June 28, 2018

There are two different types of clauses that are usually found in construction contracts. One of those is the Pay When Paid contract clause and the other is the Paid If Paid construction clause. Both are quite common in the construction world and both have their pros and cons, but are also different in many ways.

It's important that both of these clauses are understood as they are often written into contracts within the construction industry. Both have the same purpose of protecting the company who is doing the work from doing work for which they will not get paid, but both go about it by adopting different principals in different ways.

Pay If Paid Clause:

A "Pay If Paid" clause states that the contractor will only be required to pay subcontractors that they hire to do work if the contractor receives payment from the owner. In other words, if the person who hired the main company to do the work never pays them, that contractor has no obligation to pay you and your workers for the work that they subcontracted out to your company. Many of these clauses require the business that hires the subcontractor to get a receipt from the client or owner to prove they were paid before they will pay the subcontractors the money that they are owed for their work.

Moreover, most of these "Pay If Paid" clauses come with other requirements as well. These often include the work being done on time and the subcontractor doing satisfactory work before they are paid. This goes the same way as any other job would. If the people you are working for are not satisfied with the work that you do, they will not pay you for a job poorly done.

In some cases, the "Pay If Paid" clause can sometimes require you to fill out an application to prove that the work was done. If the work is reviewed and determined to be satisfactory, then you will be entitled to payment for your work.

Pay When Paid Clause:

The "Pay If Paid" clause is the other option that is often found in contracts in the construction industry which states that the contractor is obligated to pay their subcontractors only when they get a receipt that the owner has paid them for the project that has been done. If the owner of the project takes a few months to pay the contractor for the project that was done then the contractor can take just as long to pay the subcontractors. They are under no obligation to pay the subcontractors sooner than they are paid themselves.

If the contract that was written up does not contain specific terms as to when the payment is to be made to the construction company, then soon as the construction company is paid for the work they must pay their subcontractors within a reasonable amount of time. However, the construction company only has to pay their subcontractor after they receive payment for their work from the owner.

It is specified in most states that if "progress pay" is given to the construction company for a certain amount of work done on a construction project up to a certain point that they must subsequently pay the subcontractors who did portions of the work up to this point. Most states laws will say that the construction companies have seven (7) days to pay the subcontractor starting from the day they received the monies from the owner.

What Are The Legal Pitfalls To These Types Of Clauses?

Oftentimes, most of the legal problems that will arise from these types of contracts occur in the wording and how each party interprets what is stated in the contract. Oftentimes discrepancies in the wording Understanding the other party's terms moving forward can help everyone start on the same page and help avoid pitfalls of legal issues that may otherwise occur when moving forward with certain types of clauses.

It's not that either contract type is better than another, it's more along the lines of what type of clause will work best for the projects you are completing for customers. Many times other legal pitfalls come between the differences that people read into when contractors promise to pay their subcontractors when they are aid versus when they say they will do it within a reasonable period of time once they are paid by the owner. Interpretations of these laws can sometimes make them difficult to interpret how long the construction company has to pay subcontractors in areas or states where laws such as the seven (7) day limit are not in place.

One of the best ways to make it clear as to what each contract requires is to be up front about your expectations as a construction company versus those of the subcontractor. To ensure that everyone is on the same page when the process begins makes it less likely that there will be an issue moving forward with the agreement.

What Can Be Done To Help Minimize Litigation Risks?

While wording a contract in a clear manner that allows everyone to be on the same page can help clear up some confusion that still may occur. Oftentimes, when it can be avoided, subcontractors will want to avoid the "Pay If Paid" and "Pay When Paid" clauses in their contracts if at all possible.

Instead, opt, when possible, to take contracts that pay within a reasonable amount of time for the work completed to satisfaction rather than jobs that rely on other people to pay before you get paid. This protects your workers and your company's bottom line for the work that is done.

Conclusions:

"Pay If Paid" and "Pay When Paid" clauses can be tricky for subcontractors, especially considering if the person hiring the construction company does not pay them promptly (or at all) they are under no obligation to pay your company for the work out did on the project. Instead, opt for contracts that pay within a reasonable amount of time when the work is complete.

For more information on how to ensure that your subcontracting company gets paid in full and in a reasonable amount of time, please feel free to contact us.

Sources:
https://www.taftlaw.com/news-events/law-bulletins/what-difference-does-it-make-pay-if-paid-vs-pay-when-paid
http://www.lawleyinsurance.com/surety-bonds/dreaded-pay-paid-clause-contractors/