Overall, I’m not a fan of pay when paid terms. From a payee’s perspective, not only are you given little expectation as when you can expect payment, but you also have zero control over the client’s credit approval process or collection efforts.
However, when used in a typical general contractor and subcontractor relationship, pay when pad clauses can add some assurance of fiscal responsibility by the general contractor.
As an example, if a general contractor has several projects on the go at one time, and owner of Project A does not pay on time, and general contractor is required to use funds from payment made on Project B to pay subcontractors on Project A, this could put both Projects A and B as well as the company in a really difficult position. This could also potentially flow down to hundreds of subcontractors, their employees, families, etc.
With that in mind, I would never tell my subcontractor clients to just willy-nilly accept these payment terms without recommending they do the following in order for them to better assess the risk:
1) Verify who the owner is. Depending on who it is and what their reputation is like and what type of financing is in place (if you can get that far), you may want to stand your ground to a firm 30-40 day payment term (should always be five days less than the lien period).
2) Ensure there is a contract in place between the owner and the general contractor, and between the general contractor and the subcontractor.
3) The subcontractor MUST review the terms of the prime contract, specifically for the invoicing and payment terms as follows:\
- When the general Contractor is required to invoice?
- What is allowed to be included in that invoice? Is it strictly for work complete on site, or is material delivered also allowed?
- Is there a holdback and how will it be released? At the end of the entire project, or is progressive release of holdback to subs allowed?
- How many days after receipt of the invoice will the general contractor be paid? This total amount of days should always be less than your lien period.
- Is the general contractor required to submit statutory declarations?
- What is the remedy for the general contractor if the owner fails to pay on time? How many days does the owner have before the general contractor can stop the work and/or terminate the contract?
- Is there a payment bond in place? If yes, there is more assurance for the subcontractors in the case that the general contractor doesn’t pay.
4) Make sure there is a stop work remedy in the subcontract in the event that the general contractor doesn’t pay and exercise that right in the event of non-payment. There is nothing worse than continuing to work incurring extra costs that may never be paid.
5) If there are sub-subcontractors, ensure that your payment terms flow down to them as well.
PRO-TIP: If you are a subcontractor and the subcontract binds you to the terms of the prime contract, you are legally entitled to review a copy (with contract values redacted). If you are a general contractor and include the terms of the prime contract in your subcontracts, not only are you are legally obligated to provide a copy to your subcontractors, but it is also in your best interest to ensure that your subcontractors comply.
Risk tolerance is different for every company, so consider the probability of late/non-payment based on who the owner is and what type of financing is in place, then consider the worst case position your company would be in in the event of late/non-payment before agreeing to that pay when paid condition. If your contract has a pay IF paid condition, you should be highly comfortable with the worst-case scenario.
I hope these tips help you feel empowered when negotiating the terms in your next contract.
As always, I’m only a phone call away if you have any questions. ~ Rebecca