Pay-if-paid clauses in subcontracts are controversial. The clauses purport to shift the risk of owner nonpayment from the prime contractor to the sub. The prime is obligated to pay the subcontractor only if the prime receives payment from the project owner for the sub’s work. The subcontractor, which contracts only with the prime, is at the mercy of the owner’s solvency and
creditworthiness.

Shifting the risk of owner nonpayment to a subcontractor is harsh. Consequently, courts are eager to limit the impact of these clauses and interpret them in a restrictive manner. Unless a clause expressly states that owner payment to the prime contractor is a “condition precedent” to the prime’s obligation to pay the subcontractor, it will be considered a
pay-when-paid clause. The prime has a reasonable amount of time to attempt to collect payment from the owner before paying the sub, but the prime is not excused from its payment obligation. The risk of project owner insolvency still rests with the prime contractor.

This issue played out recently in a design subcontract. An agreement between an architect and an engineering consultant, on an AIA form, said, “The Architect shall pay the Consultant in proportion to amounts received from the Owner.” An Ohio court interpreted this as a pay-when-paid clause, not a pay-if-paid clause. The ultimate risk of project owner nonpayment was not shifted to the engineering consultant. When the owner canceled the project and failed to pay the architect, the architect still had to pay its consultant.

Other cases this week involved the “best value” procurement of design-build contracts and the question of a valid claim under the federal Contract Disputes Act. The best value procurement of construction services violated the Pennsylvania Procurement Code. And, the claim and its certification were valid even though the word “request” was used throughout in lieu of the word “claim.”