Construction Law

Pay When Paid vs. Pay If Paid Clauses featured image

Pay When Paid vs. Pay If Paid Clauses

One of the most challenging aspects of owning a construction business is managing cash flow. A general contractor must receive payment from an owner or developer in order to pay employees and subcontractors for a project. In a perfect world, all owners would pay in a timely fashion allowing contractors to do the same for their subcontractors. Unfortunately, this is not the case and legal protection is needed to ensure that the contractor is not shouldering the financial risk within a project. “Pay when paid” and “pay if paid” clauses can be found in many contracts between contractors and subcontracts and can shift risk away from the contractor. When creating construction contracts and subcontracts, it’s always a good idea to have a Florida construction attorney review it.

Pay When Paid

A “pay when paid” clause is considered a timing mechanism in regards to payment between contractors and subcontractors. This clause obligates contractors to pay their subcontractors within a set time period after receiving payment from an owner. Since it’s at timing mechanism, it doesn’t not absolve the contractor of their obligation to pay the subcontractor, even if the owner does not pay them.

Pay if Paid

A “pay if paid” clause is more advantageous for contractors. It sets receiving a payment from an owner as a “condition” that must be met prior to a contractor’s obligation to pay a subcontractor. This clause ensures that the contractor is not obligated to pay subcontractors if the owner is unable to pay.

One important consideration in many subcontracts is the precision of the language involving payment obligations. If the language in this area of contract is vague, it will be harder for a contractor to protect him or herself from a subcontractor claim.

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Disclaimer: The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.