Pay-when-paid (and its harsher cousin, pay-if-paid) clauses are subcontractor payment terms that condition the general contractor's obligation to pay on receipt of payment from the project owner. They are one of the most heavily disputed provisions in US construction subcontracts and the law on their enforceability varies dramatically by state — some states enforce them as written, others convert them into mere timing provisions, and still others void them entirely. The drafting matters enormously. A clause that says 'subcontractor will be paid within 7 days of GC's receipt of payment from owner' is typically interpreted as a timing provision (pay-when-paid). A clause that says 'GC's receipt of payment from owner is a condition precedent to GC's obligation to pay subcontractor' is typically interpreted as a true risk-shifting provision (pay-if-paid). Knowing which form your state enforces — and which the contract uses — determines whether you bear owner insolvency risk.
What is a Pay-When-Paid Clause?
A pay-when-paid (PWP) or pay-if-paid (PIP) clause in a US construction subcontract is a payment provision conditioning the general contractor's payment obligation on receipt of funds from the project owner. State law treats them differently: New York (Wm. R. Clarke Corp. v. Safeco Insurance, holding similar clauses void as against public policy in NY), California (similar to NY), and Wisconsin generally restrict PIP clauses; Florida, Georgia, and many other states enforce them when clearly drafted. The federal government's Prompt Payment Act (31 U.S.C. § 3905) imposes timing on federal prime payments to subcontractors.
Red flags to watch for
In states that enforce PIP clauses (e.g., Florida, Georgia, Texas, Tennessee), a clause stating that GC payment is conditional on owner payment shifts the entire owner insolvency risk to the subcontractor. If the owner files bankruptcy, the subcontractor may have no contractual right against the GC. Mechanic's lien rights against the property may be the only recourse.
Many subcontracts are drafted on national templates that don't specify the governing state law. Choice-of-law provisions favouring states that enforce PIP clauses may apply even where the project is in a state that voids them. Courts often apply the project location's law for public policy reasons, but litigation about the choice-of-law is expensive and uncertain.
Subcontractors who waive lien rights and accept a PIP clause have no remedy if the owner doesn't pay. Many states (including California, Texas, Massachusetts, Maryland) make pre-construction lien waivers void as to subcontractors and laborers — but partial waivers tied to progress payments may be enforceable.
Even in states that enforce PWP as a timing provision, courts have implied a 'reasonable time' limit — the GC cannot indefinitely defer payment. A clause without any time limit invites prolonged litigation. Some courts have implied reasonable time at 30, 60, or 90 days, but the absence of an express provision adds uncertainty.
A well-drafted PWP/PIP clause should specify that owner insolvency or material default triggers the GC's independent obligation to pay (some states require this for PIP enforceability). A clause that maintains the condition even after owner default leaves the subcontractor with no payment route except lien or bond claim.
On bonded projects (federal Miller Act 40 U.S.C. § 3131; state Little Miller Act statutes), subcontractor payment bond rights are critical when PWP clauses defer GC payment. A subcontract that does not identify the prime contractor's payment bond — or that requires the subcontractor to forgo bond claims — is materially deficient.
Your legal rights
US subcontractors are protected by: the federal Miller Act (40 U.S.C. §§ 3131–3133) on federal projects; state Little Miller Act statutes for state public projects; state mechanic's lien laws (each state has its own statutory scheme — e.g., California Civil Code §§ 8000 et seq.; New York Lien Law); state prompt-payment statutes (e.g., Florida Statutes Chapter 715, California Civil Code § 8800, Texas Property Code Chapter 28); state-specific PIP voiding statutes (e.g., New York Lien Law § 34, California Civil Code § 8122); the federal Prompt Payment Act (31 U.S.C. §§ 3901–3907); and state common-law breach of contract and quantum meruit principles. Disputes are heard in state court, federal court (where Miller Act jurisdiction exists), or arbitration.
Questions to ask before you sign
- 1Does this clause use 'pay-when-paid' (timing) or 'pay-if-paid' (risk shifting) language, and what does my state's law enforce?
- 2What is the choice-of-law provision, and does it match the project location?
- 3If owner becomes insolvent, am I entitled to payment from the GC, or is my only recourse mechanic's lien or payment bond?
- 4Are mechanic's lien rights preserved, and what is the procedure to perfect them on this project?
- 5What is the 'reasonable time' or sunset within which GC must pay even if owner doesn't?
- 6What payment bond is in place, and what are my claim rights under it (timing, claim form, surety contact)?
Disclaimer: This guide is for educational purposes only and does not constitute legal advice. Contract law varies by jurisdiction and individual circumstances. Always consult a qualified legal professional before making decisions based on this information.