It seems that more and more general contractors are using pay-if-paid clauses in their construction contracts. Pay-if-paid clauses are some of the most controversial and heavily negotiated clause in construction contracts. This article will explain what pay-if-paid clause is and provides some guidance on how to negotiate around these difficult clauses.
A pay-if-paid clause, if properly drafted, pushes the risk of non-payment from the general contractor to you. The clause will first make clear that the upstream contractor has no obligation to pay you until it has been paid. In other words, a pay-if-paid clause means the upstream contractor is only obligated to pay the subcontractor until it receives payment for the subcontractor’s work from the owner.
A typical pay-if-paid clause looks like this:
Receipt of payment from the Owner is a condition precedent to Contractor’s obligation to make payment to Subcontractor; the Subcontractor expressly assumes the risk of the Owner’s non-payment and the Subcontractor’s bid has taken this risk into account.
When you see this provision in your subcontract, your first thought should be to strike it from the contract. Unfortunately, that’s often easier said that done.
If the upstream contractor will not remove the pay-if-paid clause, here are a few recommendations to better position yourself when dealing with these clauses.
- Ask for a copy of the Prime Contract. There may be some language that contradicts the pay-if-paid language, like a verification from the general contractor that all contractors have been paid before payment will be made. Pointing out these inconsistencies may help you negotiate striking the clause.
- Ask for documentation as to the Owner’s financial worthiness to complete the project, like a letter from the bank providing financing. You may get some push back on this, but if the subcontract requires you to assume the risk of non-payment, you are entitled to know whether the Owner can financially complete the project.
- Ask to include language like: Notwithstanding the above language, Subcontractor specifically reserves its rights to pursue construction liens, bond claims and/or equitable remedies to obtain payment.
Pay-if-paid clauses are nasty business and can make it very difficult to recover payment. Dealing with these clauses up front can greatly improve your chances to get paid on your project.
If you need help reviewing and negotiating a pay-if-paid clause, we recommend you contact an experienced construction attorney.