Construction Subcontracts and the Construction Business Act: Written Contracts, the Ban on Bulk Subcontracting and Payment Deadlines

Hello, I'm Noriaki Asato, Representative Attorney at LegalAgent.

Construction sites often operate under a multi-layered subcontracting structure, with first-tier, second-tier and third-tier subcontractors stacked beneath the prime contractor, and the Construction Business Act sets its own rules tailored to this transaction structure. Even for operating companies that order or take on equipment work or interior work, entering into contracts without knowing these rules can lead to being found in violation of the law because of deficient contract documents or late payment.

When entering into an ordinary service agreement, companies often check whether the transaction falls under the Act on Ensuring Proper Transactions with Small and Medium-sized Entrustees (Torihiki Tekiseika Act), formerly the Subcontract Act, by looking at the capital and employee-count categories of the entrusting party and the entrusted party. However, the Torihiki Tekiseika Act does not apply to construction subcontracts. This is because the definition of "service provision entrustment" in Article 2(4) of the Torihiki Tekiseika Act excludes a person engaged in the construction business having another person engaged in the construction business undertake all or part of construction work that the former undertakes in the course of business. Construction subcontracts between persons engaged in the construction business are governed by the Construction Business Act instead of the Torihiki Tekiseika Act.

Why the Construction Business Act Governs Construction Subcontracting

The Construction Business Act directly regulates subcontracting because of the structure peculiar to the industry, in which multiple subcontractors line up beneath the prime contractor on a single project. While the Torihiki Tekiseika Act focuses mainly on one-to-one entrustment relationships, the Construction Business Act looks at the entire chain running from the client to the prime contractor, the first-tier subcontractor and the second-tier subcontractor.

For this reason, when construction businesses enter into construction contracts with each other, there are few occasions to worry about the application of the Torihiki Tekiseika Act to payment timing, inspection procedures or the required contents of contract documents; as a rule, the subcontracting rules of the Construction Business Act apply. That said, for transactions that sell materials incidental to the work, or for pure service entrustments that do not constitute construction business, the application of the Torihiki Tekiseika Act and the Antimonopoly Act must be considered separately. The starting point in practice is to determine first whether the subject of the contract is construction work itself or a separate transaction incidental to it.

In addition, except for minor construction work, a person must obtain a license from the Minister of Land, Infrastructure, Transport and Tourism or a prefectural governor to engage in the construction business (Article 3(1) of the Construction Business Act). Before entering into a subcontract, it is important to confirm that the counterparty holds a valid license covering the work in question. A subcontract with an unlicensed contractor is not automatically void, but a construction business that enters into a subcontract with a person engaged in the construction business without a license is subject to instructions and business suspension orders (Article 28(1)(vi) and (3) of the Construction Business Act). Confirmation before signing is a step that cannot be skipped.

Delivering Written Contracts Before Work Begins and the Statutory Items Under Article 19

Article 19 of the Construction Business Act requires the parties to a construction contract to sign, or affix their names and seals to, a document stating the prescribed items and deliver it to each other. Placing orders orally, or exchanging a contract only after the work has started, violates this provision.

The items that the article requires are listed in detail across 16 items, including the content of the work, the contract price, the times of commencement and completion, the timing and method of advance payments and payments for completed portions, the method of bearing and calculating costs and damages when the design or construction period changes, changes to the construction period and the bearing of damages due to force majeure such as natural disasters, changes to the price due to fluctuations in material prices, the content and method where the ordering party supplies materials or lends machinery, the timing and method of inspection and delivery, the timing and method of payment after completion, provisions on liability for nonconformity, delay interest and penalties for late performance, and the method of dispute resolution.

On sites where contracts are layered from the prime contractor down to subcontractors, there are cases where the contract form used at a higher tier is reused as is for a lower-tier subcontract, and inspection and payment terms specific to the subcontract are left out. When preparing a subcontract, the reliable approach is not to rely on reusing a template, but to check one by one that each item of Article 19 is satisfied in light of the specific price, construction period and inspection conditions.

The Ban on Bulk Subcontracting and the Limits on Its Exception

Article 22(1) of the Construction Business Act prohibits a construction business from having another person undertake, in bulk, construction work that it has undertaken, a practice commonly called marunage (wholesale passing-on). This rule is not limited to the prime contractor; the same paragraph (1) applies when a first-tier subcontractor has a second-tier subcontractor undertake the work it has undertaken as is. Furthermore, paragraph (2) of the same article also prohibits the act of undertaking, in bulk, construction work that a construction business has undertaken. A typical example is a form in which the prime contractor does not manage construction itself and leaves the entire project to the subcontractor.

