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the general contractor receives payment for that work from the project’s owner. The essential problem with the pay-if-paid clause is that it transfers risk of the owner’s nonpayment from the general contractor to a project’s subcontractors. This is inherently unfair, as the general contractor is the entity in the best position to manage payment disputes with the owner. It is even more unfair when you consider that subcontractors are already laying out funds for labor and materials rendered to the project and are typically required to continue rendering labor and materials regardless of whether payment occurs in a timely fashion. A reasonable alternative to pay-if-paid is the similarly-named “pay- when-paid” clause, meaning general contractor can only wait a reasonable period of time before paying the subcontractor, regardless of whether the owner has paid. This makes good sense, as it is fair that the general contractor has some time to resolve whatever payment dispute they may have with the owner, but because they have a direct contract and relationship with the owner, it is also fair that the general contractor bears the ultimate risk that the owner fails to pay. If you want to learn more skills and tips about avoiding construction claim pitfalls, you can receive a free copy of my book “The Subcontractor’s Roadmap to Getting Paid for Extra Work” by emailing me at jwyatt@harrisonlawgroup.com.
would only be entitled to an extension of time within which to finish the work. This can turn a subcontractor’s finances upside down, as the additional unrecoverable costs can eat into any profit and overhead the subcontractor was to make on the project. A reasonable alternative is requiring a general contractor (or owner) to be responsible for some damages and some scope of delay, such as reimbursing for the out-of-pocket costs of delay, which might include demobilization and remobilization costs, as well as the cost of fluctuations in the price of labor or materials over time. If a party “actively interferes” with a subcontractor’s work, such as ordering the subcontractor to stop and start work off-schedule, however, then that party should be required to pay for all damages caused by that active interference.
Pay-if-Paid
A “pay-if-paid” clause typically states that payment by a construction project’s owner is a condition precedent to a general contractor’s obligation to pay a subcontractor for project work. That is, under a pay-if-paid clause, the general contractor has no obligation to pay a subcontractor for work on a construction project unless and until
-Jeremy Wyatt
jwyatt@harrisonlawgroup.com
www.HarrisonLawGroup.com
(410) 832-0000
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