As a subcontractor, the negotiation/bid process is a very exciting, yet stressful time. The prospect of securing a new project makes it easy to consider foregoing necessary due diligence of the proposed agreement. It is important to consider what you are agreeing to and how the terms could curtail your project and affect cash flow. Most contractors expect payment for their work timely and properly performed, and rightly so. However, entering into an agreement that contains certain provisions may delay payment and create cash flow issues for contractors.
What is a Pay-if-Paid Clause?
A Pay-if-Paid clause creates a condition precedent (i.e. payment by the project owner to the prime contractor) to any obligation or duty by the Prime Contractor to make payment to its Subcontractors. Historically, Colorado courts enforce pay-if-paid provisions if the provision expressly contains the following:
- An unambiguous statement that the subcontractor will be paid only if the prime contractor is first paid by the owner of the project.
- The clause states that the subcontractor bears the risk of the project owner's nonpayment.
For example, in an agreement that contains a Pay-if-Paid provision, the Subcontractor may submit invoices to the Prime Contractor and in turn the Prime Contractor can deny payment pending payment by the project owner.
What is a Pay-when-Paid Clause?
This means when a Pay-when-Paid provision is agreed to by the contracting parties (i.e. Prime Contractor and Subcontractor), payment will be made within a “commercially reasonable” amount of time, regardless of whether the Prime Contractor received payment from the project owner. A Pay-when-Paid clause is enforceable by Colorado courts, typically.
The distinction between a Pay-if-Paid clause and a Pay-when-Paid clause is important to make. A Pay-if-Paid clause makes payment contingent on the project owner's payment. A Pay-when-Paid clause only allows for a reasonable delay in payment by the Prime Contractor to the Subcontractor, not entirely excuse it. It is important to know the distinctions between the terms before entering into an agreement.
The information contained on this blog is intended to be general information only and not legal advice. Laws change frequently and the information on this website may not be up to date, nor is the information intended to be fully comprehensive. For these reasons, we suggest you seek a licensed attorney to help you review and negotiate these agreements.