Payment clauses … no construction contract clause has a more immediate impact on the bottom line for contractors of all shapes and sizes. Understanding payment clauses can be the key to knowing when to press for payment or not and, ultimately, whether payment will ever arrive for work on a project. Careful review of your contracts with the help of counsel is a shrewd approach; but here are the basics at the risk of over-simplification.
The law varies from state to state, but there are generally two types of payment clauses about which contractors should be concerned. The first is pay-if-paid clauses; and the second is pay-when-paid clauses. While they sound the same at first blush, they are different.
Pay-if-paid clauses are exactly as they appear. If the contractor does not get paid by the owner (or a similar combination in the chain of privity), the contractor does not have to pay the subcontractor. This type of clause would include words like “condition precedent to payment”, “contingent upon receipt of payment from the owner”, “only upon payment from owner”, and other similar language.
Pay-when-paid clauses are not as penal. A pay-when-paid clause permits a contractor to delay payment to the subcontractor (or a similar combination in the chain of privity), but the contractor will eventually have to pay regardless of whether it is paid by the owner. These clauses typically include language like “payment will be made to subcontractor within 15 days of contractor receiving payment from owner, but within 90 days of invoice in any case”.
Courts prefer to see construction firms get paid for the work they perform absent a really good reason to the contrary. As a result, they tend to look for language that they can use to read payment clauses as pay-when-paid language. If it is unclear whether the clause is a pay-if-paid clause or not, rest assured the ambiguity will be interpreted in a manner that ensures it is a pay-when-paid.
Spend a little time reviewing these clauses before signing a contract. If you’re not sure what kind of clause it is, ask. Then negotiate accordingly.