Subcontract Bonding Tip: Pay When Paid

Steve Golia
November 8, 2011 — 1,396 views  

 

Here is a subtle but important point for insurance professionals who have General Contractor clients or Subcontractors.

We know that the days of the handshake contract are mostly over. In today's highly litigious society, businesses are naive if they do not rely on the services of their attorneys in legal matters and utilize written contractual documents on all their projects.

General Contractors (GC's) have an advantage when entering into contracts with the trade Subcontractors they hire (such as electrical firms, plumbers and HVAC subcontractors). The GC is giving out the work and has an opportunity to control the contract language. For subcontractors, it's harder. They may face a "take it or leave it" scenario with the GC on the contract wording.

In a construction contract, a "Pay When Paid" clause is intended to control the GCs obligation to pay the sub. The idea is that, despite any stated payment terms to the subcontractor (such as payment every 30 days), the GC is not expected to pay the sub until the project owner pays them. The assumption is that such contract language means:                            

"When I get paid, YOU get paid!"

Enter the better alternative: "Pay IF Paid." The difference is important.

Pay When Paid establishes that the GC is obligated to pay, and the timing is governed by receipt of funds from the project owner. Pay If Paid means the GC is NOT obligated to pay the sub UNLESS they receive payment from the project owner - a huge difference.

Here is an example of Pay If Paid wording *:

"It is expressly agreed that owner's acceptance of subcontractor's work and payment to the contractor (GC) for the subcontractor's work are conditions precedent to the subcontractor's right to payments by the contractor (GC)."

How you use this information may depend on the nature of your clientele. Since we are a provider of Performance Bonds for both GCs and subcontractors, we see the issue from both sides.

The IBCS Group, Inc. is the Risk / Claims Manager for the Scarborough Bond and Guarantee Program. The surety has a long history supporting subcontractors - an underserved area of the surety industry. It's one more example of how our high level of capacity and expertise can help insurance professionals serving the construction industry.

Steve Golia, Exec. V.P.

The IBCS Group, Inc.

856-673-4135

* We are not attorneys and are not offering legal advice. This article intended to inspire further discussion and is for your enjoyment. Seek legal counsel from an attorney in all matters concerning contracts.

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Steve Golia

IBCS Group, Inc.

Steve Golia is Executive VP of The IBCS Group, Inc. The company issues Bid and Performance / Payment Bonds for construction projects. IBCS is the Authorized Risk / Claims Manager for the Scarborough Bond and Guarantee Program. (Not available in all states.) The experts at The IBCS Group are always available including nights and weekends - every day, because nobody provides better service. 856-673-4135.