I am preparing for a presentation this week on Troublesome Contract Clauses to the Construction Specifications Institute (“CSI”), Nebraska Chapter. One of the clauses we will be discussing is the dreaded Pay-if-Paid clause, a particularly nasty provision that places the risk of owner’s solvency squarely on the subcontractor’s shoulders. While pay-if-paid clauses can create tremendous problems for subcontractors, they are enforceable.
Pay-if-Paid clauses eliminate the obligation to pay the subcontractor until the general contractor is paid by the owner. Pay-if-paid clauses usually contain something akin to the following phrases:
- payment to subcontractors are “expressly and unequivocally contingent upon receipt of payment from the Owner for the Subcontract Work.”
- the subcontractor “expressly acknowledges that it relies on payment under the Subcontract on the creditworthiness of Owner, not that of the General Contractor.”
- the owner’s acceptance of the work and payment to the General Contractor are “conditions precedent to any obligation of the General Contractor to pay the subcontractor.”
If you see these clauses in your subcontract, you should either investigate the owner’s ability to complete and pay for the job or negotiate alternative language in the subcontract. One alternative to the pay-if-paid clause would be to allow for an assignment from the general contractor to the subcontractor the general contractor’s claims against the owner for payment. Another alternative would be to limit the duration of the pay-if-paid clause to a certain number of days after the subcontractor’s pay application. Finally, a subcontractor could demand that is must retain its lien and bond claim rights in the event of non-payment.
I understand that negotiating changes to a general contractor’s contract is often times difficult, but practical approaches to pay-if-paid clauses, which would allow a subcontractor to make demand upon the owner, may prove fruitful.