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What is the difference between “Pay-if-Paid" and "Pay-when-Paid?"

Tuesday, August 30, 2011
By Jorg Breuning

Recently I read an interesting article in the BusinessCredit of the National Association of Credit Management regarding “Pay-if-Paid" and “Pay-when-Paid” clauses in contracts.  Parallel to this article the topic was discussed in the “Construction Advisory Today”.

In the green roof industry there are good opportunities for people to start a new company or to switch jobs. Once in this new industry many find themselves caught in a shark tank. The sharks (prime contractors or general contractors) identify fresh blood immediately and bargain for the lowest possible price because of the desperate need for references.  This is common practice in the construction industry and there is nothing to complain about.  However it is also still common practice that the sharks try to make you sign a contract with a “Pay-if-Paid" or “Pay-when-Paid” clause.  Roofing manufactures or roofing companies especially stick to one of these clauses like a bug smashed on the windshield.

Once the subcontractor has signed a contract with “Pay-if-Paid” clause he might soon feel like a bug smashed on the windshield.  In other words if the prime or general contractors do not get paid, the subcontractor doesn’t see a Penny.  The subcontractor carries full risk when problems such as insolvency somewhere in the “food chain” occur.  The subcontractor also has no realistic chance to solve any payment problems on a higher level and so the little fish will be swallowed by the sharks.  Thankfully many States discovered this serious problem with “Pay-if-Paid” clauses and have outlawed the use of this clause.  Whether it is legal or illegal in your State don’t do it.  It is an unjust rip-off and doesn’t hold any responsibility for the prime or general contractor.  To prevent a “Pay-if-Paid” agreement the subcontractor may contact the prime/general contractor’s client and notify them that this bad practice can be solved elegant and quickly.

“Pay-when-Paid” – according to my knowledge – is legal in all States.  In a “Pay-when-Paid” contract there is a realistic chance that you will get money after a reasonable period of time.  This looks like a safe contract but my experience has told me that most GC’s take advantages of the situation “reasonable period of time”.  All payments will typically come later – much later than expected.

The guaranteed payment with a “Pay-when-Paid” clause appears to be the only advantage in this agreement for a subcontractor.  However the subcontractor must still add costs to his proposal that consider delays of payment, time spent finding out whether the GC is paid, and to pre-finance materials over a much longer time.
 
Conclusion:

Green Roof Service LLC’s division Green Roof Technology stays away from both types of contracts because this increases the costs, makes the entire construction process less efficient, and is great breeding ground for unnecessary tension between the contractors.  All things that will influence the final quality, service, and timeline are not in the interest of the investor in a “Pay-if-Paid” or “Pay-when-Paid” contract.

Make contracts with clear payment term and conditions –it is as simple as that.
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