There is an exception to this ban on bulk subcontracting: under paragraph (3) of the same article, paragraphs (1) and (2) do not apply when the prime contractor has obtained the client's written consent in advance. However, this exception cannot be used for every kind of work. For important construction work relating to facilities or structures used by many people, as specified by Cabinet Order, bulk subcontracting remains prohibited even with the client's written consent, and work to newly build apartment buildings falls under this designation. In addition, for public works, the exception in Article 22(3) itself does not apply under Article 14 of the Act on Promotion of Proper Bidding and Contracting for Public Works. On public works sites and sites for newly built apartment buildings, bulk subcontracting cannot be carried out lawfully even with a written consent from the client.

On the prime contractor's side, before entering into a subcontract, it is necessary to determine whether the work is one for which the exception can be used or one for which the exception is not available, and where it is the latter, to keep proper records showing that the company plays a substantive role in construction management. On the subcontractor's side as well, undertaking work in bulk can be subject to instructions and business suspension orders as a violation of Article 22(2) (Article 28(1)(iv) and (3) of the Construction Business Act). When receiving an order that is close to marunage, it is therefore desirable to make clear in the contract the content of the order and the scope of construction management for which the prime contractor and the company are each responsible.

Subcontract Payment Deadlines, Inspection Periods and Appropriate Pricing

The Construction Business Act also sets clear rules on the timing of payment and on inspections.

First, Article 24-3 provides that when the prime contractor receives payment for completed portions or payment after completion, it must pay the subcontractor within one month from the date of receipt and within as short a period as possible. It also requires appropriate consideration to pay the portion corresponding to labor costs in cash.

There are also rules on the inspection period. Under Article 24-4, the prime contractor must complete the inspection within 20 days from the date it receives notice of completion from the subcontractor, and within as short a period as possible. When the work passes inspection and the subcontractor requests delivery, the prime contractor is obliged to accept delivery of the work immediately.

Where the prime contractor is a specified construction business, Article 24-6 sets the upper limit on the payment deadline more clearly. This rule does not apply where the subcontractor is a specified construction business or a corporation with capital at or above the amount specified by Cabinet Order (JPY 40 million). In subcontracts covered by the rule, the specified construction business must set the payment deadline on or before the day on which 50 days have elapsed from the date the subcontractor requested delivery, and within as short a period as possible. If no payment deadline is set, the date of the delivery request is deemed the payment deadline, and if a payment deadline beyond 50 days is set, the day on which 50 days have elapsed is deemed the payment deadline. Delivering promissory notes that are difficult to discount at an ordinary financial institution is also prohibited, and delay interest accrues if payment is not made by the deadline. A subcontractor would do well to confirm the prime contractor's license category and negotiate payment terms with this 50-day rule in mind.

The level of the contract price should also be checked. Article 19-3 of the Construction Business Act prohibits an ordering party from unjustly using its position in the transaction to enter into a contract for an amount below the cost normally required. A prime contractor that keeps placing orders at its previous prices without taking into account rising material and labor costs may violate this rule. Under the 2024 amendment to the Construction Business Act, paragraph (2) of the same article also prohibits a construction business from entering into a contract to undertake work for an amount below the cost normally required, except where there is a legitimate reason, and this has been in force since December 12, 2025. Attention is needed because not only the ordering side but also underpricing by the contractor side is now subject to regulation. The Ministry of Land, Infrastructure, Transport and Tourism's "Guidelines for Compliance with Construction Business Laws (Points to Note in the Relationship Between Prime Contractors and Subcontractors)" set out specific examples of undesirable transactions and the approach to passing on price increases, so it is reassuring to check, when renewing contracts, that the company's practices do not fall under these examples.

For the overall approach to ongoing transactions, see What Is a Master Transaction Agreement? Clauses to Review for Ongoing Transactions and the Relationship With Individual Contracts, and for an overview of the legal rules relating to contracting and entrustment, see Service Agreements, the Torihiki Tekiseika Act (Formerly the Subcontract Act) and the New Freelance Act: Points to Review After the Amendments.