You told the guy to do the work, the work is done, and now it’s time for payment, right? But, you only told the guy to do the work because somebody else told you do the work and that somebody else now won’t pay. This is, perhaps, the most frequent problem in construction.
Here is the short story of an Owner, GC, and Sub on a public building project in Virginia. During the project, changes were made (imagine that on a construction project). The Sub completed the changes and its scope of work three months later than planned. The Sub submitted Change Requests to the Owner through the GC. The Owner denied the Sub’s Change Requests and did not pay the GC for the delays and changed work. In turn, the GC did not pay the Sub because the Owner did not pay the GC. The Sub sued the GC and lost because of valid pay-when-paid and pay-if-paid provisions in the subcontract.
In reading the court’s opinion (Young Electrical Contractors, Inc. v. Dustin Construction, Inc., Md. App. No. 266 (Dec. 28, 2016)), there are three lessons for general contractors:
- Ask Owners. You’ll have a better chance of enforcing a pay-when-paid or pay-if-paid subcontract provision when you submit subcontractors’ change requests to owners. It’s impossible to say that the owner said NO when the general contractor fails to ask. If you don’t submit a sub’s change requests to the owner, you (the general contractor) may bear the risk.
- Get Paid to Pay. Many words are wasted over whether a clause is a pay-when-paid vs. pay-if-paid provision. Yes, there is a distinction and it can make a difference. But, it’s generally enough to remember that under either clause, the owner will or must pay the general before the general will or must pay the subcontractor.
- Repeat Specifically. You’ll benefit from specific and repeated pay-when-paid or pay-if-paid provisions vs. a blanket or general provision. Insert conditional language (g., “if”) at each of three typical subcontract payment scenarios, including, payment for: (1) undisputed work, (2) disputed (i.e., changed) work, and (3) claims and disputes.