ConstructionPro Week, Volume: 5 - Issue: 26 - 07/01/2016

Should “Pay-if-Paid” Clauses Be Bluntly Worded?

By Bruce Jervis

“Pay-if-paid” clauses in subcontracts are controversial. Many consider it unfair for a prime contractor to shift the risk of project owner nonpayment to a subcontractor that has no business relationship with the owner. In some states, pay-if-paid clauses have been rendered unenforceable by statute or judicial ruling. In most states, however, they are enforceable if clearly drafted.

A recent case in Missouri addressed a clause that said the prime contractor was not responsible for paying the sub “unless and until” the contractor received payment from the project owner. The subcontractor argued the clause was vague and merely gave the contractor a reasonable period of time to make payment – a “pay-when-paid” clause. But it was ruled that the provision was an unambiguous pay-if-paid clause.

If a subcontract payment clause is intended to shift the risk of owner nonpayment to the subcontractor, shouldn’t it expressly say so? This is a fundamental change in traditional business relationships, an alteration of the traditional chain of responsibility on a construction project. Should it be imposed with minced words – “unless and until” – when it could be stated bluntly? Your comments are welcomed.

COMMENTS

As a subcontractor we don't like the paid when paid and especially for high dollar equipment which we pay when paid but cannot hold retention on. Our subcontracts however hold retention on the entire contract amount. This sets the subcontractor up for tight cash flow.
Posted by: Annette Parker - Friday, July 1, 2016 9:19 AM

SO, whom benefits from the work/materials the subcontractor provides? Is it not the owner? Why would the GC be liable for materials/work that the subcontractor provides.

As a GC it would mean that I would have to finance the owner, and loose my leverage with the subcontractor if the owner does not accept the sub's work. GC's are not banks.
Posted by: Brad - Friday, July 1, 2016 9:26 AM

What if non-payment by owner is due to a mistake by the GC? Such as a scope difference between the Prime Contract and the contract with the subcontractor? Or a failure of the GC to adhere to contract terms (such as timely submission of a requisition)? This always concerns me with pay-when-paid clauses, so I try to limit them with exceptions covering these sorts of issues.
Posted by: Bernard - Friday, July 1, 2016 9:46 AM

Subs aren't banks either.
Posted by: Mike - Friday, July 1, 2016 9:46 AM

Pay-if-paid clauses are indeed controversial. It's probably unfair to put ALL risk on subcontractors, when it's the general contractor who contracts with the owner. On the other hand, putting ALL risk on a general contractor who is not self-performing any work is a HUGE risk.
Posted by: Rob Pitkin - Friday, July 1, 2016 9:47 AM

We are a subcontractor also. This is the only system that works. I don't expect a GC to finance a project. The bank drafts to the owner the % complete and so on down the hill. As long as a time period of 7 days after receipt from owner is in the contract. If not it needs to be installed prior to execution.
Posted by: Larry Minor - Friday, July 1, 2016 9:50 AM

Most subcontracts are written to have ties to the Generals contract with the owner as such the sub is bound by the same terms as the GC and subs cannot get paid until the GC gets paid. That is only fair.
Posted by: Rich Berg - Friday, July 1, 2016 10:16 AM

I'm in consulting engineering. Architects often impose the same clause on sub-consultants. Problems arise from “Pay-when-Paid” clauses when architects wrongly assume it shelters them from having to be the bad-guy to get sub-consultants paid. They sometimes think that avoiding collections conflicts with their clients is preserving the relationship they as the prime have developed with the client, and they will just plan to use different sub-consultants on the next job. We always supplement a “Pay-when-Paid” clause by adding verbiage defining and clarifying the architect’s fiduciary responsibility to aggressively pursue collection of sub-consultant’s fees when a client does not pay. This responsibility includes keeping the sub-consultants actively informed of the architect’s actions and efforts towards collection. If they fail to perform their fiduciary responsibilities, the “Pay-when-Paid” clause is voided.
Posted by: Bill Pryor - Friday, July 1, 2016 10:26 AM

GC's usually place a mark up on subcontractors and make good money of the sub's. They should carry responsibility on payment to the Sub's. They never share their profits why sharing the losses shall be applied with the "Paid-when-Paid".
Posted by: Alex Rojano - Friday, July 1, 2016 12:42 PM

I am in a little different spot, doing signage as a sub. I have a clause in my contract that states all signage remains my property until paid in full and require payment schedules and notifications from the owner in the contract. If not paid I simply remove the signs between a TCO and CO inspection. They are my property by contract and will be reinstalled for a fee, paid upfront! Never had an issue!!
Posted by: Mike - Friday, July 1, 2016 2:11 PM

To return to the question, I don't understand what is ambiguous or less than blunt about the "unless and until" language. It covers both necessity to pay and timing.

Eden Milroy, Pilot Development Partners, Inc.
Posted by: Eden Milroy - Friday, July 1, 2016 2:35 PM

There is a middle ground: "Should the Owner not pay Contractor for Subcontractor's work due to the fault of Subcontractor, then Owner's payment to Contractor shall be a condition precedent to Contractor's payment to Subcontractor." This ties consequences to fault which seems fair.
Posted by: Tom - Tuesday, July 5, 2016 10:15 AM

Subs can lien the property and this is the most effective way to get the owner to pay the bills if they are withholding payment to the GC
Posted by: David Dent - Wednesday, July 6, 2016 1:39 AM