Don’t Fall For The “Pay-If-Paid” Clause In Construction Contracts

pay if paid clause construction contractsAre you a subcontractor who has been handed a contract with a “Pay-If-Paid” clause? Wondering what it is or what to do about it? As the economic pinch continues, clauses like this are becoming more and more common in contracts between general contractors and their subs. They are a way for the general contractor to manage the risks of non-payment by the client and they can spell very bad news for subcontractors who are often last in line to be paid on a project. In this article we’ll take a look at the Pay-If-Paid clause and explain what it means to you, the subcontractor.

Understanding The Pay-If-Paid Clause

In a nutshell, a Pay-If-Paid clause means the subcontractor only gets paid if the general contractor gets paid.

In an ideal world, the sub and the general would come to an agreement on the scope of work, set a price that will be paid for that work and the general will pay the sub, even if the general contractor does not get paid by the homeowner/client. Under an agreement like this, the general bears all the risk of the owner not paying up. Under a contract with a Pay-If-Paid clause, however, that risk of non-payment is shifted to the subcontractor. It’s entirely possible, under contracts with a Pay-If-Paid clause that the subcontractor will never be paid for the work done.

Another common clause is Pay-When-Paid. Under this clause, the subcontractor gets paid when the general gets paid. Subcontractors are a bit more protected in this circumstance because it really only affects the timing of when the subcontractor will receive payment. Colorado courts have determined that generals must pay the subs at some point even if the general does not get paid under a Pay-When-Paid contract clause.

Colorado courts allow both of these provisions in construction contracts, but with certain protections for the subcontractor. To be enforceable, the Pay-If-Paid clause must be extremely specific and precise.

  • The primary or general contractor is only required to pay their subs if the owner pays the general first, and
  • The subcontractor understands and is accepting of the risk of the owners’ non-payment to the general.

If these conditions are not met, the courts are apt to interpret the Pay-If-Paid clause as a Pay-When-Paid clause, which allows the general to delay paying the sub but only for a reasonable amount of time. After that, the sub must be paid whether the general contractor has been paid or not.

The key to the enforceability of these clauses is whether or not the subcontractor understood the risks of homeowner non-payment and intended to accept them.

What Could Go Wrong

Both the Pay-If-Paid and Pay-When-Paid clauses are frequently seen in subcontracts. Problems arise when the sub tries to collect for work done and is denied, with the contractor relying on the signed contract as protection from having to pay the subs.

Aside from the risk of the client genuinely not paying for the work done or becoming financially insolvent, the Pay-If-Paid clause opens up the opportunity for collusion between the general contractor and the homeowner. The general could very easily come to an under the table agreement with the homeowner where the homeowner doesn’t pay for the subcontractor’s portion of the work completed. The general then claims they never got paid for the work and since you signed the contract with a Pay-If-Paid clause in it, you’re out of luck.

Protecting Yourself From Shady Clauses

The best way to protect yourself and your business from questionable construction clauses like this is to have them reviewed by a construction attorney before signing the document. Many subcontractors are reluctant to turn down contracts even if they know there are clauses in them that could harm them financially. Tough economic times have made it necessary for subs to take any work they can get, even if they have to sign contracts they aren’t 100% comfortable with to land the job.

Don’t let that happen to you! Construction contract lawyers are skilled at walking that fine line between protecting subcontractors and remaining in the good graces of general contractors. It’s okay to push back on the contract a bit, you just have to do it right, which is something that construction lawyers know exactly how to do.

For more information about preventing construction disputes, consult an attorney at Schlueter, Mahoney & Ross, P.C. Our construction attorneys can be reached by phone at (303) 292-4525, at our office, or by filling out the contact form on our Contact Us page.

Our construction law attorneys, Michael A. Schlueter and Elliot Fladen represent clients throughout Colorado, including Denver, Aurora, Broomfield, Boulder, Greely, Commerce City, Lakewood, Highlands Ranch, Littleton, Arvada, Westminster, Pueblo, Thornton, Colorado Springs, and Fort Collins.

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