Split the Risk: Understanding How to Fight Pay-When-Paid Clauses

By Karalynn Cromeens

A pay-when-paid clause is a standard operating procedure in today’s commercial subcontracts. I always tell my clients that these clauses must be negotiated to share the risk of nonpayment with the general contractor. Let’s face it; it is unfair that you, the subcontractor who put out the labor and material, have to wait to get paid and must wait for some event that you have no control over (the owner to pay the general contractor) before you get paid. My clients tell me that either the general contractor won’t accept the changes to the pay-when-paid clause, or they personally don’t want to rock the boat because they are afraid the general contractor will give the job to someone else if they do. I believe that the best way to deal with this clause is to split the risk of nonpayment from the owner, keeping the clause in the contract but changing the language.

Along Came the Lien

Another way to get around a pay-when-paid clause in your subcontract is to send a notice that you will file a lien to the owner if you are not paid. I have personally studied the lien laws in all 50 states and can tell you that all the states have the same theme. If you did not contract with the owner, you need to tell the owner who you are, what you did, and how much you are owed before filing a lien. The exact time and what the notice must say are different in all 50 states, but the idea that you must let the owner know before you file a lien is all the same. Make sure you give the owner time to take any money you might be owed from the funds due to the general contractor, so they don’t end up paying twice. Another thing that is the same in all 50 states is that you are only penalized if you send notice of your unpaid amounts late. This means there is no penalty for sending notice of
your unpaid amounts early. In fact, send it as early as possible. If you submitted your pay application and it’s been 15, 20, 30, 45 days, and you have still not been paid, send notice that you are owed money, and you will file a lien if you are not paid. If you choose to go the lien route, make sure you send the notice to the general contractor and the owner.

Golden Ticket to Getting Paid

In my experience, once an owner receives a notice that a lien will be filed on their property, they make sure the person who sent the notice is paid. Do not send notice late; if you do, you will lose your lien rights.

If you are worried about making people angry by sending notice that you will file a lien, ask your material supplier to send a notice of their unpaid amounts to the general contractor and the owner. Once that is sent, you can say that your material supplier’s terms are 30 days, and they mean it. As you know, you don’t have a pay-when-paid clause on your credit account with your material supplier, but most of the time, it works out that way. Your material supplier wants your business, so although they have 30-day terms, they really don’t take any actions to collect until the deadline required for them to send notice to have a valid lien. Whether it’s you or your material supplier who sends notice, it will get attention or be the “squeaky wheel,” as I like to call it, and in the construction industry, the “squeaky wheel” gets paid first.

You are running a business. You owe it to yourself and your team and, most importantly, your family to protect it with everything you have. You must understand the dangers of signing a paid when paid clause and how a lien notice, when used properly, can be a tool to fight the clause.

Karalynn Cromeens, author of Quit Getting Screwed, Understanding and Negotiating the Subcontract and Quit Getting Stiffed, A Texas Contractor’s Guide to Collections and Lien Rights, is the owner of The Cromeens Law Firm and The Subcontractor Institute in Houston.

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