Your subcontractor has caused a delay and you are facing the penalty

Who Pays for the Delay When the Client Only Knows You

The client bought a deadline from you, not the organization of your supply chain. If a party breaches a contractual obligation, it must compensate the other party for the resulting damage (Section 2913 of the Czech Civil Code). A party can only be exonerated by an extraordinary, unforeseeable, and insurmountable obstacle that arose independently of its will, and not even then if it was an obstacle that you were contractually obliged to overcome. The failure of your own subcontractor is generally not such an obstacle.

This leads to a distinction that is key to the entire article. The relationship with the client and the relationship with the subcontractor are two separate contracts with their own deadlines, penalties, and burden of proof. You handle a penalty asserted by the client under the first contract and claim it as your own damage under the second. You cannot simply re-invoice the penalty directly to the subcontractor; legally, it is a different claim with different prerequisites and a different scope of what you must prove.

The difference is immediately apparent in what you must allege and prove. For a penalty, it is sufficient to prove the breach of the secured obligation and its agreed-upon rate; for damages, you must also document the amount of the loss and the causal link to the subcontractor's actions. It is at this point that the chain of claims most often breaks, and the general contractor is left to deal with the penalty alone. How the opposing party defends against such a claim is shown in the article on defending against a major claim for damages.

The second thing to clarify immediately is the subcontractor's position in relation to the client. If a debtor performs through another person, they are liable as if they had performed themselves (Section 1935 of the Czech Civil Code). Therefore, the client does not examine how you selected and supervised the subcontractor; you are fulfilling your own obligation to them, and the subcontractor's failure is your problem. The argument of careful selection is useful elsewhere, not as a defense against a penalty from the main contract.

The second common misconception concerns the moment when your damage actually occurs. Compensation is paid for actual damage and what the injured party has lost; if the actual damage consists of the creation of a debt, the injured party has the right to have the tortfeasor relieve them of the debt or provide compensation (Section 2952 of the Czech Civil Code). Therefore, your damage arises from the mere fact that a debt for a contractual penalty has been validly incurred against you by the client, and payment of the penalty is not a condition for you to pursue the claim further.

For the general contractor, this leads to a practical conclusion about documenting the selection and supervision process. While documented subcontractor selection, ongoing evaluations, and records from progress meetings do not change your liability to the client, they do carry the evidentiary weight for the second half of the chain. If they are missing, you lose support for the claim that the delay belongs to a specific subcontractor, and you start the dispute over the causal link from a disadvantageous position.

What to Secure in the First Week to Make the Claim Provable

The steps below describe the typical course of a project with a fixed deadline and linked subcontracts; whether all of them are appropriate in your case depends on the wording of both contracts and whether the delay affects the critical path—which is why the lawyers at ARROWS law firm assess each project on a case-by-case basis.

The first step is to create a record that attributes the delay to a specific cause. The minutes of a progress meeting should include the date, the affected activity, the name of the subcontractor, their deployed capacity, and the impact on subsequent work expressed in days. Without this attribution, a year later you will be claiming that a specific party caused the delay, but the schedule will not show it. Have the subcontractor sign the minutes as well; if they refuse, note this and email the minutes to them the same day.

The second step is a written notice to the subcontractor with a specified deadline. A debtor who does not perform their debt properly and on time is in default (Section 1968 of the Czech Civil Code). Default thus occurs by the mere lapse of the deadline, but without a notice, you have no proof of when you objected to the delay and what you demanded. If the default constitutes a non-material breach of contract, only the fruitless expiration of an additional reasonable period will open the way for you to withdraw from the contract; in the case of a material breach, you can withdraw even without it.

The third step is to notify the client, and this is a step that companies most often omit. Concealing an impending delay will rob you of the opportunity to negotiate a deadline extension and will strengthen the argument that you were not managing the situation. The notification should include the cause, the expected extent of the delay, and the measures you are taking. It should not contain an admission of liability or a promise of a new deadline that you cannot guarantee; both will come back to haunt you during negotiations about the penalty.

The fourth step is the ongoing recording of costs. This includes the downtime of your own crews, extended site facilities, costs of accelerating work, penalties applied by the client, and additional costs for a replacement subcontract. Keep a itemized record with supporting documents from day one, because reconstructing it from accounting records a year later means losing a substantial part of the claim and giving the other party room to challenge each item separately.

