Clear Contract Language Is Key When GCs Share Risk Of Nonpayment With Subs

Joshua EtemadiBonds, Construction

Every contract involves the risk of insolvency, and every construction subcontract involves the risk of the owner/developer failing to make the payments that the contractor intends to use to pay its subcontractors. Frequently, general contractors seek to shift this risk onto their subcontractors through the use of clauses which describe payment from the owner to the contractor as a condition precedent to payment to the subcontractor. Simply put, when the contractor is successful in shifting the risk to the subcontractor, the clause is known as “Pay-If-Paid”. If contract language is not sufficient to transfer the risk, the clause is viewed as “Pay-When-Paid”. A Pay-When-Paid clause merely defers the timing of the payment due to the subcontractor until the contractor has been paid by the owner, or some reasonable time after the work was performed even if payment has not been made to the contractor.

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