Pay-When-Paid Clauses in Construction Contracts
What Is a Pay-When-Paid Clause?
A pay-when-paid clause sets the timing of a subcontractor's payment based on when the general contractor receives payment from the property owner. Unlike a pay-if-paid clause, pay-when-paid does not eliminate the general contractor's obligation to pay — it only establishes when that payment is due.
Most courts interpret pay-when-paid language as creating a reasonable timeframe for payment rather than a condition that could eliminate the payment obligation entirely.
How Courts Interpret Pay-When-Paid
The majority view among courts is:
- Pay-when-paid language creates a timing mechanism, not a payment condition
- The general contractor must pay the subcontractor within a reasonable time
- If the owner never pays, the general contractor still owes the subcontractor
- "Reasonable time" varies but is typically 30-90 days after the subcontractor's invoice
Courts generally require very explicit language to convert a pay-when-paid clause into a true pay-if-paid condition precedent.
What "Reasonable Time" Means
When an owner delays payment indefinitely, courts look at several factors to determine a reasonable payment period:
- Industry custom in the relevant jurisdiction
- The financial burden on the subcontractor
- The general contractor's efforts to collect from the owner
- The overall timeline of the project
- Any statutory prompt payment act requirements
What to Look For in Your Contract
- Ambiguous language that could be interpreted as pay-if-paid rather than pay-when-paid
- No maximum waiting period — Consider negotiating a backstop date by which payment is due regardless of owner payment
- Prompt payment act compliance — Many states have statutory requirements that may override contractual payment terms
- Notice obligations — Whether the general contractor must inform you when owner payment is received or delayed
When to Consult a Lawyer
If payment language in your subcontract is unclear or if you are experiencing delayed payments, consider consulting a construction attorney to determine your rights under the contract and applicable prompt payment statutes.
This article is for informational purposes only and does not constitute legal advice. Consult a licensed attorney for guidance specific to your situation.