Recourse Against the Subcontractor: Where It Breaks Down

A claim for damages rests on four elements, and in court practice, it almost always breaks down on two of them. You can prove the subcontractor's breach of duty relatively easily with the contract and the schedule. You can document the amount of damage with the client's invoice and your cost records. What remains are the causal link and the question of whether you could have averted the damage yourself.

The opposing party attacks the causal link by claiming a concurrence of multiple delays. On a project with ten subcontractors, several are often delayed simultaneously, and the question is who shifted the critical path. The answer is provided by an updated schedule with dependencies marked, not a verbal description. Companies that do not update the schedule during the project significantly worsen their position on this point and must prove it from construction diaries, minutes, and correspondence.

The second point is prevention. The opposing party will argue that you could have deployed replacement capacity sooner, accelerated subsequent work, or negotiated an extension with the client. The defense is documented decision-making: quotes from replacement subcontractors with dates, acceleration cost calculations, and correspondence with the client. Decisions made without a record are difficult to defend in court because they cannot be placed in time, and the opposing party can easily interpret them as an after-the-fact fabrication.

Deploying a replacement company is tied to the withdrawal regime from the original subcontract, which is discussed in a separate article on when a supplier misses a deadline: when to charge a penalty and when to assign the work to someone else. Both situations need to be planned together, as the costs of substitute performance are one of the largest items in your claim, and their assertion depends on whether you withdrew from the subcontract under the correct regime and at the right moment.

The third point is the statute of limitations, which runs differently than most companies expect. The Supreme Court has concluded that if the damage consists in the creation of a debt, the decisive factor for the start of the subjective limitation period is the knowledge of the person of the tortfeasor and of the creation of the debt, not the fulfillment of the debt or its due date (judgment of the Supreme Court, file no. 23 Cdo 1594/2021 of 15 February 2023, available at rozhodnuti.nsoud.cz). Waiting until the end of the project to assert a claim is therefore risky; the claim should be asserted continuously, and its amount specified as you go.

The fourth point is the choice of procedure for the enforcement itself. Asserting a claim by setting it off against the subcontractor's unpaid invoices is faster and cheaper than a lawsuit, but it requires your receivable to be sufficiently specific and due. What a managed claim enforcement process looks like is shown in the article on the court enforcement of claims against supplier companies.

Why Your Own Contractual Penalty Can Close Off Recourse

Most general contractors agree on a penalty for delay with their subcontractors and consider it a baseline to which damages will later be added. The law has it the other way around: if a contractual penalty is agreed upon, the creditor is not entitled to compensation for damage arising from the breach of the duty to which the penalty relates (Section 2050 of the Czech Civil Code).

The consequence for large projects is devastating and easily overlooked. A penalty agreed at a fraction of a percent of the subcontract price per day of delay will yield tens of thousands, while the penalty invoiced to you by the client based on the price of the entire work runs into the millions. Without an express reservation of the right to claim damages in addition to the penalty, you bear the difference yourself, even if you succeed in the dispute with the subcontractor.

The solution is a single sentence in the subcontract agreement stating that damages can be claimed in their full amount in addition to the contractual penalty. Add to it that this also applies to penalties asserted by the client and to additional costs for substitute performance. A general mention of damages without this clarification invites a dispute over the scope, and in practice, the opposing party will exploit it.

Moreover, you may not receive the full agreed amount. A court may, at the debtor's request, reduce an unreasonably high contractual penalty, taking into account the value and importance of the secured obligation, down to the amount of damage incurred up to the time of the decision by the breach of the obligation to which the penalty relates (Section 2051 of the Czech Civil Code). The Grand Chamber of the Supreme Court does not assess the rate itself, but the unreasonableness of the specific claim based on the circumstances of the breach and how it affected the interests protected by the penalty; the quantified damage is merely the lower limit below which the penalty cannot be reduced.

Whether a penalty or the path of damages is more advantageous for your subcontract depends on the ratio of the prices of both contracts and the penalty rate with the client—and because this ratio differs for each project, the lawyers at ARROWS law firm assess it before the subcontract is even signed.

