for the court’s judgment.’ Audit findings can only be used as the basis for a judgment when the contract explicitly stipulates that audit conclusions shall serve as the basis for settlement, or when the contract provisions are unclear or invalid. Even when it is agreed that the audit conclusions shall be used as a basis, pursuant to Article 49 of the “Minutes of the National Civil Trial Work Conference in 2015”, “if the contractor provides evidence demonstrating that the audit opinion issued by the auditing authority is untrue or unobjective, the people’s court may permit the parties to take measures such as supplementary appraisal, re-examination of evidence, or additional cross-examination to rectify any deficiencies in the audit opinion. Should these measures prove ineffective, the court shall grant the parties’ request for an appraisal of the project cost.” To understand this, consider the following case: [Typical Judgment] The contract for construction signed between the employer, the state-owned enterprise Jiaheng Industry, and the contractor, Jianghai Construction, stipulated that the contractor must submit the final settlement statement to the employer and the bank for review within 5 days after the completion of the project. The employer was required to complete its review within 15 days; if no written objections were raised by that deadline, the contractor could request the handling bank to approve the payment. After the contractor submitted the project settlement statement to the employer, a dispute arose due to the employer’s delay in reviewing it. When negotiations failed, the contractor filed a lawsuit in court. The court of first instance rendered its judgment based on the \"Project Settlement Statement\" prepared by the cost estimator. The employer disputed that ‘Project Settlement Statement’ and filed an appeal with the court of second instance. After the second-instance court upheld the judgment of the first instance, the local provincial audit department conducted an audit of the project and issued an \"Audit Opinion\", stating that there were four errors in the \"Project Settlement Statement\" and that 2.35 million yuan should be deducted. The employer submitted the \"Audit Report\" as new evidence to apply to the court for a retrial. The court conducting the retrial issued a judgment based on the Audit Report, and the contractor, dissatisfied with this decision, applied to the court again for a retrial. (Excerpted from Suopei Network Case 5A0168) [Typical Views] The first view holds that, in accordance with the law, the audit conclusion serves as the **final basis for the settlement of construction projects. The second view holds that audit conclusions cannot serve as a basis for settlement; settlement should be based on the agreements and determinations of the parties involved. 【Sobei Analysis】I agree with the second view for the following reasons: First, the valuation conclusion issued by the cost appraisal agency, which was commissioned by the court in accordance with the law and based on the provisions of the construction contract, is valid and lawful, and should be protected by law; both the contractor and the employer should settle the project payment accordingly. Secondly, the audit conducted by the auditing authority on the settlement of **construction projects constitutes an administrative form of supervision over the employer; it does not affect the validity of the construction contract signed between the employer and the contractor, and cannot serve as a basis for settlement between the two parties. Third, even if it is agreed that the audit findings shall serve as the basis for settlement, any errors in those findings can be corrected in accordance with the law. In the case law, the Supreme Court’s final judgment also supported this view. 【Sobei’s Tips】First, in project settlement, when the contract does not stipulate that an audit shall serve as the basis for settlement, any request by the employer for an audit will not be accepted; instead, settlement shall be carried out in accordance with the provisions of the contract. Secondly, if the employer requests that the audit findings be used as the basis for settlement before the project settlement is completed, this will not be accepted; in such cases, litigation or arbitration can be pursued, along with an application for cost appraisal. Third, even if it is agreed that the audit findings shall serve as the basis for settlement, as long as those findings are incorrect, it is possible to request verification, additional appraisal, or even a separate appraisal. Fourth, after the employer and the contractor sign the settlement statement, if the employer requests an audit, it will not be accepted, nor will cooperation be provided; instead, payment in accordance with the settlement statement is required. In summary, it is time to put an end to this prolonged delay in making decisions regarding settlements. Facing excuses from the employer such as disputes over individual items, errors that need to be corrected in items whose prices have already been determined, or the need for **audits** of items whose prices have already been finalized, the contractor can certainly say \"no\" without any hesitation. By grasping the settlement review stage, one seizes the key to the four rounds of operations. Faced with the challenges of the post-financial-crisis era, contractors should and must stand up, say \"no\" to unresolved settlement issues, and carry out in-depth fourth-round business efforts.