Are ‘Pay-If-Paid’ Clauses Still Widely Used?

I agree with Lystra Pitts, the subcontractors are financing the project without compensation, this needs to change at each state. Architects do not realize that the subs are financing their projects and the practice needs to stop.

The paid-if-paid scenario also affects design consultants hired as a sub to architects. If the architect is a new client, it is not unusual to require an initial payment of 50%+. Regular invoicing throughout the project can help to identify potential issues as well.

If no one gets paid by the owner then everyone (but the owner) is financing the project. I am not sure the GC should be the only individual responsible for absorbing an owners reluctance or unwillingness to pay. It is also possible that some of the comments relate to instances where the GC got paid but did not pass some or all of what they should have on to the subs. This would not be a pay if paid instance. I am an arhictect and we never approve a payment request from a GC until we recieve 'trailing' lien waivers from all of the subs listed on the previous payment request. This protects the owner and the subs from a GC who does not pay their bills.

the pay-if-pay clauses are a joke in todays world. not only are the subs on the hook for more and more stuff but the GC wants us to vet his client as well? Most Gc's are only construction managers anyway nowadays they dont do any real work themselves. So what do they know about owing your local supplier tens of thousands of dollars and they freeze your account because you cant pay because the GC hasn't paid you? They have no real money laid out for the project. The GC should be on the hook for payment because then they "push" harder to get paid. If they have no vested interest in getting paid timely then money stretches out 45-60 days and suppliers are waiting 60-90 days. we cant finance the project for you its bad enough that the architect/engineer cant even coordinate their plans so they match so they want to make it the subs resonsibility to catch 'their" mistakes. Many of the subs and trades dont work with high margins so when the GC wants to hold 5% or 10% retainage and then let the owner drag payments out forever it hurts everyone in the chain. These owners either have the money for the project or they dont. And if they do then payments should be made in days NOT weeks after end of month billing. Get the money to the people who put it out for YOUR project and get everyone paid on time. The pay-if-paid is another tool for the continually shifting burden to the subs. We dont have enough time usually to bid the job properly and run the business since most subs are small companies, and then they want us to check the finances of the owner too? then ALL plans and specs should be sent out with a letter of financial standing from the owners bank saying they are funded for the project,and lsisting names numbers and addresses of the people/bank/owner that is the utlimate person responsible for cutting checks! So when the money stops flowing everyone knows who to call. Most of the accounts paayble people in the Gc's office never talk to you or pick up the phone and give you the run around. how many times at 4:00-4:30 do you get a call from so and so saying we cant cut your check until you get or do XYZ and then we will mail it. (nevermind its already 45 days) but now you have to wait for the USPS snail mail? C'mon, they should be paying to overnight fedex the checks to people when its past due. its a vicious cycle of owners lying to GC's and GC's lying to subs and in 2011 it was harder and harder to collect money from GC's than we've seen in awhile.

Whether there has been a rise in the use of pay-if-paid clauses or not, I am certainly seeing them come up more often now in litigation. Kansas passed a law several years ago that made a pay-if-paid clause "no defense" to a payment bond claim.

I personally hate PiP clauses, but in today’s construction world, let’s face it. If the GC is not paid, few have the assets to pay their subs and material suppliers. I do not pretend to know the answer.

I do know that PiP clauses allow bad GC’s to make mistakes and then force all of their subs and material suppliers to share the cost. One of you said you did flooring work. What about when a GC buys out flooring at the end of the project and insists upon a PiP clause, when the GC know that it already have a significant dispute with the owner over the foundation that will hold up final payment to everyone and complete payment to some of the finishes? Something about that fact pattern smacks of fraud to me. A GC should not be able to use a PiP clause to spread around the cost of its mistakes, but they do.

On the other hand, when it is just the issue of owner bankruptcy or further away, lender bankruptcy, shouldn’t the GC be entitled to spread the loss around?

I think the GC should be responsible for its mistakes. I have argued that when the owner holds up the last pay apps and retainage for the entire project when the owner has a problem with something like the concrete work or the roof, he is in effect making an accounting entry on the schedule of values. He is moving money out of all the other line items and putting it back in the line item where the problem exists. The result is that the owner has paid for all the other line items and is refusing payment for the “roof”. In that case, I argue that the flooring guy is entitled to payment. I will the first to note that I have not tried this theory, but I think it does have value.

So, a partial Pip might be in order where the owner or lender went bankrupt. Then when the GC or one of his subs created the problem, all of his other subs should be entitled to payment. They should not be made insurers of the work of other trades.

If you are asking yourself where I am going, the answer is I do not know. Maybe it is a project wide system of payment bonds that insure payment by the owner and insure completion and payment by each of the major if not all of the trades. In other words, if we insist upon banning PiP provisions we will have to develop a program/system that protects both the project and the GC from the incompetence/bankruptcy of the lowest bidder in each trade. If we as an industry really try to see the other side and think through the problems we will solve them. Complaining about them and their evils does nothing. Perhaps bonding the trades and their work is a solution. At least that way the bidders should be financially qualified.