In the fast-paced world of construction, managing financial risk is paramount for both general contractors and subcontractors. A critical aspect of this risk management is understanding the contractual mechanisms in place, particularly “Pay-if-paid” and “Pay-when-paid” clauses. These clauses can significantly impact the cash flow and financial stability of the parties involved. Here’s what you need to know about these clauses in Washington D.C., Virginia, and Maryland.

Understanding the Clauses

Pay-if-paid clauses create a condition precedent for payment to a subcontractor; payment is only due if the general contractor receives payment from the project owner. Essentially, this clause can shift the risk of the owner’s non-payment from the general contractor to the subcontractor.

Pay-when-paid clauses, conversely, are timing mechanisms. They imply that a subcontractor will be paid once the general contractor is paid by the owner, setting a timeframe for payment that depends on the general contractor receiving funds.

Jurisdictional Nuances

Washington D.C.

In D.C., the enforceability of “Pay-if-paid” clauses is viewed with scrutiny. The law tends to protect subcontractors, viewing these clauses as potentially unfair risk shifts. Contractors must ensure these clauses are explicitly clear and unequivocal to be enforceable. And while the clauses may be enforceable in some circumstances, it does not delay the right of a subcontractor to receiving prompt payment for projects that are subject to public bonds for DC projects.

Pay-when-paid clauses are enforceable in public and private contracts, subject to an owner’s duty to pay within 15 days of receiving an occupancy permit, taking possession of an improvement, or receiving a request for payment, whichever is earliest. Also, unless a contract states otherwise, on public projects an owner must pay within 30 days of a contractor’s proper request for payment. Contractors then have a duty to pay within 7 days of receipt of payment.

Virginia

In 2023, Virginia banned pay-if paid clauses in both private and public contracts.

As for pay-when-paid clauses, while enforceable, an owner must pay within 60 days of a proper request for payment and a contractor must pay on the earlier of 60 days of the invoice date or seven days from the date of receiving payment from an owner. Only if an owner is insolvent or files for bankruptcy is the clause a defense for nonpayment.

Maryland

Maryland takes a somewhat middle-ground approach. While “Pay-if-paid” clauses can be enforceable, courts in Maryland will closely examine the contract language to ensure that the intent to shift the risk of owner non-payment to subcontractors is clear and explicit. Similar to the District of Columbia, a pay-if-paid clause is not a defense against a contractor’s bond claim on a public project in the State.

Pay-when-paid clauses are enforceable, but payment must still be made within a reasonable time from a request for payment.

For General Contractors

Be Clear and Explicit: Ensure your contracts clearly define the payment terms. Ambiguities in “Pay-if-paid” and “Pay-when-paid” clauses can lead to legal disputes and potential financial liabilities.

Understand Local Laws: Recognize the legal landscape of the jurisdiction in which you’re operating. The enforceability of these clauses can and does vary across D.C., Virginia, and Maryland.

Communicate with Subcontractors: Transparency with subcontractors regarding payment terms can prevent disputes and foster better working relationships.

For Subcontractors

Review Contracts Carefully: Understand the implications of “Pay-if-paid” and “Pay-when-paid” clauses on your cash flow and financial risk.

Negotiate Terms: Where possible, negotiate these clauses to limit your financial exposure. For example, you might agree on a reasonable timeframe for “Pay-when-paid” clauses.

Legal Consultation: Consider consulting with a legal expert in construction law within your jurisdiction to navigate these clauses effectively.

Conclusion

“Pay-if-paid” and “Pay-when-paid” clauses are critical components of construction contracts that can significantly impact the financial dynamics between general contractors and subcontractors. By understanding and navigating these clauses with the nuances of local jurisdiction laws in mind, construction professionals can better manage their financial risk and foster more equitable, transparent working relationships.

If you have questions about construction law in Virginia, Maryland, or D.C., please contact Juanita Ferguson, at jferguson@beankinney.com or (703) 525-4000.

This article is for informational purposes only and does not contain or convey legal advice. Consult a lawyer. Any views or opinions expressed herein are those of the author and are not necessarily the views of any client.