Pay when paid and pay if paid clauses: what they mean for subcontractors

It links the subcontractor's payment to the general contractor (GC) being paid by the owner. Read as a timing clause, the GC can wait for the owner's money, but not forever: if the owner fails to pay, the GC still pays you after a reasonable time.

It makes the owner's payment a condition precedent. If the GC is never paid, you may never be paid either. The owner's credit risk moves from the GC to you.

The words matter. A clause that expressly calls the owner's payment a "condition precedent" and says the subcontractor bears the risk is more likely to be read as pay if paid, where the law allows it.

These examples are invented for illustration only. Do not copy them into a contract without a lawyer's review.

ILLUSTRATIVE PAY WHEN PAID CLAUSE

Contractor shall pay Subcontractor each progress payment within
[Number] days after Contractor receives payment from Owner for
Subcontractor's work. If Owner has not paid Contractor within
[Number] days after Subcontractor's pay application, Contractor
shall pay Subcontractor within a reasonable time regardless.

ILLUSTRATIVE PAY IF PAID CLAUSE

Receipt by Contractor of payment from Owner for Subcontractor's
work is a condition precedent to Contractor's obligation to pay
Subcontractor. Subcontractor assumes the risk that Owner may not
pay, and Contractor shall have no obligation to pay Subcontractor
for any amount not received from Owner.

There is no single national rule. Three examples:

• California. In Wm. R. Clarke Corp. v. Safeco Insurance Co. (1997), the California Supreme Court held pay if paid provisions contrary to public policy and unenforceable, because they work as an indirect waiver of a subcontractor's mechanics lien rights. The court did not strike down pay when paid clauses. It noted the approach, followed in California, of reading them where possible as fixing the time for payment, leaving the subcontractor an unconditional right to be paid within a reasonable time.
• North Carolina. G.S. 22C-2 says that a subcontractor who performs is entitled to payment, that the owner's payment to the contractor is not a condition of paying the subcontractor, and that an agreement to the contrary is unenforceable.
• Wisconsin. Statute 779.135 makes void, in contracts for the improvement of land in the state, a provision that makes payment from someone without a contract with the subcontractor a condition precedent to the prime contractor paying the subcontractor. It expressly does not prohibit provisions that only delay payment until the prime contractor is paid.

Other states enforce pay if paid when the wording is clear. Check the law of the state where the project sits. On federal jobs, the Prompt Payment Act has its own rules for paying subcontractors.

Before you sign, ask for some or all of these:

• Change "if" to "when" and add a cap. For example, payment within a set number of days of the GC being paid, and in any event within a set number of days of your pay application.
• An exception for the GC's own fault. If the owner withholds because of the GC's work, paperwork or dispute, the clause should not stop your payment.
• Keep your lien and bond rights. Do not sign anything that waives them in advance. Our page on lien waivers explains which waivers to sign and when.
• Retainage terms. Ask that your retainage is released when your scope is accepted, not at the end of the whole project.

Handle it in steps:

1. Read your clause. Is it timing, a condition, or silent? If silent, the payment date in the subcontract applies.
2. Ask a specific question. When did the GC submit its pay application to the owner? When is the owner due to pay? Has the owner raised anything about your work?
3. Ask for the date in writing, then follow up the day after it passes.
4. Protect your rights in parallel. Keep your preliminary notice and lien deadlines in the diary. They keep running while you wait.
5. Escalate on a schedule. A clear sequence, as in our guide to how to collect unpaid invoices, keeps it from drifting. More on getting paid as a trade is on our construction page.

Subject: Pay application [Number] - [Project name]

Hi [First name],

Thanks for letting me know the owner has not yet paid on
[Project name]. Could you tell me:

- the date your pay application covering our work went to the owner
- the date the owner is due to pay it
- whether the owner has raised any issue with our work

Our subcontract [Clause reference] provides for payment within
[Number] days of [trigger]. Pay application [Number] for [Amount]
was submitted on [Date]. Please confirm when we can expect payment.

Thanks,
[Your name]
[Company name]