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.