Getting paid on time for work performed on a construction project is a natural concern for subcontractors. Generally speaking, your subcontract with the general contractor contains a payment clause that sets forth when and how you are entitled to receive payment. Two PA- Pay if paid.jpgcommonly used types of payment clauses are “pay if paid” and “pay when paid” clauses. In Pennsylvania, these two types of payment clauses are treated differently by the courts. Therefore, it is critical that you know the difference between both types of payment clauses so you can recognize if they are part of your subcontract.

What is a “Pay if Paid” Clause?

A “pay if paid” clause is a payment clause that states that the contractor is obligated to pay its subcontractors only if the contractor receives payment from the owner. In other words, if the owner never pays the contractor, the contractor has no duty to pay you. Pennsylvania courts view a pay if paid clause as a “condition precedent.” This simply means that payment to the contractor by the owner is one of many conditions that must be satisfied before any payment is due to the subcontractor. Just as you would not be entitled to payment if you did not perform the work, you would not be entitled to payment if the owner never paid the contractor. When this type of payment clause appears in a subcontract, the owner’s payment to the contractor is added to the list of conditions, such as satisfactory performance of the work and submission of an application for payment, that must be fulfilled before the subcontractor is entitled to payment.

What is a “Pay When Paid” Clause?

A “pay when paid” clause is a payment clause that states that the contractor is obligated to pay its subcontractors following receipt of payment from the owner. In other words, if the owner delays three months in paying the contractor, the contractor has no duty to pay you during that period of delay. Pennsylvania courts view a pay when paid clause as a “timing mechanism.” This means that payment by the owner triggers the timing of when the contractor must pay you. When this type of payment clause appears in a subcontract, the owner’s payment to the contractor is an event that starts running the clock on when the contractor must pay the subcontractor. In general, the subcontractor must be paid pursuant to the terms of the subcontract. If the subcontract does not contain payment terms, then the subcontractor must be paid within a reasonable period of time.

Pay if Paid vs. Pay when paid: Why Does it Matter Which Clause is in My Subcontract?

The difference between these two types of payment clauses is significant and highlights the need to carefully review subcontracts with your attorney. Where there is a “pay if paid” clause in a subcontract, the subcontractor and the contractor share the risk that the owner will fail to pay. If the owner fails to pay the contractor, it is unlikely that the subcontractor will succeed on a claim against the contractor for payment.

By contrast, where there is a “pay when paid” clause, the subcontractor and the contractor do not share the risk of owner non-payment. Because a “pay when paid” clause controls only the timing of payment, not whether any payment is due, Pennsylvania courts generally allow a subcontractor to sue a contractor for non-payment where a reasonable amount of time has passed following the subcontractor’s demand.

Which is Better: “Pay if Paid” or “Pay When Paid”?

In Pennsylvania, “pay when paid” clauses are better for subcontractors. This is because the courts recognize that where there is a “pay when paid” clause rather than a “pay if paid” clause, the contractor still has a duty to pay the subcontractor even where the owner defaults. Because Pennsylvania courts view these clauses differently, and because they can look similar, it is important to carefully review your subcontract with a Pennsylvania attorney who can properly advise you as to the risk of non-payment if you enter into the subcontract.