ConstructionPro Week, Volume: Construction Advisor Today - Issue: 60 - 06/17/2010

Shared Risk of Owner Non-payment

Several months ago we addressed the risk of owner nonpayment. Should the risk be borne solely by the prime contractor who, of course, elected to contract with the project owner? Or should subcontractors share this risk?


The question arises in the context of “pay-if-paid” clauses in subcontracts. The subcontractor gets paid for its work only if the prime contractor receives payment from the project owner for the sub’s work. These clauses are controversial. And their enforceability is increasingly subject to challenge.

 

The controversy was evident in the large volume of comments we received. The breakdown was predictable. Subcontractors react to pay-if-paid clauses with indignation. Prime contractors feel shared payment risk is an appropriate business arrangement.

 

I again invite you your opinion on this topic, particularly with regard to the relative abilities of the parties to determine the creditworthiness of the project owner. And is it fair to utilize a contract clause which effectively negates a subcontractor’s public works payment bond rights or private works mechanic’s lien rights?

 

Bruce Jervis, Editor
Construction Claims Advisor

 

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