General contractors and subcontractors on a construction project always have at least one thing in common: They want to get paid. Unfortunately, there can be big delays in those payments when an owner or developer holds up their end of the deal for some reason. When that happens, the pay-if-paid or pay-when-paid clause in the agreement between the general contractor and any subcontractors takes on critical importance.

Understanding contingent payment clauses

Essentially, both of the clauses mentioned above are contingency clauses that seek to allocate risk. In this case, the clauses are trying to manage the fallout that comes when an owner or developer fails to pay up after work is done.

When that happens, general contractors are usually faced with the uncomfortable task of dealing with their subcontractors — the electricians, plumbers and painters who helped on the building. Without one of these clauses in their agreements, a general contractor has an ugly choice: breach their contracts with their subs or pay their subs with money they may not really have (and could never see).

How pay-if-paid and pay-when-paid clauses help

Although these sound similar, there's a critical difference between a “pay-if-paid” clause and a “pay-when-paid” clause. A pay-if-paid clause basically shifts the risk of nonpayment to the subcontractor. If the builder or owner never pays the contractor, the contractor has no further obligation to the subcontractor.

By contrast, a pay-when-paid clause buys some time for the contractor, obligating them to pay their subcontractors within a reasonable period after they receive money from the owner — but it never erases their liability, even if the owner fails to pay up.

Knowing the difference between these types of clauses is essential for protecting your interests, whether you're a contractor or a subcontractor — and it's often wise to have an attorney review any construction contract before you sign.