More contractors and subcontractors are having trouble getting paid for their work. While an owner losing financing is nothing new, subcontractors are more and more finding pay-if-paid clauses in their contracts that arguably prevent them from pursing the general contractor for payment. What can you do to minimize this risk?
Read Your Contract
I know this sounds obvious, but pay-if-paid clauses can get stuck deep in the contract. And, after reading 15 pages of specifications and terms, one’s mind can start to wonder. But, be on the lookout for these provisions.
What does a pay-if-paid clause they look like?
The clauses can take any number of forms, but one I frequently see looks like:
The obligation of general contractor to make a payment under this Agreement, whether a progress or final payment, or for extras or change orders or delays to the Work, is subject to the express condition precedent of payment therefore by the Owner.
What can you do about pay-if-paid clauses?
Not surprisingly, contractors often refuse to change their contract. But, one alternative may be to modify the clause to allow for an assignment of the contractor’s contract rights against the owner. Another option would be to change the language so that the contractor cannot refuse to pay, even if it does not receive payment, so long as any fault causing the delayed payment is not the fault of the subcontractor. Finally, you could modify the clause to clarify that the subcontractor retains its lien and bond rights should payment not be made.
Pay-if-paid clauses are serious business and you need to review them very closely so that you better gauge the amount of risk you are undertaking.