ConstructionPro Week, Volume: 6 - Issue: 6 - 02/10/2017

Pay-if-Paid Clause Enforcement Controversy Continues

Last week’s article on “Pay-if-Paid” clauses was one of our most-read construction law articles in recent weeks. Thirteen readers weighed in with their responses, from a simple “Read and understand your contract” to a couple of 200+ word commentaries. In short, from the general contractor’s perspectives, GC’s feel they are not banks on hand to finance the project, and if the owner doesn’t pay them, they shouldn’t pay the contractor. Subcontractors, on the other hand, often are the ones taking the most risk and have the most out-of-pocket expenditures.

 

“Pay-when-paid” clauses can be similarly unfair. However, in many public contracts, GC’s (and subs) can usually expect to finance part of the work, particularly change orders. In recent years, prompt payment provisions have evolved to help eliminate delay on the part of the owner, but change orders can drag out payment because of the efforts to submit proposals, negotiate costs and finalize the terms. Pay-if-paid is more onerous, since if the GC never gets paid, neither does the sub.

 

A number of respondents simply recommended not entering into contracts with these clauses, or have them removed. Other suggestions include the use of payment or surety bonds, or for the sub to find other ways of including costs in its bid to cover the risks. If the clause is used, two people recommended including the right to stop work for non-payment. This may be more crucial to private contracts, since this is where a non-payment is more likely to happen, such as a bank pulling funding from a developer. On public contracts, if funding is pulled, payments would likely be due under a termination for convenience clause.

 

Another scenario is where a subcontractor performs a portion of the work, but the owner is refusing to pay for the work due to other issues beyond the subcontractor’s control, i.e., the sub is caught in the middle. In theory, many would say that the GC is the entity that has control over the situation, and should be bearing the risk, thus pay the sub for the work performed. Finally, one reader pointed out that the situation is not limited to trade contractors; that consulting engineers working for architects are exposed to the same problem. To read all the comments, visit the “Should ‘Pay-If-Pay’ Clauses be Enforceable?” article page here.

 

COMMENTS

This type of clause is yet another example of risk transfer to the party least able to mitigate it. Until we figure how to assign risk to the party most able to mitigate the risk, we will continue to make the lawyers rich.
Posted by: Willy Nowotny - Friday, February 10, 2017 11:00 AM


The best defense against this issue is lower your price and require bi-weekly payment for labor and joint checks on materials

Worst case you are out your profit
Posted by: Jim L - Friday, February 10, 2017 12:49 PM


I have been on all sides of this question, and I don't think that there is any one right answer. Subcontractors believe that GC's have more power to get paid than they do. In reality, the GC has little more power over payments than the subs. For any work that is substantial, almost no GC is in a position to guarantee payment if they are not paid.

The two fundamental protections for subs are the lien right and the right to stop work if not paid. No sub should give these up. In Massachusetts, where we work, it is illegal for a bank or owner to interfere by contract with a sub's or GC's lien rights.

One thing GC's normally have the right to do is to satisfy themselves that the Owner has adequate funding sources to do the work. GC's will often share that info with Subs if requested. Also Subs should talk to people in their industry. Does the GC or Owner have a reputation for non-payment or slow payment? Your attorney can also quickly check if these parties have been involved in many lawsuits regarding payment.

Subs have to protect themselves, but its best to stop thinking that you should just be able to look to the GC.
Posted by: Eden Milroy - Friday, February 10, 2017 4:17 PM


It is an "at-risk" industry for the CM's and subcontractors. Ultimately, there are legal remedies, liens, and we all have to take responsibility for our actions and/or in-actions. If we don't submit a timely proposal for a change order, this is on us. If we aren't on top of the monthly billing, that is on us. And yes, we have often have to be an intermediate financier and it sucks. We all want to do the work but also have to stay on top of payments and paperwork.
Posted by: John - Sunday, February 12, 2017 10:21 AM


 









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