What every subcontractor really needs to understand.
One little word in a contract can make a big difference. Take for example the word “if” and the word “when”. If you are a subcontractor, your ability to get paid and when that payment will happen is dependent on whether the word “if” or the word “when” was written in the contract you executed with General Contractor you are working for.
Pay –if -paid and Pay –when -paid are the two most common terms used in construction contracts.
Pay- when– paid refers to the more common practice in construction. Basically, it means the subcontractors will get paid once the general contractor has been paid by the owner.
Pay –if -paid means that if the general contractor does not get paid by the owner, the subcontractors will not get paid either. Now while this may be concerning, it becomes downright alarming when you consider that Pay- if– paid may, in some cases, prevent a subcontractor from filing a lien on a project should they not be paid by the General Contractor.
The concern that a subcontractor may lose the ability to easily file a lien for work completed is why some states simply do not recognize pay- if– paid contracts at all. Still, pay- if- paid contracts are recognized in 24 states: AL, AR, AZ, CO, CT, DC, FL, GA, ID, KS, LA, MD, MI, MO, NE, NH, NJ, OH, OR, PA, RI, TX, VA, and WV. In these states, specific language within the contract is required to ensure a subcontractor does not forfeit their right to file a lien in the instance of non payment from the General Contractor. Since the wording around a pay –if– paid contract must be exact, it is important to only participate in projects with a General Contractor that utilizes contracts that have been carefully written by a business attorney; one who is familiar with the rules around pay-if- paid within the state the construction project is happening.
As mentioned, other states, seven to be exact; DE, IL, IN, KY, MA, SC, WI simply do not recognize pay- if– paid agreements at all. However, these seven states will allow pay- when– paid contracts.
Naturally, and just to make it all more confusing, there are still another four states out there: CA, NC, NV, and NY. Who do not recognize either Pay –if- paid or Pay- when- paid. The reasoning being that in these four states, the General Contractor is always required to pay their subcontractors; regardless if they have been paid by the owner or not. That is why a subcontractor’s contract in these states should always contain a payment schedule or payment due date.
As for the other states that were not mentioned specifically; well, the courts and state legislatures have not decided either way. So, until the laws change, if you are working in those states, it is very important to pay attention to the wording in your contracts. As a subcontractor, not knowing the difference in what your signing could significantly lessen your ability to successfully collect on a debt you are rightfully owed.
Do you have a contract you would like one of our Attorneys to look over? Do you have questions or concerns about how you will be paid for your work? Would you like help drafting contracts to use when working with General Contractors? L4SB is here to help! Contact Law 4 Small Business. today and let us help you get paid for your work.