A general contractor sits in the middle of the payment chain. The owner pays you and you pay your subs. When the owner pays late or not at all, the question is whose problem that is, and the answer is usually one sentence in the subcontract. This guide expands the payment section of our construction contract review checklist.
The difference in one sentence each
- Pay-when-paid sets the timing: you pay the sub within a stated period after the owner pays you. If the owner never pays, courts that read the clause this way still require payment within a reasonable time.
- Pay-if-paid makes the owner's payment a condition precedent: if the owner doesn't pay you, you don't owe the sub. The sub carries the owner's credit risk.
The label doesn't decide it. Courts look at whether the clause plainly makes owner payment a condition or only fixes a date. Compare two illustrative sentences (our drafting):
- Timing: "Contractor shall pay Subcontractor within seven (7) days after Contractor receives payment from Owner for Subcontractor's work."
- Condition: "Receipt of payment by Contractor from Owner for Subcontractor's work is a condition precedent to Contractor's obligation to pay Subcontractor, and Subcontractor assumes the risk that Owner will not pay."
The AIA's own general conditions use timing language: A201-2017 § 9.6.2 has the contractor pay each subcontractor no later than seven days after it receives payment from the owner.
How courts read the clause
A case still cited for the rule is Thos. J. Dyer Co. v. Bishop International Engineering (6th Cir. 1962). The subcontract said no part of the price was due until five days after the owner paid the contractor. The owner went into bankruptcy reorganization without paying the balance for the work, and the court read the clause as fixing the time of payment, not as a condition: the money was due within a reasonable time. The owner's solvency, the court said, is a credit risk the general contractor normally carries, and moving it to the sub takes an express condition that clearly shows the parties meant it.
California's Supreme Court described the majority view the same way: if reasonably possible, courts read these clauses as fixing the usual time for payment rather than as true conditions precedent, so the sub keeps a right to be paid within a reasonable time (Wm. R. Clarke Corp. v. Safeco, 1997).
Florida's Supreme Court states the rule compactly: a clear and unambiguous provision is a condition precedent to the general contractor's obligation to pay, and an ambiguous one is read as fixing a reasonable time to pay (DEC Electric v. Raphael Construction, 1990).
A GC that wants to shift the risk has to say so in plain terms. A GC receiving a clause from a construction manager, design-builder or developer-affiliated contractor should look for "condition precedent," "assumes the risk" and "only if," and treat those words as the real clause.
Where state law limits pay-if-paid
Even a clearly drafted pay-if-paid clause can be void. Examples from statutes and state high courts:
| State | Rule | Source |
|---|---|---|
| New York | A clause that makes the sub assume the risk that the owner won't pay the GC is void as against the public policy of the Lien Law. | West-Fair Electric v. Aetna (1995) |
| California | Pay-if-paid clauses are unenforceable because they work an indirect waiver of subs' constitutionally protected mechanic's lien rights. | Wm. R. Clarke Corp. v. Safeco (1997) |
| North Carolina | Owner payment to the contractor is not a condition precedent to paying a subcontractor; agreements to the contrary are unenforceable. | N.C. Gen. Stat. § 22C-2 |
| Wisconsin | Void to make the owner's payment to the prime contractor a condition precedent to paying subs, though a clause that only delays payment until the prime is paid is allowed. | Wis. Stat. § 779.135(3) |
| Virginia | For construction contracts executed on or after January 1, 2023, owner payment can't be a condition precedent to paying a sub. On private projects the ban doesn't apply if the party that contracted with the contractor (usually the owner) is insolvent or a debtor in bankruptcy. | Va. Code § 11-4.6, § 2.2-4354 |
| Florida | Enforced if clear and unambiguous; an ambiguous clause is read as a reasonable-time provision. | DEC Electric (1990) |
Texas allows contingent payment clauses but limits them by statute (Tex. Bus. & Com. Code ch. 56). A GC can't enforce one where its own failure caused the owner's nonpayment. Once 45 days have passed after a proper payment request, the sub can send a written objection; when it takes effect, the clause generally can't be enforced for work performed after the GC received it. Enforcement is also barred if it would be unconscionable; the GC avoids that by showing it was diligent in telling the sub in writing, before the sub was bound, about the owner's finances and funding, and that it pursued collection or offered to assign its claim. The clause can't be used to defeat a mechanic's lien. The chapter doesn't apply to contracts solely for design services, civil projects such as roads, bridges and utilities, or one-to-four-unit residential work.
This list is not exhaustive, and the law moves; Virginia's ban only took effect in 2023. Check current law where the project is.
Federal and bonded work
- Federal subcontracts. FAR 52.232-27 requires the prime to include a clause obligating it to pay each sub for satisfactory performance within 7 days after receiving payment from the government, with an interest penalty for late payment.
- Miller Act bonds. A sub that hasn't been paid in full within 90 days after its last labor or material can sue on the payment bond, and a waiver of that right is void unless it is written, signed by the sub, and executed after the sub has furnished labor or material (40 U.S.C. § 3133). The Ninth Circuit held that a surety and its principal couldn't use a pay-when-and-if-paid clause to avoid Miller Act liability without a clear and explicit waiver of those rights (Walton Technology v. Weststar Engineering, 2002).