How Companies That Succeed in Passing on Liability Secure Themselves

The foundation is mirroring deadlines and penalties. The subcontract should contain deadlines derived from the main contract's schedule with a buffer for your inspection and acceptance, and penalties at least high enough to cover a proportional part of the penalty from the client. A practical rule is to subtract the time you realistically need for inspection, defect removal, and handover to the client from the main contract's deadline, and only then agree on the result with the subcontractor.

The second element is security that survives even the subcontractor's insolvency. Even the best-drafted clause is worthless if the other party has no assets to pay from. In practice, what works is a retention from each payment released after acceptance, a bank guarantee for subcontracts above an agreed value, and for smaller companies, a shareholder's personal guarantee. The order of strength is obvious; the order of feasibility during negotiations is often the opposite.

The third element is the right to substitute performance at the subcontractor's expense, agreed upon in advance. A clause allowing you to assign the work to another party and set off the costs after the fruitless expiration of an additional deadline is, in practice, more effective than a penalty because it resolves the situation factually and immediately. However, it must include a procedure for determining the reasonableness of the substitute performance price; otherwise, the dispute will shift from the deadline to the price, and you will lose the time you gained all over again.

The fourth element is cooperation in providing evidence, which is often forgotten. The contract should include the subcontractor's obligation to participate in progress meetings, to maintain and hand over documentation of the work's progress, and to provide it even after the collaboration has ended. Without this, after the subcontractor leaves, you are left with only your own records, which the opposing party will challenge as unilateral. The context of contractual setups for construction projects is discussed in the article on the contract for work in construction.

Mistakes General Contractors Make and Their Cost

The most expensive mistake is signing a subcontract using the other party's business terms. These usually limit liability to the price of the subcontract and exclude consequential damages, thereby closing off recourse before the work even begins. For subcontracts of significant value, it pays to insist on your own template, even at the cost of longer negotiations on the terms; you can concede on price, but not on liability for the deadline.

The second mistake is extending the deadline with the client without simultaneously amending the subcontract. If you negotiate a new deadline with the client but leave the original one for the subcontractor, you formally create a claim that has no basis in actual damage, because none was incurred. The opposite scenario is worse: you extend the subcontractor's deadline but not the client's, thereby creating a delay for yourself.

The third mistake is settling the matter with the client through a settlement agreement before you have resolved the issue with the subcontractor. A settlement usually contains a declaration that all claims have been settled, and the subcontractor will build a defense on it, arguing that you no longer have any damage left. The text should therefore include a reservation of claims against third parties, formulated specifically and with reference to the affected subcontracts.

The fourth mistake is mixing delays with changes in the scope of work, which is discussed in a separate article on when the client changes the scope during implementation. Additional work and changes in scope have their own regime and their own impact on the deadline, and if you mix them into a claim for delay, you will weaken both. The claims must therefore be kept separate from day one and quantified separately.

Whether specific work falls within the original scope or constitutes additional work is assessed by the lawyers at ARROWS law firm based on documentation in disputed cases, not on the custom established on the construction site.

Where the Claim Against the Subcontractor Is Lost

Final Summary

The article has shown that passing a penalty on to a subcontractor is not a matter of re-invoicing, but a separate claim for damages with its own prerequisites. You are responsible to the client for the work, and you cannot change that position. The only thing you can influence is whether you will have a provable claim against the party who actually caused the delay.

For the company's management, two things are crucial, and both are addressed before signing. The first is the ratio between the penalty you face from the client and the penalty you have agreed upon with the subcontractor. The second is whether your subcontract allows you to claim damages in addition to the penalty. If the answer to the second question is no, the difference between the two penalties is your loss.

Meanwhile, procrastination becomes quietly expensive. Every week that a delay is not recorded and attributed to a specific cause reduces the chance of proving the causal link, which is the point where these disputes are most often lost. Companies that succeed in recourse do nothing complicated; they simply record who the delay belongs to from day one.

The lawyers at ARROWS law firm will review and align your main and subcontract agreements, set up the work progress documentation, quantify and assert the claim for damages, and represent you in settlement negotiations and any subsequent dispute. Write to us at consultation@arws.cz or browse our commercial and litigation service.