Pay When Paid

Pay when paid” is a contract clause that basically says that subcontractors won’t receive payment until the hiring contractor receives payment from their customer. For example, suppose that General Builders, Inc. hires Plumbing R Us. By including a “pay when paid” clause in their contract, General Builders is effectively saying that they will not pay the plumbers until they receive payment from the project owner. 

Several states say that this contract clause is allowed as long as a time frame for payment is included. That is, a general contractor can use the clause to delay payment until they receive payment from the property owner, as long as they make payment to the subcontractor within a “reasonable time.” Even in states that allow “pay when paid,” they do not let the GC off the hook for paying their subs. 

This is different than a “pay if paid” clause, which some general contractors try to include in the contract. “Pay if paid” means a developer or prime contractor who is still waiting for funds isn’t responsible to pay their contractors or subcontractors. The federal government and many states passed prompt payment laws that require contractors to make payments in a timely fashion. 

In most states, contractors are responsible to pay subcontractors and suppliers within a reasonable time frame – whether they have received any funds or not. 

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