A pay-if-paid clause can protect your cash flow on paper while your payment bond may still answer to the sub.
What a GC should check
- Your prime contract first. When the owner must pay, what it can withhold, and whether you get interest. Under A201-2017 § 9.7, if the owner doesn't pay within seven days after the due date, the contractor may stop work on seven more days' notice. Under § 2.2, you can ask for reasonable evidence of the owner's financial arrangements before starting work, and again later if payments lapse or other triggers occur. Check that the owner's edits keep both.
- Your subcontract form. Is the clause a timing clause or a condition, and does it work in the project's state? A pay-if-paid clause on a North Carolina job does nothing for you.
- Fault. If the owner withholds because of your own defective work or late paperwork, Texas bars enforcing the clause (§ 56.051). Don't draft one that assumes otherwise.
- Prompt-payment deadlines. Statutes and regulations often set the clock: 7 days after receipt on federal work; on Virginia private projects, the earlier of 60 days after the sub's invoice or 7 days after the owner pays; in Nevada, no later than 10 days after the higher-tier contractor is paid for the work (NRS 624.624).
- Retainage. What you hold from subs should mirror what the owner holds from you. See our retainage guide.
Drafting and negotiating
When you write the subcontract:
- In states that void pay-if-paid, use a clean timing clause with an outside date rather than a condition that won't hold.
- Where a condition is enforceable, say it plainly: "condition precedent," the sub "assumes the risk" of owner nonpayment, and the clause covers progress and final payments.
- Carve out nonpayment caused by your own fault, commit to pursue the owner or assign your claim, and share what you know about the owner's financing.
- Don't try to waive lien or bond rights in the same clause.
When you receive one from a construction manager or design-builder: convert it to pay-when-paid with an outside date, limit any condition to owner insolvency, and keep your stop-work and financing-information rights.
Illustrative language (our drafting; have counsel adapt it to your state):
Contractor shall pay Subcontractor within seven (7) days after Contractor receives payment from Owner for Subcontractor's work. If Owner has not paid for reasons other than Subcontractor's default, Contractor shall nonetheless pay Subcontractor within forty-five (45) days after Subcontractor's properly submitted application. Nothing in this Section waives Subcontractor's lien or payment bond rights.
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FAQ
What is the difference between pay-if-paid and pay-when-paid?
Pay-when-paid sets when a subcontractor gets paid, usually a number of days after the general contractor is paid; if the owner never pays, courts applying that reading still require payment within a reasonable time. Pay-if-paid makes the owner's payment a condition precedent, so the subcontractor bears the risk that the owner never pays.
Are pay-if-paid clauses enforceable?
It depends on the wording and the state. Courts look for clear language making owner payment a condition precedent and read ambiguous clauses as timing provisions. New York and California void pay-if-paid clauses by court decision; North Carolina, Wisconsin and Virginia restrict them by statute; Texas allows them with significant limits.
Does a pay-if-paid clause protect the GC's payment bond surety?
Not reliably. The Ninth Circuit held that a surety couldn't use a pay-when-and-if-paid clause to defeat a subcontractor's Miller Act bond claim, and the Miller Act voids waivers of bond rights unless they are written, signed and executed after the work was furnished.
How fast does a GC have to pay subcontractors after the owner pays?
Check the contract and the state's prompt-payment law. AIA A201-2017 § 9.6.2 says seven days after the contractor is paid. Federal contracts require a 7-day subcontract payment clause, Virginia private projects use the earlier of 60 days after invoice or 7 days after the owner pays, and Nevada requires payment no later than 10 days after the higher-tier contractor is paid.
Related guides
- Construction contract review checklist for general contractors
- Retainage in construction contracts: what to check before you sign
- Notice provisions: how contractors lose valid claims on a technicality
Sources
- Thos. J. Dyer Co. v. Bishop International Engineering Co., 303 F.2d 655 (6th Cir. 1962).
- DEC Electric, Inc. v. Raphael Construction Corp., 558 So. 2d 427 (Fla. 1990).
- West-Fair Electric Contractors v. Aetna Casualty & Surety Co., 87 N.Y.2d 148 (1995).
- Wm. R. Clarke Corp. v. Safeco Insurance Co. of America, 15 Cal. 4th 882 (1997).
- N.C. Gen. Stat. § 22C-2.
- Wis. Stat. § 779.135.
- Va. Code § 11-4.6; Va. Code § 2.2-4354; 2022 Va. Acts ch. 727 (SB 550), enactment cl. 3.
- Tex. Bus. & Com. Code ch. 56, Agreement for Payment of Construction Subcontractor.
- NRS 624.624.
- FAR 52.232-27, Prompt Payment for Construction Contracts.
- 40 U.S.C. § 3133.
- United States ex rel. Walton Technology, Inc. v. Weststar Engineering, Inc., 290 F.3d 1199 (9th Cir. 2002).
- AIA Document A201-2017, §§ 2.2, 9.6.2, 9.7 (paraphrased).
This guide is general information, not legal advice. Payment law varies by state and changes over time. Have a construction attorney licensed in your project's state review your contract before you rely on it.