Glossary
Pay-When-Paid Clause
A pay-when-paid clause is a subcontract term stating that the general contractor will pay the subcontractor within a set time after the contractor is paid by the owner.
Construction subcontracts often tie payment to the flow of money from the owner. A pay-when-paid clause generally addresses timing: the general contractor will pay the subcontractor after it receives payment from the owner, often within a stated number of days. A related but different term, the pay-if-paid clause, tries to make the owner's payment a condition that must happen before the contractor owes anything at all, shifting the risk of owner nonpayment to the subcontractor.
Courts in many states read pay-when-paid language as setting the time for payment, not eliminating the obligation. If the owner never pays, the contractor typically still must pay the subcontractor within a reasonable time. Pay-if-paid clauses are treated very differently from state to state. Some states enforce them if the language clearly shows that the parties intended to shift the risk. Others, including California and New York, have held them unenforceable in many situations as against public policy, and some states limit them by statute. A pay-if-paid clause may also affect lien or bond rights in some states but not others.
Here is a fictional example. A flooring subcontractor, Oakline Flooring, finishes $85,000 of work on a medical office building. The general contractor says it has not been paid by the owner and points to the subcontract, which states it will pay 'within seven days after receipt of payment from owner.' Oakline's attorney reads that as a pay-when-paid clause governing timing and, under the governing state's law, argues payment is now due within a reasonable time. Oakline also preserves its lien rights while the dispute plays out.
These clauses matter to a creditor because they can delay or block payment even when the work is done perfectly. Subcontractors and suppliers should read payment provisions before signing, know how their state treats them, and never let a payment clause cause them to miss lien or bond deadlines.
Example
Oakline Flooring's subcontract says it will be paid within seven days after the owner pays. Its attorney argues this sets timing only, and it preserves lien rights meanwhile.