Getting paid as a subcontractor — what to do before the money stops

Updated 2026-09-24 · All guides

Most contractors who bid government work also take subcontracts from larger firms executing those same projects. The money behaves very differently there, and the difference catches good contractors out.

On a government contract the rules are published, the measurement procedure is written down and a bill that is certified gets paid from a budget. Down a private subcontracting chain, payment depends on a contract you signed, a reconciliation you may not have kept, and a certification you cannot see. None of that means anyone intends to cheat you. It means the risk sits with whoever has the weaker paperwork — and that is usually the smaller firm.

This guide is about not being that firm. Nothing here is legal advice, and your own contract overrides every general statement in it.

The clauses that decide whether you get paid

Read these before you sign, not when the money stops. In a dispute, the contract is the first thing anyone asks for, and "it was understood on site" carries no weight.

• The payment period, and what starts it. Thirty days from what — your bill, the certified bill, or the client's own receipt from the principal? A clause that pays you only after the main contractor is paid ("pay when paid") moves someone else's delay onto your cash flow.
• Retention. How much is held (commonly 5–10%), when half comes back, and what releases the rest. Retention released "after the defect liability period" with no date is money you may chase for years.
• What may be deducted. Statutory deductions are unavoidable — income-tax TDS, 2% GST TDS on contracts over ₹2.5 lakh, labour cess where it applies. What matters is the rest: material recovery, debit notes, hire charges, penalties. Get the rates written down.
• Free-issue material, and the rate at which excess is recovered. This is the clause that quietly turns into a large recovery. See the next section.
• Variations and extra items. How a rate is fixed for work not in the schedule, and whether you may start before that rate is agreed. Work done on a verbal instruction, at a rate never fixed, is the commonest unpaid claim in this industry.
• Escalation. On a contract running more than a year, whether steel, cement and labour rate rises are yours to absorb.
• Suspension and termination. What notice you must give before stopping work, and what notice they must give you. Walking off site without following this clause can turn you from the aggrieved party into the defaulter.
• Dispute resolution. Arbitration or court, who appoints the arbitrator, and where it sits. A seat in another state makes a small claim uneconomic to pursue, and both sides know it.

Register as an MSME before you start. It is the strongest card you have.

If your firm is a micro or small enterprise, get the Udyam registration done before the contract begins — not after a payment goes bad. The law that follows applies to a registered micro or small supplier, and it covers services rendered, not only goods supplied, so subcontracted works are included.

What the MSMED Act 2006 gives you:

• A hard payment deadline. The buyer must pay by the agreed date, and that date cannot exceed 45 days from acceptance of the goods or services. Where there is no written agreement on the period, it is 15 days (section 15).
• Punitive interest, automatically. A buyer who misses it owes compound interest with monthly rests at three times the RBI bank rate (section 16). That is far above any commercial rate, and it runs whether or not your contract mentions interest.
• A forum that must decide quickly. You can refer the dispute to the Micro and Small Enterprise Facilitation Council in your state, online through the MSME Samadhaan portal. Every reference must be decided within 90 days (section 18).
• And the part that changes behaviour: if the buyer loses and wants to challenge the award in court, no court will even entertain the application unless the buyer first deposits 75% of the award (section 19). A large firm can outspend you in a normal civil suit for years. It cannot do that here without paying most of the money first.

There is a second lever, in tax law. Under section 43B(h) of the Income-tax Act, a buyer cannot claim a deduction for a sum payable to a micro or small enterprise beyond the section 15 limit until it is actually paid. A finance department that would happily hold your bill another quarter behaves differently when holding it moves the firm's own tax liability.

Two practical points. Keep your Udyam certificate with the contract file and state the registration on every invoice. And do not treat Samadhaan as the nuclear option to be saved for the end — a firm that knows you are registered and know your rights usually pays before it gets there.

