Pay When Paid

A pay-when-paid contract provision shifts the risk of nonpayment from one party to another. This provision is commonly found in subcontracts, but it can occur in all types of construction contracts. In subcontracts, the general contractor shifts the risk of nonpayment to the subcontractor if the general contractor is not paid by the owner. This type of provision is valid if it contains certain “magic language” such as “condition precedent” or “contingent upon”.
An example is:
“Receipt of payment by Contractor from Owner for the Subcontract Work is a condition precedent to payment by Contractor to Subcontractor, and Subcontractor hereby acknowledges that it will rely on the credit of Owner, not Contractor, for payment of the Subcontract Work.”
Alternatively, if the agreement is silent on this topic, generally there is no contingent payment obligation. In the example above, this would mean that the general contractor must still pay the subcontractor even if the general contractor was not paid by the owner.
Assuming the contract has a pay-when-paid provision, make sure to enforce your lien or payment bond rights. Doing so can mitigate against an otherwise valid pay-when-paid provision. Specifically, in most cases, if you have valid lien rights against the owner or payment bond rights against the contractor, they cannot assert pay-when-paid as a defense. As important is having the express right to stop work if not paid. Finally, if you are subject to a pay-when-paid provision, then passing that exposure to your subcontractors is important.
We hope this helps you understand the construction contracting process a little better. If you have questions about your contract, send us an email or give us a call (www.thelienzon.... And make sure to check out our other free tools (www.thelienzon... our weekly podcast (www.thelienzon....