Pay-If-Paid Versus Pay-When-Paid in Construction Contracts

by Michael S. Zicherman, Esq., Peckar & Abramson, P.C. with Practical Law Real Estate

A Practice Note addressing how construction contracts allocate the risk of an owner's nonpayment between contractors and subcontractors. This Practice Note examines the significant legal differences between "pay-when-paid" and "pay-if-paid" payment provisions. While a pay-when-paid clause is generally treated as a timing mechanism, a pay-if-paid clause attempts to shift the entire risk of owner default from the prime contractor to the subcontractor by creating a condition precedent to payment. The enforceability of these contingent payment clauses varies significantly across jurisdictions, as many states render them void as against public policy. This Note discusses different state-specific approaches, including the impact these clauses have on a subcontractor's ability to file a mechanic's lien or recover against a payment bond. It also explores key drafting considerations for creating enforceable payment provisions.