Reconcile material every month, in writing, signed

Where client-supplied material is involved, this is the single largest avoidable liability in subcontracting — and it accumulates silently. Steel, cement, pipes and fittings are issued against your account all year. Nobody totals it. At final bill, the client's stores produce a consumption statement, compare it with theoretical consumption from the drawings, and recovers the difference — often at a penal rate well above market. A year of small unrecorded losses becomes one number large enough to wipe out the profit on the job.

Every month, without exception:

1. Total what was issued to you — from gate passes and issue slips, not memory.
2. Total what the work should have consumed — theoretical quantity from the executed measurement and the drawings.
3. Count what is physically left on site, and what you have returned.
4. Explain the gap — legitimate wastage, cutting loss, breakage, rework ordered by the client, material consumed in work not yet billed.
5. Get the statement signed by the client's storekeeper or engineer, and keep your copy.

A signed monthly statement is almost impossible to reopen a year later. An unsigned one is an invitation to a recovery you cannot disprove.

Agree the wastage norms in writing at the start — steel cutting loss, cement in wet-mix, breakage on tiles and fittings. If the contract is silent, the client's norm applies, and it will not be generous. Return scrap and surplus formally, against a receipt. Scrap handed back without paperwork is scrap you were never credited for.

The records that win a dispute two years later

Disputes are not decided by who is right. They are decided by who can show what happened.

• Joint measurement, recorded and signed as the work proceeds. Not reconstructed later.
• Proof that a bill was submitted — an acknowledged copy, a stamped inward register entry, or an email. "Submitted on the 5th" with nothing to show it is not a date.
• A hindrance register. Every day you could not work because the front was unavailable, a drawing was awaited, or material did not arrive. Recorded when it happens, and copied to the client. This is what answers a delay claim against you.
• Written notices. If the contract says notify within so many days, notify in writing, within the days. A valid claim is regularly lost purely for want of notice.
• Instructions in writing. If it was said on site, send an email the same day confirming what was said. An unanswered confirmation is worth far more than a memory.
• Drawing revisions, with dates. Work done to a superseded drawing is work you may be asked to redo at your cost.
• Photographs, dated, of hidden work before it is covered.

Watch your exposure, not just your profit

The failure that closes contracting firms is not a bad rate. It is running too much unbilled and unpaid work at once, and discovering it only when the cash stops.

• Bill early and often. Monthly, small, on time beats a large bill at the end.
• Know your number. At any moment, unbilled work plus uncertified bills plus certified unpaid bills is your exposure to that client. Decide what you can survive losing and treat it as a limit, not a guideline.
• Slow down before you are in too deep. When the exposure passes your limit and payment has not moved, that is the moment to raise it — formally and in writing, while you still have leverage and while the relationship is intact. The "just one more month" instinct is what turns a recoverable amount into an unrecoverable one.
• Never let the running account statement drift. Reconcile your ledger against theirs monthly. Two ledgers that have not been compared for a year will not agree, and the difference will be argued from their statement, not yours.

When the money stops

In order, and do not skip steps — each one builds the record the next one needs.

1. Put your own house in order first. A clean, reconciled statement: work done, certified, paid, deducted, outstanding. A claim that does not tie out invites a counter-claim about material.
2. Ask in writing, with that statement attached, and a date for reply.
3. Send the notice your contract requires, in the form and within the time it requires.
4. If you are a registered MSE, file on Samadhaan. It is online, costs nothing to start, and puts a 90-day clock and punitive interest on the table.
5. Invoke arbitration under the contract clause, if that is what it provides.
6. Keep an eye on limitation. Court claims generally must be brought within three years of when the amount fell due. An acknowledgement of debt in writing — a signed reconciliation, a letter admitting the balance — restarts that clock, which is another reason to collect signatures while relations are good.

The short version

Register as an MSME before you start. Read the payment, retention, deduction and free-issue clauses before you sign. Reconcile material monthly and get it signed. Put everything in writing the day it happens. Know your exposure and act while you still have leverage.

None of this makes you difficult to work with. Every good client already keeps these records — and the contractors who keep them are the ones who get paid on time.