By Robert Blochinger
Note: The comments in this article are not to be interpreted as legal advice. This is a simple explanation of some clauses and what to look for and consider when reviewing contracts.
In today’s world of business, contracts have become more legal and technical with respect to clauses that protect the contract author from harm should the owners not perform and pay as intended. Here’s an example: An owner wants to build something, so they hire a general contractor (GC) who will perform accordingly. The GC in turn hires sub-contractors to perform work according to the specifications presented by the architect, designer and engineers hired by the owner.
In turn, your Attorney may need to be consulted for your individual requirements and limitations. After understanding the clauses, one of your decision-making points is if you can finance this project in relation to your scope of work.
Within a building project, there are multiple contracts between various entities. Each requires the three basic components of a contract: an offer, acceptance, and performance. However, it’s not as simple as it sounds.
Case in point: a commercial building is being built, and as a flooring installer, you have the contract for providing the labor for the specified flooring materials specified (materials provided by the owner or GC). You are responsible for providing sundry items, pad, glue, strip, seam tape, etc.
The project requires you to sign a contract with the GC and within this contract, after the basic terms are presented, in the financial section you find: “To be paid when and if GC is paid.”
Depending on the wording within the contract/clause, there can be different meanings and understandings. When reading the contract, keep the following in mind:
- Are the clauses ambiguous?
- Is it clearly and precisely written who will pay, when they will pay?
- Will a retainer be deducted?
- Where is your company listed in the order of payees?
Construction contracts contain many important clauses. Our discussion is focused on the “Pay-If-Paid” and “Pay-When-Paid” or “Pay-If-And-When-Paid” provisions, or any other configurations of words.
You may find yourself in a position where work has been completed to the specifications and scope of work, yet payment is not forthcoming. Yes, you signed a contract; yes, it had a clause “pay if paid from the GC,” however, the owner is not paying anything due to workmanship issues with the other trades. This scenario is not your responsibility but does affect you. You have no choice but to wait. There is a legal remedy for this situation — lien.
In general, according to attorney-at-law and Architect Emeritus (AIA, NCARB) J. Norman Stark in his ConstructConnect blog, “the ‘Pay-When-Paid’ clause, which provides the prime contractor, will pay the subcontractor within a certain number of days after receiving payment from the owner. Further, the ‘Pay If-Paid’ clause, which requires the prime contractor pay the subcontractor if, and only if, it is first paid by the owner.”
Each of these terms significantly defines important rights and the potential liability of parties to the contract. While each of these terms affects a prime contractor’s obligations to its subcontractors, whether the owner pays them, the critical distinctions seriously affect primary rights and duties under the laws of each state and jurisdiction. This is where your lawyer comes in, preferably one that does commercial or construction law contracts.
These clauses should not prevent you from doing jobs but should make you aware of the legal responsibilities you must address. In this context, the workmanship must be an acceptable standard, however; it is not enough just to follow any published basic guidelines. I suggest you perform above them. Further, using an apprentice or helper to perform in place of a journeyman is not smart labor management.
With these types of contract clauses, the payee may use any excuse to prevent timely payment to you. You may find yourself in a position where work has been completed to the specifications and scope of work, yet payment is not forthcoming. Yes, you signed a contract; yes, it had a clause “pay if paid from the GC,” however, the owner is not paying anything due to workmanship issues with the other trades. This scenario is not your responsibility but does affect you. You have no choice but to wait. There is a legal remedy for this situation — lien.
Once the contract is awarded to you, a Purchase Order is issued, or a signed contract is returned to you, prepare to place a lien on the project and/or jobsite. The process starts with a letter of intent. Keep in mind there are time frames that must be followed to issue and deliver the documents to all contractor signees. Do not hesitate! Many times, others have done the same thing by placing a lien on the project. Though you may not get paid next week, you are at least assured a place in line to receive payment. Again, know where you stand in the line of sub-contractors.