Contingent Payment Clauses: Pay-When-Paid, Pay-If-Paid, and What They Actually Mean

If you work in construction, you have probably seen a clause like this in a subcontract:

"Subcontractor expressly agrees to accept the risk that it will not be paid for work performed in the event that the Contractor, for whatever reason, is not paid by the Owner for such work. The Subcontractor acknowledges that it relies for payment on the credit and ability to pay of the Owner, and not of the Contractor. The Subcontractor agrees that payment by the Owner to Contractor for work performed by the Subcontractor shall be a condition precedent to any payment obligation of Contractor to the Subcontractor."

That is a contingent payment clause, and it can make a significant difference in whether and when a subcontractor gets paid. While these provisions most commonly appear in the contractor-to-subcontractor relationship, they can be used in any arrangement where one party's payment depends on receiving funds from another, including developer-to-contractor and subcontractor-to-supplier agreements.

The confusion is that not all contingent payment clauses work the same way. There are two types, and the difference between them is substantial.

Pay-When-Paid

A pay-when-paid clause delays the timing of payment to the subcontractor until the general contractor receives payment from the owner. It does not eliminate the payment obligation. If the owner never pays the general contractor, the general contractor still owes the subcontractor. Courts in most jurisdictions treat these clauses as timing mechanisms rather than conditions that excuse payment entirely.

The practical risk for subcontractors is delay, not forfeiture. However, some pay-when-paid clauses are written without a defined payment window, which can extend the delay indefinitely. Subcontractors should look for clauses that establish a maximum number of days after invoice submission regardless of upstream payment status.

Pay-If-Paid

A pay-if-paid clause shifts the risk of owner nonpayment from the general contractor to the subcontractor. Under an enforceable pay-if-paid provision, if the owner does not pay the general contractor, the general contractor has no obligation to pay the subcontractor for that work. The subcontractor bears the credit risk of the owner rather than the general contractor.

Pay-if-paid clauses typically use language such as "condition precedent" and state that the subcontractor is relying on the owner's payment rather than the contractor's obligation. Courts that enforce these provisions generally require clear and unambiguous language. A vaguely worded clause is more likely to be interpreted as pay-when-paid.

State Law Variations

Not every state enforces pay-if-paid clauses. Some states, including South Carolina, prohibit them by statute. Others, including Kentucky, allow them but only when the language is unambiguous. Kentucky courts have addressed enforceability through case law rather than statute, and the outcomes depend heavily on how the clause is drafted.

Before relying on or accepting a contingent payment clause, both general contractors and subcontractors should understand how the applicable state treats the provision. A clause that is enforceable in one state may be void in another.

Practical Considerations for General Contractors

A contingent payment clause is only useful if it is enforceable. Vague or boilerplate language may not hold up in the jurisdictions where the work is being performed. Contractors who intend to rely on pay-if-paid provisions should confirm that the clause is drafted with sufficient specificity and that the applicable state law supports enforcement.

Practical Considerations for Subcontractors

Subcontractors should identify whether a contingent payment clause is pay-when-paid or pay-if-paid before signing. If the clause is pay-if-paid, the subcontractor is accepting the risk that it may never be paid for completed work if the owner defaults. Options include negotiating a defined payment window regardless of upstream payment status, converting the clause to pay-when-paid, or preserving mechanic's lien rights as a separate recovery path.

The Foundation of the American Subcontractors Association and Kegler Brown Hill publish a 50-state survey on contingent payment clause enforceability that is a useful reference for evaluating these provisions across jurisdictions. For a broader discussion of payment provisions, retainage, and Kentucky payment law, see the Payment and Payment Terms section of the Field Guide.

This article is for informational purposes only and does not constitute legal advice. No attorney-client relationship is formed by reading this content. If you have questions about a specific contract, consult with qualified construction counsel. THIS IS AN ADVERTISEMENT.