Do you, as a subcontractor or/and material supplier, examine the contract/purchase order you are signing to determine if it includes a pay-when-paid or a pay-if-paid provision? These days, it is more important than ever to receive timely payment for labor performed or material and supplies furnished on a project. However, frequently, prime contractors and therefore subcontractors and suppliers must wait an extended period to receive payment. When this occurs, a contract that has a pay-if-paid versus a pay-when-paid provision enables the prime contractor to withhold payment until it receives payment from the owner. A properly drafted pay-if-paid provision shifts the risk of non-payment by the owner to the prime contractor. This means you might never get paid if the owner becomes insolvent during construction of the project, or payment could be substantially delayed if the owner has a dispute with the prime. However, a pay-when-paid provision requires payment from the prime within a reasonable period after the work is performed.
Subcontractors and suppliers should, therefore, always examine the terms and conditions of a subcontract/purchase order before signing to make sure it includes a pay-when-paid provision. You should also look for a provision that gives you the right to stop work or delivery if payment is not made when required. The pay-when-paid term reflects the notion that responsible prime contractors will endeavor to assure themselves that the owner has adequate financing at the outset and should track the owner’s financial resources during project performance to minimize the risk that anyone contributing to the project comes up short.